The Conspiracy Against the Taxpayers

A prophetic piece by Steven Malanga from 5 years ago that predicted that rising public sector compensations would lead to rising taxes, debt and unfunded liabilities. Since then the situation has gotten markedly worse. While reading this keep in mind the fundamental differences that exist between public sector and private sector unions. The latter is disciplined by economic realities, whereas the former can utilize their political connections to increase their compensation at a high cost to tax payers. To view the full article, click on the following link:

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The Conspiracy Against the Taxpayers

By Steven Malanga

Autumn 2005

For 50 years, public unions, health-care lobbyists, and social-services advocacy groups have doggedly been amassing power in state capitols and city halls, using their influence to inflate pay and benefits for their workers and to boost government spending. The bill for that influence is now coming due, and it is overwhelming state and local budgets. For instance:

In New Jersey, legislators wooing union votes in 2001 voted a 9 percent hike in already rich pensions for the state’s 500,000 public workers, even though a falling stock market was shrinking pension-fund assets. Today, those new perks have added $1 billion to Jersey’s deficit-riddled budget and will add another $4.2 billion over the next five years.

In Washington State, the powerful teachers’ union led a successful 2000 effort to win legislation mandating smaller class sizes, promising that it would cost taxpayers nothing, because surplus revenues could cover the program. This year, the cash-strapped state passed $500 million in new taxes to finance the mandate.

In California, then-governor Gray Davis and a union-friendly state legislature passed a series of bills that swelled the number of state employees who could claim disability retirement benefits and also expanded the number of ailments automatically classed as job-related to include HIV, tuberculosis, and lower-back pain. The flood of new disability claims will cost the state’s retirement system some $465 million over five years, much of which will come out of taxpayers’ pockets.

Such extravagances help explain why state and local government spending reached an all-time high relative to the national GDP during the 2002 recession, producing a fiscal hangover that continues today. Even in an expanding national economy, with tax revenues surging once more, state and local budgets teeter in precarious balance, long-term deficits pile up, and politicians hike taxes to close spending gaps. The budgetary excess has prompted the stirrings of America’s newest tax revolt, as overburdened taxpayers grope for ways to curb the often automatic expansion of state and local government and to reduce the power of public unions.

The tidal wave of local government spending that produced this crisis built up as tax revenues poured into state and municipal coffers during the 1990s boom. State tax collections rose by 86 percent, or about $250 billion, from 1990 through 2001, while local property-tax collections soared by $90 billion, or 60 percent, during a period when inflation increased by a mere 30 percent. Rather than give surpluses back to taxpayers, government went on a spree, lavishing opulent pensions on employees and expanding politically popular health and education programs.

Unions and social-services groups were perfectly positioned to funnel this flood of surplus tax revenues into their pockets rather than back to the taxpayers. Starting with virtually no representation in the public sector 50 years ago, unions have relentlessly organized workers, so that in some states as many as 60 to 70 percent of public employees now are members. As a result, these unions wield huge clout at the ballot box, and union dues give them vast resources to sway public opinion and influence legislation. Gradually, public unions have aligned with local social-services and health-care groups that federal (and later, state and local) government began funding heavily during the War on Poverty of the 1960s and early 1970s—creating a new class of organization that lives off government money. These government-financed nonprofits and their union allies now make up a powerful coalition for bigger government and higher taxes in statehouses and big cities across the land, and they didn’t let a nickel of the 1990s tax windfalls slip through their fingers.

All told, the swell of tax revenues produced about $93 billion in surpluses that state governments soaked up, the Cato Institute estimates; indeed, state general-fund spending alone increased by 85 percent from 1990 to 2001, much faster than the combined rate of inflation and population growth. Absurdly, this spending tempo carried over into the economic slowdown that began in late 2001 and lingered into 2003, as budgets that appeared to be on autopilot grew rapidly, producing $85 billion in collective state budget deficits in fiscal 2003 alone. To close their budget gaps, state and local governments boosted taxes and fees on citizens and businesses already hurting from the economic downturn. Local property-tax bills, for instance, grew by about 6 percent a year from 2001 to 2004, even though the consumer price index increased by only 6.7 percent for the entire period.
The prime budget buster has been the outlandish wage and benefits packages of public employees. Contractually guaranteed, they are untouchable even during economic slowdowns. Public-employee unions have so successfully used their political muscle that whereas public-sector compensation once lagged the private sector, now the reverse is true. Astonishingly, the average state and local government employee now collects 46 percent more in total compensation (salary plus benefits) than the average private-sector employee, according to the nonpartisan Employee Benefit Research Institute.

Wages average a hefty 37 percent higher in the public sector, but the differences in benefits are even more dramatic. Local governments pay 128 percent more, on average, than private employers to finance workers’ health-care benefits, and 162 percent more on retirement benefits. Although the private sector’s heavier concentration of low-wage service employment accounts for some of the wage and benefit gap, public-sector employees do better these days even when you compare similar jobs. Total compensation among professional workers in the public sector is on average 11 percent higher than for similar jobs in the private sector, for instance.

Other comparisons of public- and private-sector pay illustrate the same gap. The Citizens Budget Commission, a New York City fiscal watchdog, found that the average public-sector worker in the metropolitan region received 15 percent more in pay (not including benefits) than the average private worker. The gap was greatest in service-sector jobs, like security guards, health-care workers, and building-maintenance workers, where government on average paid 94 percent more than private firms. A 2001 Rhode Island Public Expenditure Council comparison of private- and public-sector average wages across the nation found that the average public-sector wage was higher in 35 states.

The public unions could only achieve this reversal because government is a monopoly, exempt from marketplace discipline. Competition can punish private companies that give away the store to employees or that perform ineffectively—driving the most profligate or inefficient out of business—but government is perpetual regardless of how it performs, and public unions have succeeded over the years in layering new perks and benefits on top of previous collective-bargaining gains that rarely get rolled back, even in tough times. Awash in contributions from the unions and agencies whose pay they set, the gerrymandered state legislatures and one-party city halls that hand out such largesse are well insulated from voter retribution. Thus taxpayers wind up being nicked by a thousand small benefits piled upon one another year after year.

The buildup of two benefits in particular—pensions and health care—is now producing major budget disasters nationwide. State and local governments used tax surpluses and the 1990s stock-market rise to gold-plate pension programs, with disastrous effect once the stock boom ended. By 2003, state and local pension funds had accumulated over $250 billion in unfunded liabilities, reports the National Association of State Retirement Administrators, leaving taxpayers on the hook. Pension costs in California’s state budget skyrocketed 14-fold, from $160 million in 2000 to $2.6 billion in 2005, and are headed to $3.6 billion in 2009. New Jersey’s pension costs are rising so quickly that without reform they will consume 20 percent of the state budget in five years, up from 8 percent this year. Illinois’ state budget pension obligations will reach $4 billion a year by 2010, which could make them a bigger share of the state budget than local aid to education.

The pensions for which taxpayers must now foot the bill far outshine what many of those same taxpayers in the private sector receive. In New Jersey, for instance, a 62-year-old state employee who retires after 25 years gets 50 percent more in yearly pension payments than an employee retiring with the same salary from the Camden, New Jersey plant of Campbell Soup, a Fortune 500 company, according to the Asbury Park Press. In addition, the state employee receives free health insurance for life to supplement Medicare, while full health benefits for private-sector retirees are now rare. In California, a public employee with 30 years of service can retire at 55 with 60 percent of his salary, and public-safety workers can get 90 percent of their salary at age 50. By contrast to these rich payouts, the small (and shrinking) number of private firms that still provide “defined benefit” pension plans—instead of the now-common “defined contribution” plans that transfer all risk to the worker—pay on average 45 percent after 30 years of service.

Retired public employees in many states also get cost-of-living adjustments to their pensions, which those private-sector workers who still have defined benefit plans rarely enjoy. In Illinois, for instance, where pension payments increase by 3 percent each year—faster than the rate of inflation for most of the last decade—an employee who retired ten years ago with a monthly pension of $4,000 would now be collecting $5,400 a month.

Features unheard of in the private sector drive up government pension packages still further. In New York and Oregon, public employees who contribute their own money to retirement plans get a guaranteed rate of return that is often far beyond what the market provides, and taxpayers must make up the difference. In Oregon, the return is 8 percent annually—about double what safe investments like treasury bonds provide today.

Yet even with states facing fiscal ruin, legislators continue to pour out new pension kickers and health benefits. New Jersey lawmakers recently proposed 86 bills that would increase pension benefits, even though Acting Governor Richard Codey has declared that “these entitlements are strangling the taxpayers of New Jersey.” In Illinois, legislators trying to craft an early retirement plan three years ago to help meet the state’s budget crisis so enriched the plan at the last minute that it cost about $200,000 per retiree, instead of the projected $80,000.

Though union leaders defend these porcine compensation packages by claiming that they help private workers by preventing a private-sector race to the bottom on wages and benefits, high public-sector pay is partly responsible for holding down private wages. Rhode Island is an especially telling example. The state ranks fourth in average pay in the public sector but only 23rd in average private-sector wages, according to the Rhode Island Public Expenditure Council. To cover its high public-sector employee costs, Rhode Island has consistently raised taxes, giving it the sixth-highest total state and local tax burden in the country, including one of the highest corporate tax rates and sky-high property taxes. Those high taxes drain investment capital out of private-sector firms, making it harder for them to finance improvements that boost productivity, which is what in turn allows private-employee wages to rise. Rhode Island businesses have among the lowest rates of investment capital per employee in the country—30 percent below the national average. Thus, the more the state enriches public workers, the further its private workers, who pay public-sector salaries, fall behind. Rhode Island should serve as a cautionary tale for other states: it has one of the highest rates of unionization in the public sector—62 percent, compared with 37 percent nationally.

In this environment, public-sector retirees have become the haves and private retirees the new have-nots. When New Jersey’s pension crisis hit, the state’s newspapers began chronicling the flight of private-sector retirees to states where taxes are lower. Beset by its high public-sector costs, New Jersey has the highest combined state and local taxes in the country, and the fourth-highest level of migration of citizens to other states. One retiree from a manufacturing job told a local newspaper that he moved to Delaware so that he could reduce his property taxes from $3,300 a year in Jersey to $615.

Such resources have made teachers’ unions among the biggest lobbyists and political givers at the state and local level. The Wisconsin teachers’ union plunked down a state-high $1.5 million for lobbying in Wisconsin’s most recent legislative session, while Minnesota’s union was number two in its state, spending nearly $1 million. Oregon’s teachers’ union, with $15 million in annual revenues, spent nearly $900,000 on political contributions in the state’s recent legislative races, and its support, according to the Oregonian, is one reason that Democrats now control the state’s legislature and that a union ex-president is the governor’s education advisor. In New Jersey’s last legislative elections, four-fifths of all incumbents got donations from the state’s teachers’ union.

In addition to higher wages and benefits, this mega-lobby increasingly has focused its might on schemes requiring big spending increases that will boost membership but are of dubious education value. A $2 million advertising campaign by California’s teachers’ union in the mid-1990s, for instance, won nearly $1 billion from the state government to cut class size, though considerable research shows that class-size reduction does little to improve student performance. The money set off a hiring frenzy that added 30,000 teachers (and union members) in three years, but a Rand Corporation study found no significant change in test scores of students who wound up in smaller classes. The program’s only tangible result is that those without full credentials jumped from 1.8 percent of all California teachers to 12.7 percent, as school districts snapped up warm bodies to get the extra state aid.

With no other group able to spend anywhere near so lavishly on education advocacy, voters now get most of their information—or disinformation—from union lobbying and advertising. By relentlessly repeating that mean-spirited taxpayers shortchange America’s kids, teachers’ unions and education bureaucrats, with help from PTAs, have helped spread the myth that public schools are underfunded. An Educational Testing Services poll found last year that nearly half of Americans think that the schools spend on average just $5,000 per pupil a year—half the real amount.

Unions have also convinced Americans that teachers are underpaid, when they now take home considerably better pay packages on average than professional workers in the private sector. The federal government’s national compensation survey estimates that local public school districts pay teachers an average of $47.97 per hour in total compensation, including $12.39 per hour in benefits—figures that far outstrip not only what private school teachers earn, but also the average of what all professional workers earn in private business, a category that includes engineers, architects, computer scientists, lawyers, and journalists.

Teachers’ unions use their power over state lawmakers to smother cost-saving reform ideas in their cradle. When school reformers sought support from Connecticut state legislators, they found teachers’ union representatives camped outside the office of the legislature’s education-committee chair, keeping tabs on who met with him. When the Yankee Institute for Public Policy, a Hartford free-market think tank, held a media briefing on the state’s budget, representatives of state-employee unions outnumbered the invited press. Institute board member George Schiele calls their pervasive presence in Hartford “Orwellian.”

If state pols find teachers’ unions so fearsome, little wonder that local school boards and municipal officials are no match for them at all. Lewis Andrews, a member of the Redding, Connecticut, board of finance, got a glimpse of their raw power when he proposed an innovative alternative to the town’s plans to build a new high school for a projected 50-student enrollment increase. Supporters mailed out a proposal to local residents, suggesting instead that the town pay to have 50 kids sent to private schools and save the millions on construction. The state’s education lobby, which resists any program that smacks of privatization, went ballistic. “At 11 o’clock on the morning the proposal started arriving in the local mail, the president of the State Senate stormed into my office and started screaming at me about it,” says Andrews. “I have no idea how they even found out about it so fast in the capitol.” Needless to say, Redding is building its high school.

The education lobby’s success most clearly shows up in the stunning growth of U.S. public education spending. In the last 30 years, per-pupil spending has nearly doubled, after accounting for inflation, to about $10,000 a year—far more than in most other industrialized countries, according to the Organisation for Economic Co-operation and Development, whose latest figures show that the U.S. outpaces Germany in per-pupil spending by 66 percent, France by 56 percent, and the United Kingdom by 80 percent. Even so, American students rank only in the middle of countries on student achievement tests, the OECD reports.

Municipalities have largely asked taxpayers to finance this spending through local property taxes. Since 1980, property-tax collections in the U.S have increased more than fourfold, from $65 billion to about $275 billion—“only” a doubling after accounting for inflation. Collections have well outpaced the combination of population and inflation growth, according to the Tax Foundation, which found that per-capita local tax collections rose by over 20 percent after inflation from 1987 to 1997. The reason is clear: Pennsylvania’s Commonwealth Foundation estimates that in the two decades before mandatory union dues, local property taxes in that state increased just 14 percent after inflation. But in the 13 years after the 1988 legislation, property taxes went up 150 percent in real terms. Across the nation, much of that tax revenue has gone to finance new local education hires. Local public education employment grew 24 percent, or by 1.4 million workers, in the U.S. during the 1990s.

Since 2003, Medicaid has surpassed even education funding as the biggest state budget item. California will spend $32 billion—29 percent of its budget—on subsidized health care this year, a 129 percent growth in the past decade. Ohio’s $10 billion Medicaid program, left unchecked, will consume half of the state’s general-fund spending by 2009. New York State’s $44 billion Medicaid budget not only constitutes 42 percent of state spending but also is now a larger budget item than education spending even for many of the state’s county governments, which are forced to share Medicaid’s costs (as is not the case in other states).

Health-care advocates insist that Medicaid spending is growing because of increasing need, but the numbers tell a different story. As tax revenues poured in during the 1990s, state politicians funneled the money into ever more generous programs. According to the Kaiser Family Foundation, two-thirds of Medicaid services that states now provide are optional under federal guidelines—from free ambulette rides to doctors’ offices to dental and podiatry services. From 1994 to 2000, when U.S. poverty rates were plunging, spending on Medicaid, originally a program for the poor, grew by 30 percent after accounting for inflation, an American Enterprise Institute study shows. By contrast, Medicare spending, entirely controlled by the federal government, grew only half as fast, and total U.S. health-care spending increased by 18 percent after inflation.

SEIU has managed to exploit other well-intentioned Medicaid programs for its own purposes. Washington State, for example, hoping to encourage family members to care for sick relatives at home, decided to allow Medicaid to pay family members or friends of recipients a nominal, state-subsidized fee to care for them, and such caregivers now account for about two-thirds of the state’s subsidized home-health-care workers. But SEIU, sensing opportunity, campaigned for the right to organize these caregivers, eventually spending $1 million on a ballot initiative that had little formal opposition, because few understood its implications and because no other special interest would lose from the legislation—just the taxpayer. When SEIU then successfully signed up the program’s 26,000 workers, doubling the union’s state membership, it demanded big increases in salaries as well as health and pension benefits. One local newspaper even quoted a newly organized mother whom the state was now paying to care for her retarded son as saying, without irony, “We need a decent wage.”

Having opened the door to this madness, Washington State can’t shut it. Not only has SEIU obtained two raises—costing the state, which had a budget deficit of $2 billion this fiscal year, tens of millions in extra payments—but now the union is pushing for a law requiring the state to pay these workers for services like shopping and cleaning, which by one estimate would push the cost of home health care beyond the cost of residential care, defeating the home-health-care program’s original purpose.

With so much power and money at stake, health care is witnessing the transformation of former professional organizations into militant unions, as happened earlier to the National Education Association. The bellicose California Nurses Association, for instance, is using its vocal opposition to Governor Schwarzenegger as a springboard to national organizing. The union won a political prize in 1999 when Governor Davis and the Democratic-controlled legislature mandated that hospitals have a five-to-one ratio of nurses to patients, despite warnings from hospitals that the law would cost the state’s health-care system $1 billion annually and be virtually impossible to implement because of a nursing shortage. Governor Schwarzenegger, responding to reports that hospitals were closing down emergency rooms and wards because they couldn’t meet the staffing demands, delayed implementation of the ratios for three years, igniting a firestorm. The union followed him on dozens of out-of-state visits to picket his appearances, hired a blimp to fly over a Super Bowl party at his private residence, and spent $100,000 on ads attacking his decision.

Government spending has bred strange alliances, as unions and managements put aside their differences to lobby for more public money. In Illinois, Maryland, and Ohio, for instance, the nation’s largest operator of private nursing homes, Trans Healthcare Inc., struck an agreement with SEIU locals not to oppose organizing efforts at its facilities if the union would help it lobby for higher Medicaid reimbursements. Together, the two groups created a separate lobbying arm, financed with a $100,000 union contribution and a company pledge to match that amount.

Unsurprisingly, the unions and nonprofit hospitals that have flourished in the shower of government money don’t want any private-sector competition. In Rhode Island, for instance, unions have joined with doctors and local hospitals to oppose the entry of for-profit hospitals into the state, arguing that nonprofits are more altruistic and more faithful to their mission than profit-making hospitals. This contention ignores the fact that nonprofit hospital executives often pocket huge salaries and that subsidized nonprofits without bottom-line motivation often become inefficient and offer overly costly care. Nonetheless, the coalition managed to push through one of the country’s strictest hospital-takeover laws, barring for-profits from entering Rhode Island on the false grounds that they funnel money out of health care to investors. Now Rhode Island is paying the price for its unwise policy. Far from siphoning money out of health care, for-profit hospitals can use their ability to raise money in the capital markets to invest in new technologies and facilities, exactly what Rhode Island needs, since it is beset by “an aging hospital infrastructure that requires significant investment,” according to a state health-care group.

Even so, the out-of-control cost of state and local government has sparked the stirrings of what could be the next great taxpayer revolt. In states where citizens have the right to get initiatives on the ballot and vote for them in referendums, campaigns to limit the growth of government are gearing up. Ohio secretary of state Ken Blackwell is stirring up taxpayer support for a constitutional amendment to cap state spending increases. Nevada voters recently said that they favor spending restraints by a 46-to-19 percent margin, encouraging anti-tax activists to go ahead with a ballot initiative after legislators shot down a bill to restrain state spending. Taxpayer groups are also pushing tax and spending limits in Maine and Oklahoma and exploring a ballot initiative in Tennessee after lawmakers there gobbled up $272 million in surplus revenues, squandering much of it on expanding the state’s Medicaid system, without providing any tax relief.


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