Public pensions and public unions

In a long and thoughtful reflection on David Brooks’ bleat about public pensions, Jon admits that there is a public pension problem and maybe even a public employee salary issue.  Here’s some more along those lines, too long for a comment. My main point is that  the problem is structural: political arrangements, intentional and other, matter.

First, there’s no shame in civil servants demanding outrageous employment terms, whether pay or pensions.  That’s how negotiations are supposed to work: the dealer starts with a loaded model at full sticker price, you come in looking for a bargain that will put his kids’ orthodontist on the street, and you make a deal  in between.  The deal that will staff government at the right price can be a range of combinations of pension and upfront salary; of course if money is shifted from the latter to the former, it has to be more for the workers to be indifferent.  But the government side of this negotiation has a short time horizon: pension costs are NIMTOs [Not In My Term of Office] and “wow, I wish I had voted against Mayor Giveawaythestore twenty years ago” butters no parsnips.  If the pension is a defined-benefit package, all the investment and actuarial risk is on the government side, and this is getting very technical and hard to put before voters, in fact I’m getting a headache myself. “We can avoid a strike two months before the election at no cost to me?  Sign it; next agenda item, please.”  Indeed, public sector salaries (corrected for education and experience) seem to be about 4% below private sector pay, but total compensation including benefits is about the same: compensation is shifted toward pensions.

The size of the package itself, counting pay, benefits, and job security, is biased towards being too big because public employee unions are groups with high individual stakes, who know each others’ phone numbers and addresses, who contribute to campaigns and who tend to live and vote in the jurisdiction, while the other side of the table (government service consumers) are often passing through or commuting, are more numerous, and have lots of issues that vary across their membership and are larger for any one of them than the tax hit from the current pay deal.  They tend to vote on potholes and current taxes, and have no clue about labor contracts.  Mancur Olson explains all this in The Logic of Collective Action, still a classic.   When bad times come and the city has to choose between layoffs and salary cuts, the layoffs always win because public employee union members stop being members when they’re laid off: all the angry losers will not vote in the next union election.  So salary packages are on a ratchet.

General Motors was in a similar situation vis-a-vis the UAW back in the day when the Big Three divided up the US auto market like gentlemen instead of competing, and when investors were more or less obliged to hold GM stock. It’s stockholders were many and various, none greatly affected by the GM labor contract, and its customers similarly atomized organizationally.  Only when Toyota started to eat GM’s lunch was the company unable to set prices unilaterally or to manage the company for the short-term comfort of its managers, and the system began to crumble.

Overall, the ability of governments to keep total pay at what would appear to be the market clearing price (about the same as the private sector) is an accomplishment, pace pathologies like the city of Bell.  There remains, however, the possibility that job security is undervalued as an offset to money pay, and that we are still overpaying counting everything, also that starting public pensions when civil servants actually retire rather than when they leave their government jobs would be yessable and would certainly reduce pension costs.  The politics and optics of people “retiring” into full employment at 50 are in any case terrible.  There also remains the likelihood that specific public enterprises, of which corrections in California is exhibit A, will be too big, especially when the biased negotiating situation described above meets voters’ ignorant impulses.  And of course, nothing in this story pushes towards excellent, productive public management.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

4 thoughts on “Public pensions and public unions”

  1. I put a comment on the Jonathon Zasloff post quoting Jesse Unruh: when he met newly elected members, he would say, “Son, if you can’t eat their steaks, and drink their whiskey, and fuck their women, AND VOTE AGAINST THEM IN THE MORNING, you don’t belong here.” In those days, people got to the California legislature and stayed 20 years. Mike, you are right on with ".. government side of this negotiation has a short time horizon: pension costs are NIMTOs [Not In My Term of Office] and “wow, I wish I had voted against Mayor Giveawaythestore twenty years ago” butters no parsnips.""

    This comment is to suggest that a big part of your structural problem in California is term limits. The incentive to be Mayor Give-Away is higher if you are term limited and won't be there when the bill comes due. What would be the acronym for caring what will happen later in the public official's career, in the fifth term from now? Not While I'm Here NWIH is not nearly as good as NIMTO. The acronym needs work.

    The other part of that is the afterlife for these folks – where do people go when they are termed out? Well, surprise, surprise, they often go to swell jobs with (drumroll) the public employees unions! If it's even on your radar screen that that may be your afterlife, you tend to not want to pee in a well from which you may want to drink.

  2. This is mostly right, but misses twp parts of the dynamic. One of them applies mostly to local jobs: stupid newspaper articles about overpaid public professionals and managers. Such articles are seldom written about overpaid cops and firemen (although kudos to the Star-Ledger for a recent series on cops). The result? A public-sector compensation scheme that skews very favorably to uniformed employees, fairly favorably to other blue-collar employees, neutrally to feminized jobs like teachers, and against public professionals and managers. The other part of the dynamic is at the federal level, where no civil servant can get paid more than a member of Congress, with a few exceptions. Since most federal civilian employment these days consist of professionals and managers, we have real problems with federal pay above the GS-13 level.

  3. My crappy pay as a state employee is only one aspect. The benefits package used to be pretty decent, which the state used as a make-up somewhat for the low pay.

    But now our legislature has snipped and slashed benefits to the point where the health insurance is no better than the private sector, and employees themselves contributed 2/3 of the funds in the pension plan (mandatory paycheck deduction). For me, that means the state puts only $51 per month in the retirement system at my salary level.

    As a result of the general lowering and crappiness of the whole compensation package, the state is steadily losing its ability to attract good talent (which it used to be able to) and now the workforce is more and more made up of those who can't get work in the private sector for some reason.

    And these are the people protecting everyone's drinking water from contamination, preventing child abuse, going after criminal offenders, and ensuring that the mentally ill and disabled have the services they need.

    These functions are already compromised and will be even more reduced if this cycle continues.

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