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Commentary By Daniel DiSalvo, Jeffrey Kucik

How Today’s Big Supreme Court Case on Public-Sector Unions Could Lead to a Fiscal Crisis

Governance Public Unions

The Supreme Court is to hear arguments Monday in Janus v. AFSCME, a case in which the justices will decide whether public-sector workers who do not belong to unions must still pay union fees. The court deadlocked 4 to 4 on a similar case in 2016. With Justice Neil M. Gorsuch now on the bench, many expect the court to declare that mandatory union fees for workers who are not union members violate the First Amendment because they compel such workers to underwrite speech with which they might disagree.

“Unfunded retiree benefits for state workers are a time bomb for state budgets.”

Such a ruling would weaken unions by reducing their revenue and limiting their bargaining power. But here is what has been going on under the radar. Janus could affect an important state government obligation: paying post-employment benefits other than pensions — primarily health-care coverage — to retired public workers.

As of 2016, these unfunded state government liabilities totaled $1.1 trillion nationwide. Stronger unions tend to push back when states try to reduce such benefits to balance their books. Weaker unions could enable states to relieve some fiscal stress.

How did we get here?

Compared with private industry, public employment tends to backload compensation into retirement. This arrangement is meant to compensate for the fact that many public-sector jobs offer lower salaries than their private-sector counterparts. As a result, public employees tend to have far more stable and secure retirements than similarly situated private-sector workers.

Yet before 2008, no one knew what state and local governments’ retiree health-care liabilities were — because reporting them was not required. In some states, post-retirement benefits were determined through collective bargaining, negotiations that take place behind closed doors. In other states, policy was made by obscure legislative committees. Either way, the promises of future benefits were then hidden in arcane footnotes in lengthy state budget reports. As a result, such liabilities ballooned. Legislators could satisfy unions by promising benefits sometime in the future, long after the next election cycle — without arousing any opposition.

No more. In 2008, the Governmental Accounting Standards Board changed the rules — and revealed the magnitude of states’ liabilities. Unlike pensions, these benefits are not funded in advance. States set aside very little money in dedicated investment accounts for future bills. This pay-as-you-go funding model forces state governments to come up with vast sums of money on the fly to pay for promises made by earlier administrations.

What does union strength have to do with this?

In recent research, we examined the relationship between unions and state retirement-benefit liabilities. We determined the liabilities in 49 states, leaving out Nebraska because of a lack of data. We measured the relative strength of unions in each of the states, using the percentage of public employees in each state who were members of a union.

First, we found that states with stronger unions have higher liabilities. Moreover, they tend to be states run by Democrats. Unionization rates — the percentage of public employees who are union members — are twice the national median in New Jersey and Connecticut, states where 60 and 61 percent of public employees belong to unions. In each of these states, liabilities are also twice the national median, totaling $7,770 and $6,785, respectively, when divided across those states’ total residents.

Second, and more surprising, public unions also secure generous benefits in Republican-controlled states. Contrary to Republicans’ reputation for austerity, GOP lawmakers are frequently aligned with unions, especially those representing police, fire and corrections officers. Such alliances result in promises of future benefits — and the accompanying liabilities. Moreover, workers in these fields are more likely to retire earlier and draw on their public benefits longer than other public-sector employees. Hence, red and purple states like Michigan, Ohio and New Hampshire also have significant liabilities.

Third, we found that unions have been the central interest groups driving up such liabilities. Legislators in both parties have incentives to appeal to public-sector workers since they are an important voting bloc and because unions are a source of campaign cash.

New York provides a useful example of the influence of public-sector unions. In 2015, a state Senate committee passed a bill to prevent state and local government employers from restructuring public employees’ future retirement benefits without first collectively bargaining with unions. The bill’s Republican sponsor hailed from Staten Island, where many police officers and firefighters live — and in 2016, received more than $60,000 in campaign contributions from public unions. That is three times the average given to other New York legislators, including Democrats, during the same cycle.

We see similar patterns nationwide. Republican legislators receive twice as much in labor contributions in states with strong public-employee unions ($91,000) than in states where such unions are weaker ($45,800). This money matters. In states where legislators receive greater contributions, retiree health-care liabilities are triple those in states where unions are weaker.

How might the court decision affect states’ options?

We’ll have a sense of how the Supreme Court is leaning after oral arguments. If the court rules for Mark Janus, an Illinois state employee who objected to the deduction of union dues from his paycheck, that is likely to reduce public unions’ political power. If so, without strong unions pressing for more-expansive benefits, states and localities will have more flexibility as they look at looming legacy costs. That’s especially true because post-retirement benefits are not protected by the constitutional and legal guarantees that make it hard for states to roll back pension commitments. Thus, states will have more opportunity to innovate — not only by cutting benefits or asking workers to pay more toward their health plans, but in other ways as well.

[Democracy weakens when workers have less power]

Some states have already acted. For example, after Wisconsin passed Act 10, eliminating health care as a subject of collective bargaining, the costs of benefits for retired state employees fell from $128 million in 2011 to $77 million in 2012 and have stayed at roughly that level since.

So what options are there other than the unpopular one of cutting retiree benefits? Another option is to create retiree medical trusts, or RMTs. In effect, these are defined contributions plans for health care run by and for workers. We’ve already seen such plans adopted by private-sector unions, most notably the United Auto Workers. A few public-employee unions, including those of Southern California firefighters, have followed suit.

The Affordable Care Act’s subsidized exchanges provide another option. If a government seeks to phase out promised retirement benefits for some categories of workers, retirees who were not covered through other jobs or their spouses could instead obtain subsidized health insurance through the state exchanges. Detroit and Chicago have decided to use the ACA to eliminate their retiree benefit commitments.

In other words, the Janus decision not only will affect unions’ power and influence but will also determine whether and how states avoid a looming fiscal crisis.

This piece originally appeared in the Washington Post's “Monkey Cage” Blog


Daniel DiSalvo is a senior fellow at the Manhattan Institute, an associate professor of political science at the City College Of New York (CUNY), and author of Government Against Itself: Public Union Power and Its Consequences (2015). Follow him on Twitter here.

Jeffrey Kucik is an assistant professor of political science at the University of Arizona.

This piece originally appeared in The Washington Post