End collective bargaining for public employees
August 18, 2016
The Public Employment Relations Act (PERA) is the state law that requires local governments and public schools in Michigan to engage in collective bargaining. It never was a good idea, but recently it has been seen - by me, at least - as a major cause of underfunded pension systems and an obstacle to solutions.
I've posted several stories here about underfunded pension and retiree heath care systems. The most recent said Lansing's debt amounts to $16,000 per household and that pension systems in 80 of Michigan's 100 largest cities are underfunded.
The National Labor Relations Act was passed and signed into law by President Roosevelt in 1935. It does not apply to government employers:
Collective bargaining for public sector employees did not come to Michigan until 1965:
The Michigan Labor Relations Commission (MERC) was given responsibility for administration of the labor relations and mediation functions of the Act.
Pensions for public employees existed long before PERA, but they increasingly became a way to boost total compensation. With the public's soft spot for old folks, generous pension plans were easier to accept than high wages, and the complexity of the pension calculation made the long-term consequences less understood.
For school and local government administrators, it was also a way to kick the can down the road - satisfy union demands without damaging the current budget. And many of those same administrators, if not enthusiastic supporters of the union movement, appreciated the unions' campaign contributions and endorsements.
How pensions grow
The formula for calculating pensions is typically years of service times final average compensation (FAC) times a multiplier (for example, 1.5%). The FAC factor is the least understood.
FAC is the average earnings for the employee's best 2, 3 or 5 years, almost always the years immediately prior to retirement. There are several ways to increase FAC. Since FAC often includes payoffs of accumulated sick and annual leave at retirement, it is to the employee's advantage to to save up as much as allowed. This practice is called "pension spiking."
Other ways to increase FAC are achieved in the collective bargaining process. Step wage increases based on experience increase FAC. For teachers, advanced degrees - often earned while on the job - also boost salaries by an average of $10,000. Whether these salary increases are justified by improved performance in the classroom is questionable, but they do serve to increase FAC and the pension. The following is from a study of Michigan teachers done in 2005. It shows that veteran teachers with master's degrees make over twice as much as starting teachers:
FAC can also be increased by including in its definition as many types of pay as possible. For example, for a Lansing firefighter, FAC includes
Another way to increase FAC is by making the FAC period as short as possible, maximizing the average:
Another way to increase pensions is to increase the multiplier:
The third factor in the pension calculation is years of service. Ordinarily, an employee can increase his pension by staying on the job longer. That is not always the case, however. Although mandatory retirement age for Lansing police is 60 and firefighters is 70, they get a maximum 25 years service credit. State Police are also limited to 25 years. All can retire at any age after 25 years.
While retiring with as little as 25 years of service does not boost the pension amount, it increases costs to the employer by increasing the number of years the pension will be received. This is the downside of "early out" programs often pushed by unions as well as employers as a cost-saving measure with the claim that reducing staff or replacing higher-paid veteran employees with lower-paid new employees will reduce costs. Examples: Lansing Teamsters in 1992, Lansing School District in 2005, Lansing firefighters in 2011.
Changes to the pension systems were recommended by Lansing's Financial Health Team in their 2013 report. This is from page 51:
Although little information is released to the public, some changes have been agreed to by Lansing unions. I wrote about a "tentative agreement" with the IAFF, the union for Lansing firefighters, in December 2014.
Collective bargaining coercion
All provisions of the retirement plan are negotiated in the collective bargaining process and written into the contract. The employer has a tough time beating back benefit increases and winning reductions. This is from MERC's Guide to Public Sector Labor Relations Law in Michigan:
Collective bargaining sessions are not open to the public or to the public's elected representatives: the city council, the county board of commissioners or the school board. No one gets to observe the behavior of the employer's representative or the union negotiators. No meeting minutes are posted. State law does not require contracts to be posted on the employer's website.
What would happen if employers did not have deal with unions? That is, if PERA were repealed? They would have a free hand to deal with the underfunded pension problem:
With these debts facing us, public employers must be granted the power to take the steps necessary to make course corrections. We cannot afford to pay public employees any more than needed to attract and retain qualified employees. That's what's called the market rate, although the term might be offensive to Progressives. Paying more than the market rate is unfair to the people paying the bills: the taxpayers.
Any attempt to repeal PERA would bring on a tremendous battle, comparable to right-to-work. We know what happened then:
Nevertheless, it has to be done. I thought at first the best way to do it would be as a ballot initiative. That way, the decision would be made by Michigan voters and Republican legislators could not be blamed. But a ballot initiative is a massive, expensive undertaking, while simply passing a bill in the Legislature is routine. Then, if collective bargaining supporters think the public is with them, they can initiate a referendum to reject the new law. A referendum petition can be circulated from the date the law is enacted by the legislature to 90 days following the final adjournment of the legislative session. (source, page 3) Signatures of 5% the total vote cast for all candidates for governor at the last general election are required to put a referendum on the ballot. (Article 2, section 9 of the Michigan Constitution) That is 157,827 signatures. (source, page 4) 8% is required for an initiative.
You may remember that I tried to start a petition drive to repeal PERA back in 2010 - long before I became aware of the underfunded public employee pension problem. I took it on alone, and the campaign didn't get off the ground.
For more information on this nationwide issue, see the 2010 article The Trouble with Public Sector Unions.
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