Friday, March 16, 2012

More March Madness ... Governments, Unions and Taxpayers

In the spirit of madness in general, and March Madness in particular, today we'll look at the public sector pension, health care and related matters involving Detroit and the states of Michigan and New York.

All taxpayers need to pay attention, since these same issues may soon be coming to a town, county, state or country near you.

First up is Detroit. The Message of Motown makes all too clear the idiocy of the various unions' and political leaders' actions which may be driving (no pun intended) that city straight toward bankruptcy court:

"The clock's running out on Detroit. City leaders are up against a $200 million deficit driven by exploding labor costs and may not be able to pay the bills come May. . . .

Governor Rick Snyder is offering Detroit a "consent agreement," which includes $100 million of state-backed bonds that would tide the city over until labor agreements can be restructured. The catch: Labor agreements will have to be restructured. . . .

Legacy costs are bankrupting Detroit just as they crushed its automakers. Firefighters can retire at 55 and earn 70% of their highest salary plus a 2.25% annual cost-of-living inflator in perpetuity. The result? Employee benefits alone now make up about half of the city's general fund. Health costs have grown by more than 60% since 2008 while the city's pension bill has quadrupled to $200 million.

Since state law and collective-bargaining agreements bar the city from modifying worker benefits, Mayor Dave Bing earlier this year announced plans to lay off 1,000 workers, saving $14 million. But according to a report by Ernst & Young, Detroit could lay off 2,200 workers and still run out of money by July. Getting rid of all 11,000 city employees wouldn't solve Motown's problems.

That's because the city, which has twice as many retirees as workers, is spending more on retirement benefits than wages. Pensions make up about two thirds of the public-safety payroll, and many collective-bargaining agreements entitle laid-off workers to pensions. The city has a $600 million unfunded pension liability and a $5 billion—you read that right—liability for retiree health benefits.

The only way to wring out the savings that the city requires is to modify retirement benefits and make workers pick up more of the tab. . . .

The best solution would be for the state to limit collective bargaining as Republican Governor Scott Walker did in Wisconsin. This would allow city leaders to remain in charge and give them the flexibility to modify benefits and ward off future fiscal cardiac arrests. Such a move, if unlikely, would help the 109 other fiscally distressed cities on Michigan's watch list too.

Even if the state and city work out a deal to avoid default, Detroit must still contend with the problem of growth. Due to manufacturing job losses, a high crime rate and failing public schools, Detroit's population has shrunk by 25% in the last decade. The city has raised property and income taxes to make up for lower revenues, but that's merely caused more residents to leave. Detroit's unemployment rate was 17.3% in December.

The city may not be able to support its growing retiree force even with benefit modifications in another decade without population and economic growth. What that would require is making the city a more attractive place to live and do business—e.g., reducing the city's 2.5% income tax and 1% business tax. Mayor Bing, on the other hand, has proposed raising the business tax to 1.9% and the city council wants to increase income taxes.

Similar fiscal crises are playing out in cities across the country from Stockton, California, to Providence, Rhode Island. Maybe if a big city like Detroit fails, more politicians would start caring."

Then there's New York and its unaffordable public sector pensions. Cuomo Crosses Labor describes the situation as follows:

"The AFL-CIO is running ads blasting the governor's plan to "cut pensions by 40%." He should instead "make the big corporations and Wall Street pay their fair share." A couple of footnotes are in order. First, Mr. Cuomo's pension reform wouldn't affect current workers or retirees. Future workers would receive annuities about 16% smaller than what recently hired workers will get, though they would have to wait three more years to retire. New hires would also have to pay twice as much to their pensions -- about 6% of their pay -- but they would have the option of enrolling in a portable 401(k)-style plan in which they could select their own contribution rates.

The unions don't want to create another pension tier for future employees -- the state's sixth tier -- because it could sow more division among their ranks. But what really has them up in arms is the defined-contribution plan. Even though these plans would be voluntary, the unions fear that the governor's proposal lays the groundwork for making the 401(k)-style pensions mandatory down the line. Defined-contribution plans also make it harder for unions to retain members. The promise of a generous pension after 25 years of service is the only thing tying many public workers to their jobs.

Trouble is, taxpayers are the ones getting hit with the bill. In New York City, for instance, taxpayers are contributing $8 billion a year to worker pension funds, up from $1.3 billion a decade ago. . . .

Even though 66% of New Yorkers support the governor's plan . . . the union airstrikes have lawmakers running for cover. The governor recently suggested that he'd be open to goosing benefits when pension fund returns improve, and lawmakers are working on a watered-down bill that scraps the defined-contribution option. The governor and legislators may represent voters, but they answer to the unions."

Discussion and Analysis

How true and how very sad is the part about government, especially Democrats, answering to the unions.

Public sector unions create no wealth. Thus, they have no money except for that which they take from their members in the form of dues. The dues come from wages received by their members. Those wages come from the dues paying members' government employers--aka the taxpayers.

No jobs = no wages = no dues. Those jobs and wages are provided by taxpayers. Accordingly, the taxpayer, and not the unions or politicians, should call the shots.

And the taxpayer should be in charge, because that's where the money comes from--end of story.

Along that same line of reasoning, the city of Detroit creates no wealth and has no money of its own either. Same goes for the states of Michigan and New York and the U.S. government, too.

And it's equally true for all other governments, domestic and foreign, as well. In the end, it's all on the taxpayer.

To get money to pay benefits or salaries, either the city, state or national government must tap the taxpayers. And when a local government appeals to a "higher" level of government for funds, such as a state or the national government, that "higher" level of government has no money of its own either. Unless it's someone like the Chinese, of course.

The borrowed money for Detroit's and New York's pensions is simply part of a big shell game. Or Ponzi scheme, if you prefer. And it doesn't matter which government or lender fronts the funds. In the end, the taxpayer stands behind them, willingly or not.

Summing Up

Here are two questions for my fellow taxpayers.

(1) Why do the good citizens of Detroit, Michigan, New York and the U.S. as a whole put up with the antics of irresponsible public sector union officials and their government allies?

(2) Why don't we cause these "leaders" to come to grips with the simple reality that it's our money they're spending foolishly?

As background, the federal GM and Chrysler taxpayer bailouts once again confirmed to the union leadership and government officials that we taxpayers are fools, but that we fools are the ones with the money.

Just ask the UAW or the public sector union leadership.

Or Vice President Joe Biden, for instance. If all else fails, they know where to go for "taxpayer" help. Washington.

Thus, the public sector unions are merely following the UAW's and national government's auto industry bailout lead.

But taxpayers need some help and some leaders, too. And those leaders aren't likely to be found among union or government officials.

Thus, it's up to us. When will We the People stand up and speak clearly about all this? Soon, I hope.

Thanks. Bob.

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