Wednesday, June 6, 2012

Lessons From Wisconsin, San Diego, San Jose, Central Falls and Providence

The public employee unions are nursing their wounds yesterday from Wisconsin, San Diego, and San Jose. The public employee unions got hammered in Wisconsin yesterday.

They asked for it; they deserved it. Regardless of the union’s anger over the Republican’s union busting statute, they should not have started the recall unless they had a strong chance of winning..

They lost the recall election yesterday in Wisconsin by a decisive margin. Thus the union busting reforms of Wisconsin will remain in effect.

Just as significant voters in San Diego and San Jose, California voted to cut public employee pensions. San Jose is a Democratic city with a Democratic Mayor while San Diego is Republican with a Republican Mayor. Both cities’ budget are essentially broke due to union contracts, especially the underfunded pension plans.

San Jose spent $73 million in pension costs in 2001, but $245 million this year. Pension costs now chew up 27% of the general fund. The city has reduced its work force by 27% over the past ten years. It has built 4 new libraries and one police station, but lacks the personnel to staff them.

San Diego spent $43 million on pensions in 1999. This year the pension costs, $231.2 million, equal 20% of the general fund. It has cut 14% of its employees since 2005.

The joke is that at current rates cities like San Diego, San Jose, and Stockton, which is approaching bankruptcy, will have to shrink their work force to just one employee, whose job will be to administer the benefits.

San Jose approved the cuts with a 70% approval rate, while San Diego was slightly behind with 66%. These votes send a message.

The unions in San Diego and San Jose did not contest the elections, realizing that they would lose. Instead, they prepared law suits, hoping to find a favorable judge who would strike down the new rules.

As compared to Wisconsin, the voters in San Diego and San Jose did not strip the unions of their collective bargaining rights.

Let us now look to the two Rhode Island cities of Central Falls and Providence. Both were approaching bankruptcy due to the benefits and pension liabilities. The unions in Central falls refused to grant concessions, so the city entered bankruptcy, where the unions ran the risk of losing the benefits. They entered into an agreement with Central Falls trustee to cut the health benefits and pensions.

The Providence public employee unions saw the writing on the wall. Last week they entered into an agreement with the city to forgo pension retirees cost of living increases for 11 years, cap pensions payouts at 150% of the state’s median household income, and transfer retirees 65 and over into Medicare.

The unions otherwise retain their collective bargaining rights.

Let us remember that Governor Walker initially approached the unions about contributing to their health insurance and pension plans. The unions, out of the arrogance possessed by many public employee unions, brushed the Governor off. The rest is now history.

The moral of the story is that irrespective of the political power possessed by these unions in recent years, the public fisc is broke and the public knows it.
States like California and Illinois may hold out longer, but the benefits cannot last. The states cannot raise taxes fast enough to cover the escalating pension costs. The states, counties, cities, towns, and school districts are broke.

President Obama is not going to enact another Stimulus Bill to bail out the public sector employees for two years. He simply postponed the day of fiscal reckoning.

The unions have four choices: 1) sit down and meaningfully negotiate cuts, 2) let the voters, perhaps vindictively do it for them, 3) let the legislature do it, or win in the courts through litigation.

The first has the benefit of retaining collective bargaining rights. The alternative in many states will be a replay of Wisconsin.

The union wounds yesterday are not mortal; they should serve as a wakeup call.

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