Public Unions for Private Benefits: Public Sector Unions Enrich their Members by Distorting State Finances


Concerned citizens of California are already familiar with the undue political influence of California’s prison guard union. According to Tim Kowal of the Orange County Federalist Society, the union raises $23 million dollars per year and spends $8 million of it lobbying. As a result, the state has found it impossible to engage in meaningful reform of its correctional system. The union helped defeat a 1999 bill allowing alternative sentencing to select parole offenders and attempts in 2000 and 2008 to provide substance abuse treatment for nonviolent drug users as a substitute for prison sentences. Such laws remain on the books that keep nonviolent criminals in prison, keeping prison guards in high demand with enviable job security.

Experience shows that when public sector unions become powerful, they can influence the democratic process to secure promises of future benefits. These benefits are ubiquitous; a recent investigation uncovered that many Chicago police officers are eligible to receive annual six figure pensions upon retiring at age 50. In no way are these promises in the public interest. And the real fiscal crisis in America, at the state and local level, looms in states where public sector unions are out of control.

Unions want more benefits and politicians would rather not incur the wrath of their constituents by raising taxes. To serve both masters, politicians incur more debt. But off the books, they also make completely unrealistic promises about retiree health benefits and pension plans. The promises are known as an unfunded liability – a promise to pay without a source of funds attached to it. Our research, “The Public Sector ‘Union’ Effect: Pushing up Unfunded Pension Liabilities and State Debt” published by The Beacon Hill Institute, establishes a convincing link between the strength of public sector unions and both public failures.

For California, for instance, we attribute 42.8% of state and local debt to unions. This amounts to $173 billion dollars. We arrived at this conclusion by finding that, after controlling for other factors, a one percentage point increase in membership in public sector unions will lead to an increase in state and local debt by $78 per person. So, if the percentage of public sector employees increases from five to six percent, then we predict that public debt would eventually increase by $78 times the population of the state.

In California, 58.7% of public sector employees are unionized – it isn’t even the most unionized state. The states in which public debt is most attributable to unions are Iowa (55.2% of their debt), Montana (54.3%), and Michigan (54.2%). The states which can least credibly attribute their fiscal problems to unions are Virginia (10.3%), South Carolina (11.8%), and North Carolina (12.8%).

But this is only side of the problem. Unfunded liabilities are not included in these figures. The Pew Center on the States has elsewhere analyzed how well states are managing their public pensions and retiree health care benefits. For each of these, Pew rated states as a “Solid Performer,” “Needs Improvement,” or has having “Serious Concerns.”  California was one of several states to have “Serious Concerns” for both.

There was only one state rated by Pew as having both liabilities under control, Wisconsin. To accomplish that, Governor Scott Walker expended a great deal of political capital to limit unions, and paid for it by nearly being recalled.

To critically analyze this, we constructed an index out of Pew’s two ratings. For each unfunded liability, we assigned a “0” for states with “Serious Concerns,” a “1” for “Needs Improvement,” and a “2” for “Solid Performer” Then, we summed the two ratings together. States like California that are performing poorly in both have a total score of 0 in the index. Wisconsin received a total score of 4. Any state that receives a total score of 0 or 1 is poorly managing its liabilities.

More detail is available in the paper, but one way of summarizing our results is this: After controlling for other relevant factors, a one percentage point increase the proportion of public sector employees who are unionized makes it one percent more likely for the state to receive a total score of 0 or 1. This demonstrates the link between unfunded liabilities and pressure from unions.

The combination of high public debt and the specter of a drastic increase in costs to pay for retiree benefits constitute a recipe for disaster. If the issue is ignored, states like California will experience problems very similar to what European countries like Greece and Spain are now experiencing. Similar austerity measures would mean cuts to basic services and the highest state tax rates seen in US history to avoid bankruptcy.

Responsible citizens and politicians should recognize the lethal pairing of high debt and poorly funded pension plans. And there is a clear relationship between poor state performance and the power of public sector unions. Engaging in real reform, as was accomplished in Wisconsin, may be politically costly, but it is the best path to allow democracy to function effectively once more.

Ryan Murphy, PhD, is a research associate at the Beacon Hill Institute at Suffolk University.