Interview: Dr. Robert Costrell on Public Employee Unions

Last week, I had the opportunity to speak with Dr. Robert M. Costrell, an expert on teacher pensions and author of two Wall Street Journal op-eds from the last year ("Oh, To Be a Teacher in Wisconsin," February 25, 2011, and "Collective Bargaining Weakens Cities," November 23, 2011). In addition to writing extensively about the challenges posed by union-negotiated public employee benefits, Dr. Costrell has direct experience trying to address these challenges as an economic and education adviser to three governors of Massachusetts. Dr. Costrell kindly agreed to answer some of my questions about public unions, collective bargaining, and the manageability of government. A transcript of our conversation, edited for length and clarity, follows below:

Benjamin Miller: Your recent op-ed draws a distinction between state versus local unions. You argue that local governments are in a much weaker bargaining position relative to state and national public unions.

Robert Costrell: The evidence of it is in the results: more expensive health care benefits in particular. In at least some states, particularly the three I wrote about [Ohio, Wisconsin, and Massachusetts], they were more expensive at the local level than they were for state employees, for a number of reasons.

I’ll give you a clear example that I learned from my seven years at the state house in Massachusetts. In each state you typically have two houses, the Senate and the House of Representatives, and the House obviously has smaller districts. In each of those districts one of the most active groups is the [union for] teachers and other school employees. They’re all under the umbrella of one of the two state teachers’ unions, affiliated with the NEA [National Education Association] or the AFT [American Federation of Teachers]. So they’re very powerful and influence both Democratic and Republican legislators.

State employee unions are very influential as well, and many states will have to sit down and collectively bargain with them. But the state employees are concentrated in or around the state capital. So they do not have the type of influence district by district as the teachers’ unions.

BM: This discrepancy between the state and local influence of these organizations has significant fiscal effects. You say that in Massachusetts, the health insurance benefits on the local level were 37% higher than on the state level?

RC: The estimate by the Massachusetts Municipal Association—which is aligned more closely with the Democrats than the Republicans—was that the new law would save as much as $100 million a year, by allowing the localities to change the design of their health plans. Mostly by setting copayments and deductibles to match those offered in the state plans.

BM: It’s clear that a lot of these contracts with public employee unions on both the local and state level have stood in the way of the governments trying to make necessary fiscal choices, because they precommit large portions of their budgets that then can’t be adjusted when public needs change.

RC: You’re getting close to what I think is a critical distinction to be made between bargaining over wages and bargaining over benefits. When you’re bargaining over wages, you’re bargaining over a known dollar quantity. When you’re bargaining over benefits, you’re bargaining over plan design—co-payments, deductibles, and so on—and you have only limited control over what the actual cost trajectory of those benefits is going to be.

BM: In Ohio and Wisconsin, the recent efforts to reform the collective bargaining process focused primarily on benefits—collective bargaining wouldn’t be permitted for benefits, but it would be permitted for base salary. But if you plug one hole, will the public unions simply focus their efforts more aggressively on increasing base salaries? Or is that more politically difficult for them to accomplish?

RC: That’s a good question. Experience will tell. I’m getting speculative here, but the transparency with regard to wage negotiations is far greater than it is for benefits. For benefits you really have to get into the weeds—what’s the deductible, what’s the co-insurance rate, all these details that people are not typically aware of. And even if you are aware of them, it’s hard for the general public to figure out what they really cost.

Moreover, wages have to be paid now. It’s much easier for political entities to agree to something that they may not actually ultimately have to pay all of—that will fall on someone else’s lap.

Retiree health is another whole area here. It’s a cross-over area between pensions and health care, and that’s a huge issue. These are rarely pre-funded. They’re almost all pay-as-you-go. Until recently there weren’t even any actuarial valuation reports as to what the true liabilities were that were being incurred by these plans. There’s a real opportunity in many of these cases to kick the can down the road to someone else.

BM: We’ve just seen what happened in Ohio with the referendum around the reform attempt there—there was a lot of public outcry. Ohio voters rallied around trying to repeal these restrictions on collective bargaining rights. These are the same voters who are the taxpayers who will ultimately have to foot the bill for generous public worker benefits, but they seem to be averse to reform.

RC: What happened in Ohio, based on the polling data that I’ve seen, is actually fairly complex. Conflicting answers were given on a lot of polling questions. Taxpayers did understand that the benefits were getting too pricey. They actually favored some of the measures with regard to benefits. For example, the proposed law set a minimum required employee contribution for health insurance monthly premiums at 15 percent. That’s the level that is already paid by state employees. That kind of measure received support from the general public.

Other measures, however, were considered to go too far. The conventional wisdom about what happened in Ohio, which may well be correct, is that the bill was too broad. In particular, a lot of the television ads apparently focused on non-fiscal issues such as the right to collectively bargain over staffing ratios. For example, teachers’ contracts may stipulate what the maximum class size can be. But this also extended to public safety contracts. So contracts might specify how many emergency medical responders there needed to be. That was what was played up in a lot of the television ads, as I understand it, that resonated with the public—if we don’t have collective bargaining over these staffing ratios, the government will simply cut back and we won’t have enough first responders.

It was a mixed message in terms of the polling data. But then the question arises as to whether and when the legislature may try again with more narrowly crafted solutions to these problems. The fiscal issues aren’t going to go away.

BM: So if these reform efforts focused more specifically on the fiscal issues, there would be much more public awareness and a broader support base?

RC: If you focus on fiscal issues that voters can readily understand, such as how much you contribute to your health care. What the deductibles are.

In Wisconsin, for example, it was a fairly broad bill. Certain pieces of it were very easy to understand, such as the contribution rates. For health benefits, which is a locally-bargained item, the law stipulated that the employees would have to pay 12 percent of the premiums. For pensions—this is where it gets a little complicated. Benefits are determined by legislation. The pension contribution is also determined by legislation. The legislation specifies the employer and employee contribution. However, it did allow local unions to bargain for the employer to pay the employee share. And that’s what happened in 99 percent of the school districts.

Governor Walker’s legislation said, let’s not allow that anymore. Let’s stipulate that what the state pension plan says is the employee share will in fact be paid by the employee, rather than putting local governments or school districts in the difficult position of having to fend off collective bargaining demands that they pay that too.

That’s readily understood, and in fact, the unions agreed to that. They said, we’re willing to make the change on the contributions and have the employee pay the contributions for health care and for pensions. But we don’t want any changes in the collective bargaining. To my mind that was good but really only dealt with a minor aspect of the problem. A much larger dimension of the problem is plan design itself. In my February piece in the Wall Street Journal I laid out what was going on up in Wisconsin by using the example of Milwaukee Public Schools, where the fringe benefit rate is 74.2 percent. That’s huge, triple what it is in the private sector on average. If you have the employee pay the 5 or 6 percent for pension contribution that otherwise gets picked up by the employer, that’s good, but it really only brings it down to maybe 68 percent instead of 74 percent. You’ve still got a huge problem there, unless you can bring the costs of the benefits themselves under control, not just who’s paying what share of the premium. That’s why it was important, and that’s why I wrote that piece—to say it was important for plan design to be removed from collective bargaining.

BM: Reforming collective bargaining rights tends to be seen exclusively as a Republican issue. But in your op-ed in November you mentioned a number of examples of Democrats supporting similar reforms. In Massachusetts, you successfully laid a nominally bipartisan groundwork for reforms of the kind that are needed in many states, probably most states across the country.

RC: I served in the administration of Governor Romney, and the administration did find common ground with the Massachusetts Municipal Association on this issue. Ninety percent of what they did before then was argue for increased state aid, but they also realized that the cost drivers at the local level needed to be addressed. So there’s an organization that was overwhelmingly oriented toward the Democratic side of the aisle, which did find common ground with the Republican administration over this issue of trying to rein in local health care costs in particular, and to try to get them down to the levels of the state plan. However, we were not able to get anything through the legislature at that time—about six years ago. The legislature simply wasn’t going to give a Republican governor anything along those lines. It had to wait until there was a Democratic government and the fiscal crisis really hit hard.

The fact is that there really is a commonality of interest which is becoming more and more widely recognized, even in progressive quarters—out in California or wherever. Groups within the Democratic Party that want services are realizing that the capability to provide public services is being cannibalized by these out-of-control benefits, whether it’s health care or pension benefits at the local or state level. Take Governor Brown in California. He is now out there trying to get pension reform done. This isn’t a collective bargaining issue, it’s a state legislative issue, but there is that commonality that he has found with people that would otherwise not be allies. Of course he’s getting pushback. We’ll see what happens with the legislature.

BM: What conditions are necessary for reform—does there have to be a real fiscal crisis like California is experiencing before it’s possible to make legislative progress?

RC: Unfortunately I think the answer is yes. It does seem like things have to really get bad before these benefits can be reined in to sustainable levels. Some of these local unions are really willing to drive their governments to the brink of bankruptcy before they’re willing to come to the table. Look at Detroit. It’s about to go into a fiscal receivership on the part of the state. In Massachusetts we had a similar situation, even before this downturn, when during the Romney Administration the City of Springfield was going to default on its obligations. So legislation was enacted by the Democratic legislature to put the city temporarily under a state fiscal control board. One of the main things that happens in those circumstances is you get the collective bargaining agreements reexamined. Which you can’t do ordinarily. You need these extraordinary powers in order to do that.

BM: Anything else you’d like to add?

RC: Let me elaborate a little on this last point—the difference between private sector unionism and public sector unionism. Private sector unionism has some built-in restraints. You can't drive your employer out of business.

In the public sector, it’s a different situation. You’re dealing with an employer, which is to say the taxpayers—who it’s much harder to drive into bankruptcy. We’re now finding that it’s not impossible, but it takes a lot more, so things can go a lot further before you finally have to take some action to rein them in. One of the frustrating things in watching the rhetoric that goes on in these battles is to see this romanticized version of private sector collective bargaining—oppressed workers versus capitalist employers—being taken over, lock, stock, and barrel, to a completely different situation. It’s not like public sector employees are being exploited by capitalists—it’s the taxpayers. And yet you have the same rhetoric being used. I was reading a quote today about the fight up in Wisconsin about our “God-given right to collective bargaining.” Well, no—it’s not a God-given right.

As we know, even icons such as Franklin Delano Roosevelt thought it was completely inappropriate to have public sector collective bargaining. Even some of the private sector union leaders—George Meany, President of the AFL-CIO in the 1950s—said it would be impossible to have public sector collective bargaining. And yet it came to pass. And it came to pass quite suddenly. In the education area it happened in the 1960s because legislatures were convinced to change the law to allow that to happen. These are not rights we were endowed with by our Creator. They were given by legislatures. And if after a 50-year experiment it turns out that there are some very serious flaws that are going to endanger the ability of the public sector to provide the public services that we need, then legislatures can take it back.

BM: Are you more or less optimistic now than in the past?

RC: Definitely more optimistic than I was, say, five years ago. It’s going to be a struggle. But again, I think progress can be made. One of the reasons I wrote that op-ed in November was to say, look—this isn’t asking too much. To take measures that would bring local benefits into line with those of state employees. Not even talking about the private sector. Surely even on this we can reach common ground. Massachusetts was a prominent example of that.

(Robert M. Costrell is Professor of Education Reform and Economics and holds the Endowed Chair in Education Accountability at the University of Arkansas. He is also a Fellow of the George W. Bush Institute at Southern Methodist University in Dallas. He served as Chief Economist for the Commonwealth of Massachusetts from 2003-2006 and Education Advisor to Governor Mitt Romney from 2005-2006.)