News Story

Proposal 2 Is Not Good For Government Union Workers

...or taxpayers, as Illinois shows what can happen when unions get nearly everything they want

It’s no secret that the main supporters of Proposal 2, which would guarantee public employee collective bargaining and override state laws that conflict with local contracts, are government employee unions. But members of those unions who think this is in their own best interest should look to another Midwestern state to see how the measure not be good for the state or for their own pocketbooks.

A new report from former New York Lt. Gov. Richard Ravitch and former Federal Reserve Chairman Paul Volcker — men who most recently worked for the Democratic governor of New York and President Barack Obama, respectively — details the precarious financial situation in Illinois, as the Wall Street Journal noted:

Unfunded pension liabilities now total more than $85 billion, while Medicaid liabilities have doubled in 10 years and are "growing far more rapidly than tax revenue." Rampant borrowing through the sale of pension bonds has made Illinois debt per capita one of the highest and its credit rating the worst. Based on a projected $27 billion cash deficit in Illinois in 2021, the University of Illinois Institute of Government and Public Affairs Fiscal Futures calculates that "if the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years."

Reforms to those Illinois pension obligations were blocked every step of the way by government employee unions. That worked for the unions in the short term, but what happens next? And what would happen in this state if Proposal 2 gives those unions the power to veto laws made by the elected legislature if they relate to collective bargaining?

Illinois has unfunded government employee pension liabilities of at least $167 billion, out of a total state budget of $33.7 billion (not counting federal money). In addition, it had an $8.3 billion general fund budget deficit in 2011, and has a bond rating of "A2" with a "negative" outlook — lowest in the country. The state is months behind paying its bills, to such an extent that the state Comptroller refers to it as a “deadbeat state.”

Raise taxes? Been there, done that. A lame-duck legislature jammed through a 67-percent income tax increase as well as a 69-percent business tax hike on the eve of its own final adjournment   in early 2011. As a result, businesses fled and state finances got worse.

National bailout? A few weeks ago, Illinois Gov. Pat Quinn floated the idea of a federal pension guarantee of the state’s debt. It was quickly shot down and ridiculed by leaders in Congress, non-profits and the Chicago Tribune.

So what happens when the laws of mathematics slam into a legislature that refuses to cut spending because of government union demands? Eventually, insolvency.

Here in Michigan, the government and public school employee unions pushing Proposal 2 have touted dozens of laws that would be nullified by the constitutional amendment. One of these is the 1996 pension reform that put new non-teacher state employee hires into 401(k)-type plans, preserving Michigan taxpayers from up to $4.3 billion in unfunded liabilities. Another is the law passed this year increasing the amount school employees must contribute to their own pensions, which is saving over $300 million this year and much more going forward.

Repealing those laws, and dozens of others, would cost the state at least $1.6 billion annually. It would add more costs to a pension and health care system and revert back to a system with nearly $50 billion in unfunded liabilities — benefits promised without allocated money. And that fiscal situation was getting worse and worse.

Case studies of what happens to public employees during bankruptcy are occurring around the country. In Stockton, Calif., police and fire positions were cut by 25 percent and 30 percent. In Central Falls, Rhode Island, current employees saw their pensions slashed 34 percent. In Scranton, Pa., city worker wages were cut to minimum wage and citizens are facing a 78 percent tax increase. And here in Michigan, emergency managers in Pontiac, Ecorse, Highland Park, Flint, Benton Harbor and elsewhere have been forced to amend collective bargaining agreements in order to save cities and school district.

If those Michigan cost-savings are repealed, and union power is so consolidated that the legislature cannot reform the system, little stands in the way of this state joining Illinois and many municipalities on the road to fiscal ruin.

Which would not good for taxpayers or government union workers.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.