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Monday, May 27, 2024

Unions and Unfunded Pension Liabilities

As an economics major, I think I have the concept of monetary incentives down pretty well. So why am I even still here writing this column? Why am I asking my parents to pay tuition when I am most likely going to come out of college making about $30,000 as a congressional staffer? It really doesn’t make sense to me from a monetary perspective when I look and see that a Bay Area Rapid Transit (BART) station agent makes around $135,000 a year (Contra Costa Times). (It’s worth keeping in mind that a good public school teacher is lucky to make $70,000 in California). A few reasonable questions to ask would be: how is this possible, and where do I sign up?

Unfortunately, this is not an isolated incident, or a recent occurrence. Public sector unions are alive and well, and they have been successfully lobbying and negotiating for their members for decades. The dangerous amount of influence unions wield over elected officials is derived from their political contributions. The Mercatus Center at George Mason University has done some work on the influence of public sector unions, and they found that unions that monetarily support the governor’s party see employment, benefit and salary increases at the expense of tax payers. According to the American Enterprise Institute, even during the last recession, public sector jobs grew by 10,000 a month and more and more public employees were making over $100,000 a year. Yet another example of the political clout unions have, the AFL-CIO in 2013 managed to secure an exemption from the Patient Protection and Affordable Care Act (a.k.a Obamacare) for its members, while the rest of us are subject to the federal mandate and subsequent penalties.

If I haven’t convinced you of the severity of this problem, go to and look at the list of top organizational donors across all cycles. The top six organizations all donate exclusively to Democrats and, of those six organizations, three of them are unions. Sen. Harry Reid’s (D-NV) favorite target, Koch Industries, clocks in as the 50th largest contributor. (While you’re on open secrets, go to the 2014 overview tab and look at the top individual donors. You will find that Tom Steyer and Michael Bloomberg came in at one and two respectively, and the Koch brothers came in tenth, together). The larger problem is that the rent-seeking activities of unions and the willingness of lawmakers to meet union demands have put many states, localities and taxpayers in serious debt.

Illinois, California, Michigan, New York, and New Jersey, to name a few states, all have serious debt issues, driven by public sector pensions. Mark Perry, of the American Enterprise Institute, found that there is a statistically significant relationship between the percentage of unionized public sector employees and the state’s per-capita debt; showing that stronger unions, have led to more public debt.

Detroit is one of the first localities to have declared bankruptcy over public pension debt, eventually resulting in the city shaving off $7 Billion in liabilities. The Federal Reserve was quick to note that this could be the start of a dangerous trend nationwide. As more and more localities, and possibly states, struggle to pay their pensions and other liabilities, their credit ratings could be in danger. Many localities rely on bond measures to accomplish medium to long term projects, and a lower credit rating would mean their bonds would carry more risk, which hurts the city’s ability to finance projects.

The state of Illinois is currently making moves to avoid bankruptcy from its massive pension debt. The state also has the lowest credit rating by Standard and Poor’s in the nation. According to the Wall Street Journal, 25 percent of all Illinois tax dollars go towards public pension payments. The state’s newly elected governor, Bruce Rauner (R-IL), has put out a plan to pay pension recipients their accumulated benefits in a lump sum, so they can be rolled into a 401(k) plan. It has been estimated that this will save the state $2 billion a year. Moreover, the governor’s plan wouldn’t raise taxes a dime, which is the leading idea from the state’s Democratic legislature.

Illinois is not the only state in trouble; rather, it is one of the few states in trouble that is taking action. California has an unfunded pension liability of $198 billion according to CBS-Sacramento, but no serious action has been taken. Gov. Chris Christie (R-NJ) is trying to rein in unions and New Jersey’s unfunded pension liabilities, but he is being held up by Democrats in Trenton. Democrats would need to bite the hand that feeds them if they wanted to be serious about reconciling pension liabilities, but that has proven unlikely. Republicans, who aren’t beholden to public sector unions, must solve this national crisis.

I would like to revisit the unique case of Detroit before I end this column. The National Review wrote an article in 2013 which highlighted the problems with a close relationship between public sector unions and Democratic politics. The article notes that Detroit in the 1950’s was the center of American progress, as the center of a booming auto industry. However, after over 50 years of uninterrupted Democratic control of the city, Detroit has suffered a 25 percent population decrease over the past 10 years. 60 percent of Detroit children live in poverty. Skyscrapers stand abandoned. The National Review goes as far as to call the situation “the Left’s ground zero.” Those who could leave already have. Moreover, there has been a recent phenomenon of one-way U-Haul rentals from California to Texas. It’s clear that Democrats have failed to deliver on all of their lofty promises over the years, and Americans are starting to vote with their feet.