Could Janus Ruling Open the Door to Pension Reform?

This week, the United States Supreme Court heard oral argument in the case of Janus v. AFSCME Council 31, which could significantly impact unions representing government employees. A ruling in favor of plaintiff Mark Janus, an Illinois social service worker, would free public employees across the country from being required to pay for union representation as a condition of employment.

Those payments, known as “agency fees,” which non-members pay in lieu of union dues, are supposedly intended to pay for the costs of collective bargaining on behalf of all employees in a workplace. All workers, union leaders claim, should pay their fair share—including individual workers who would prefer to negotiate with their employer on their own or through a different representative.

Agency fees are supposed to pay only for the costs of collective bargaining. But money is fungible. Funds received for one purpose free up other funds to use for other purposes—and one of those other purposes is often politics.

In states like California and Illinois that allow the collection of agency fees, public sector unions wield considerable political influence, which has enabled them to negotiate higher compensation for their members and increased public spending and more government hiring. Thus, those states’ alarming fiscal condition shouldn’t be surprising.

One major area straining state budgets is unfunded public pension obligations and retiree health care benefits. The funding problems are well known, but opposition by government employee unions has made reform extremely difficult.

“Thirteen years ago, California’s teacher union went toe-to-toe with the state’s movie star governor and crushed him at the ballot box, funding almost half of the $121 million campaign that swamped his proposals to revamp tenure and restrict government spending,” notes Adam Ashton of The Sacramento Bee.

Janus, along with a case now before the California Supreme Court, would not make reform easy, but they can certainly help, and not a moment too soon.

In the Golden State, a new study by the California news site CALmatters, in partnership with The Los Angeles Times and Capital Public Radio, lays out the extent of the problem:

Broadly, we know California state and local governments face more than $400 billion in unfunded liabilities for public employee retirement benefits—enough money to cover the state’s general fund for three years, including funding schools, universities, prisons and health care for the poor.

That debt is made up of two chunks: $254 billion in pension liabilities and $147 billion in retiree health care.

A major driver of these funding gaps is union-friendly politicians offering generous benefits, which they justify based on overly optimistic return projections for pension fund investments.

For the California Public Employee Retirement System (CalPERs), the nations’ largest public pension fund, the CALmatters sstudy’s author, Judy Lin, explains:

Gov. Gray Davis signed legislation in 1999 granting early retirement and enhanced pension benefits for state workers amid the intoxicating highs of the dot-com bubble. School districts and local governments followed suit and many employers took so-called pension holidays, or a break from making pension contributions. Assuming an annual return of 8.25 percent over the coming decade, proponents, largely public employee unions, sold the measure with the promise that it would not cost taxpayers a dime.

That experience is similar to that of Illinois, where public pension investment returns have been unable to keep up with the growth in benefits.

In addition to political activism, government employee unions also have successfully opposed reform through litigation, thanks to laws in 12 states, collectively known as the “California Rule,” that treat pension obligations as ironclad contracts. In California, a case currently before the California Supreme Court could give elected officials seeking to curb pension costs greater flexibility in union negotiations.

“Union leaders looking at the make-up of the Supreme Court are anticipating a loss, potentially driving down their membership by one third or more,” notes the Bee’s Ashton. “That begs the question, would Schwarzenegger’s initiatives have passed if the California Teachers Association had $20 million less to throw at them?”

For more on public pensions, see here.

For more on government employee unions, see here.