It’s a story that’s playing out across the country — cash-strapped governments are scrambling to balance their budgets while hamstrung by the contracts of current and retired public union workers. The situation has led to demonstrations, legislators fleeing their states and harsh words from both sides.
The details differ from state to state, but governments are finding themselves facing the same fundamental financial challenges brought on by generous union contracts. As states try to fill budgetary gaps, they have little maneuvering room because of existing agreements with public sector union members. Without the ability to renegotiate contracts or get concessions from unions, governments are left to increase their tax rates and cut services. And the consequences for businesses and their private-sector employees are becoming steeper all the time.
Money equals power
Some public-sector unions, particularly teachers unions, donate huge amounts of money to political candidates, creating concerns about cozy relationships with politicians.
Consider the situation in Illinois. Facing a $15 billion budget deficit, the state’s General Assembly passed a 45 percent corporate tax increase and a 66 percent income tax increase in January. But while the state can raise taxes, it cannot lay off any members of the American Federation of State, County, and Municipal Employees Council 31. That’s because in the midst of his reelection campaign last year, the Democratic governor Pat Quinn signed an agreement with the union promising no layoffs or facility closures until the end of June 2012. If the state does lay off any employees, they will have to be non-union workers.
Collective bargaining rights
In Wisconsin, collective bargaining rights for public unions have been a major sticking point. Wisconsin governor Scott Walker, in taking on the collective bargaining rights of his state’s public sector employees, has pointed to the highest-paid employee in the city of Madison. In 2009, it was a bus driver who earned $159,258. That included $109,892 in overtime, which was guaranteed as part of the union’s collective bargaining agreement. The bus driver was one of seven in Madison who made more than $100,000 per year in 2009.
Walker said in a statement in March, “Our reform plan gives state and local governments the tools to balance the budget through reasonable benefit contributions. In total, our budget-repair bill saves local governments almost $1.5 billion, outweighing the reductions in state aid in our budget.
For weeks, protestors turned the statehouse in Madison, Wis., into a circus while they railed against Walker’s actions to balance the budget. Although Walker’s actions set off a firestorm of protests, many states do not grant their workers any collective bargaining rights.
Pensions have also become major financial burdens for states looking to balance their budget. Obviously, not all the public sector employees who receive pensions belong to unions, but those in unions often tend to have more muscle when it comes to negotiating and protecting pension benefits. According to some estimates, governments across the country have $1 trillion in unfunded pension liabilities.
As state, local and the federal governments strive to balance budgets in an economy that is still struggling, companies need to keep a careful eye on how exactly those holes will be filled. If public-sector unions don’t step up to do their part and share in the sacrifice, governments will have limited options. They can take on the unions directly, which can be difficult and politically dangerous. Or they can try to raise money through higher taxes, which will hurt businesses and their private-sector employees, who have already suffered in this difficult economy.