Who Pays for Public Employees’ Benefits?

Forbes, shamelessly chumming the waters of the internet with link bait, currently hosts a blog post working another variation on the eternal “lying Republicans” theme. The claim this time is that Wisconsin Governor Scott Walker is either a liar or a fool for claiming that his state’s public-school teachers are not already paying 100% of the cost of their pension and health-care benefits by having accepted lower salaries in exchange for higher benefit levels. The blog author and the “Pulitzer Prize winning tax reporter” upon whose analysis the post is based are themselves either liars or fools sorely in need of either remedial education or a good scolding. I am happy to provide both.

In a privately negotiated contract, what matters to the employer is total compensation paid, either in the form of salary or benefits. This much the Forbes writer and his prize-winning source are able to comprehend. But of course, any contract that extends over a reasonable amount of time is based on forecasts of industry-wide salaries and benefits. When the industry is in decline, or when the cost of benefits skyrockets, firms routinely seek concessions from their workers. Forbes’s blogger may even have come to understand this point, thanks to his commenters, but he persists in claiming that it is Gov. Walker who misrepresents the facts.

It does not seem to have gone unnoticed generally that health-insurance costs have been rising steeply for some time, and they appear to have received a further bump from Obamacare. Clearly, Wisconsin’s public employees have, in recent years, received a large increase in the their full compensation. They don’t feel this way, because there is no change in the amount of health insurance that they’re receiving in compensation. But the cost of their benefits to the taxpayers of Wisconsin has indeed risen. This much is clear, and is common to both the private and public sectors.

There is another point of contention in Wisconsin that is unique to public employees and is fully ignored at Forbes: the structural dysfunction of public-sector bargaining over deferred compensation. In the private sector the owners of a firm are indifferent between salary costs and benefit costs of equal present value. The difference between the two is in the pattern of cash flows, not the net worth of the firm. But this is not true–it is not even remotely close to being true–in the public sector.

Because salaries represent immediate cash liabilities while defined-benefit pension plans are deferred liabilities, the planning horizons of those negotiating with public employees are critically important. Elected public officials have time horizons that are truncated considerably by the nature of a political career. If they fail, they’re not around when the bills come due. And if they succeed, they’re likely to move up to a higher level of government that is not directly liable for the contracts they negotiated. So the bargaining is decidedly one-sided in favor of the employees’ unions. But what about the voters? Surely they care. The answer to this question is, yes–but.

In normal times, ordinary voters are concerned primarily with their own day-to-day lives. After all, the idea behind representative (as opposed to direct) democracy is for the general electorate to delegate direct oversight to its representatives. This situation allows the canny incumbent to buy the favor of public employees without incurring the immediate wrath of taxpayers through the simple tactic of boosting public-sector retirement benefits without reducing salaries. This political free lunch is possible because the cash liabilities of the state resulting from higher pension benefits rise only slowly over time. Some years down the road, when taxpayers start to notice that they are paying more and more in taxes with no corresponding increase in state services, the free lunch comes to an end. That is what is happening in state after state in the US.

The band-aid approach favored by the Wisconsin public-employee unions and, apparently, by Forbes, calls for a reduction in current payments sufficient to balance this year’s state budget. But once the crisis has passed, things will return to normal. Which is to say that the structural budget problems of the state will not have been solved. Wisconsin’s Republicans understand this, which is why they are pushing for truly structural reform of the negotiation process. Given the enormous resistance by Wisconsin’s Democrats, unions, and leftists, it seems clear that they understand this as well.

Apparently it’s asking too much of contributors to Forbes to understand as much.

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