The political battle under way in Wisconsin has Gov. Scott Walker and Republicans in the Legislature taking on the state's powerful public employee unions. Similar battles have been joined in a number of other states, often focused on the collective bargaining rights of public employees. In Ohio, a bill is pending that would prohibit collective bargaining over pensions.
I've been asked professionally and journalistically whether the public sector's retirement-funding crisis has given anti-union activists a legitimate justification for abolishing public employee unions. My answer is no.
There's no question that the pendulum has swung and the public's mood has shifted to become less supportive of public employees and their compensation. And there's no question that public employee bargaining power has veered out of control in states where these unions can buy off legislators and policymakers to feather their members' nests at public expense. But there's a big difference between reform and abolition. So I think it worthwhile to separate the issues and focus on ways to reform retirement systems that finesse and clarify the collective bargaining debate — which tends to be ideological and partisan and less focused on achieving sustainable reforms.
Needed first: arbitration reform. There is no doubt that the current system of public employee labor laws has failed in states where the unions can "divide and conquer" public employers. Unions can bargain for increased benefits in one jurisdiction and then leverage that feature with other employers, especially in states that compel binding arbitration to resolve impasses. This problem is even worse in states that prohibit reductions in pension benefits once employees are hired. It's the ratchet effect: benefits go up but never down.
Unless arbitrators are required to compare public employee benefits with those offered in the private sector (from which most employees are hired), the rules of the game have become so rigged that it's impossible for public-sector leaders to defend taxpayer interests. So one of the labor law reforms we need to see first is a change in arbitration laws to require consideration of both public and private sector compensation and benefits levels in the labor markets from which public employees are initially recruited. Benefits (and especially retirement benefits) that exceed competitive compensation levels in both labor markets should be prohibited. Below that level, there is no reason that collective bargaining cannot operate reasonably. But, the burden of proof should be on employee groups seeking compensation above-market in the real world and not just a chosen handful of other unionized public employers.
Next: Equal cost-sharing. If public employees are required to share equally in the full costs of their retirement benefits (including actuarial shortfalls for benefits improvements and investment underperformance), then collective bargaining will take on a new face. No longer will employees view retirement benefits as "free money" if they share the cost burdens equally. If employees wish to bargain for benefits enhancements — and pay half the cost — then it's up to public employers to pay closer attention to what they're getting into.
Benefits and compensation caps. The third feature of retirement plan reform, and one that must inform the entire collective bargaining scene, is a regime of finite limits on retirement benefits and total employee compensation. In most states, such limits must apply prospectively and in some cases for new employees only. These should include the following public policies that cannot be negotiated:
Within these constraints, I see no reason that public employees should not have the right to bargain collectively for retirement benefits and negotiate the trade-offs necessary to determine their compensation packages at the table with public employers. The public's interests can be protected, and local labor markets conditions will be scrutinized far more carefully than they are today, which would probably benefit the taxpayers' interests as well. In most states, a simple statutory change can effect these reforms; in a few, it may require a constitutional amendment to make the limits permanent and ensure a balanced system. In states where the unions have greater sway on the legislature, I would not be surprised to see taxpayer and business groups propose ballot initiatives to achieve these objectives.
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