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• Is Collective Bargaining Healthy for Taxpayers and our Financial Markets

Is Collective Bargaining Healthy for Taxpayers and our Financial Markets?

written on April 12, 2011 by Frank Fantozzi

With Senate Bill 5 passing in Ohio and many States considering similar measures in dealing with deficit positions, reexamining collective bargaining and its merits to taxpayers and in general financial markets seems overlooked.  Senate Bill 5 has clearly polarized groups.

What is taking place is that simple economics are catching up to the public sector. How long can states continue to operate in deficit mode, passing on future and exponentially larger obligations to the next generation? Let’s take a lesson from the auto industry where unions have played a prominent role for decades. Union employees in the auto industry enjoyed significantly stronger benefit compensation and benefit packages than comparable jobs for non-union workers. All of these costs were passed on to consumers.

For years Detroit’s Big 3 were able to compete based on habit and tradition. There were no real challengers.  However, over time quality decreased, prices increased and profit margins for the Big 3 shrank. Chrysler was bailed out years ago under Iacocca; more recently GM and Ford had to completely restructure; and Chrysler is now owned by an Italian company…Fiat. Why? Checks and balances eventually came into play.

Management is accountable to its shareholders. Unions are accountable to management and companies are accountable to consumers. When we, as consumers, grew tired of overpriced and underperforming cars, we bought elsewhere….Toyota, Honda, Kia and more.

An issue with collective bargaining in the public sector is that no system for checks and balances exists. Politicians, school boards and the like have little negotiating power. Public sector unions ask for more and more and their demands are routinely met. There is no consumer check in place to say “listen we think your product lacks quality and is expensive so we will go elsewhere.” It became too easy for the politicians, municipalities and school boards to pass the problem on.

In most states, while the private sector recently decreased compensation, eliminated jobs and essentially froze the creation of new jobs due to the Great Recession, total compensation for public sector jobs have actually increased relative to private sector is higher.

In addition, while private sector employees are employed at will, public employees are not. There are rules that govern civil servants and teachers which make it difficult to terminate their jobs if they are underperforming. Also, much of their compensation and job security is tied to tenure, not performance.

The first issue that needs to be tackled is whether any city, state or federal government needs to operate under a balanced budget approach. This would require cash Inflows to be balanced with cash outflows.  On many levels I think it is not economically prudent to run deficits. The danger with this is that in the end there is no clear accountability. Government officials should have a fiduciary obligation to watch over how our money is reinvested in services that benefit the community and remain accountable to taxpayers.

Think of it this way: How long can a business operate at a deficit? Eventually the business’ suppliers would stop providing needed inventory or supplies if they weren’t getting paid. Employed would have to leave because the company was unable to meet payroll obligations. The business would be limited in what it could borrow to sustain cash flow and would eventually be cut off by its creditors. The bottom line: It wouldn’t take long for a private sector business to go out of business. This is a perfect check and balance. Management is accountable to the shareholders, the employees accountable to management and the entire organization accountable to the consumer.

As taxpayers are we not the consumer? Yet as consumers of municipal and federal government services, the problem becomes far more complex. It is not as simple as merely firing your local government for shoddy service or poor quality in the delivery of services (school district performance; safety services like fire and police; infrastructure management and upkeep) as it is to fire your cable company or mechanic?

Collective bargaining, where members can collude with regard to acceptable wages, benefits and working conditions is analogous to the airline industry agreeing to fix ticket prices, capacity and so on. There are antitrust rules to protect consumers from this yet there is no similar protection for taxpayers where collective bargaining negotiations are concerned—taxpayers essentially have no say.

Currently, 22 states are striking back with legislation similar to what we’ve seen in the past in federal antitrust regulations.  In fact, each of these states has enacted Right to Work laws which allow employees to work for an employer that also employs union workers without being forced to join the union to gain or retain employment. I hope we can agree that while unions have a right to exist, it is not fundamentally right to force workers to join a union to work if they choose not to. 

In Ohio, we currently face an $8 million dollar deficit.  My understanding is that Senate Bill 5 seeks to maintain collective-bargaining rights for wages but bans bargaining over benefits, sick time and vacation, plus adding most public sector job classifications to the no strike list.

What hindered the auto companies was not necessarily higher wages but huge unfunded liabilities for pension plans and medical benefits. The benefits were extraordinary compared to the private sector. Regarding private sector total compensation versus public sector jobs, historically private sector jobs were higher. .So why would someone want to work for the government? Safety…it is a lot tougher to lose your job. In most cases it was a job for life. The tradeoff was simple…compensation versus job security.

Now we face a situation where government jobs promise both greater security and offer higher overall compensation. The result is a pool of voters who apparently do not want to place restrictions on the size of government; want to increase union membership with little or no accountability to the taxpayer; and are driving costs out of control.

The possible benefits to this bill in Ohio include more control and accountability to taxpayers. One example is determining pay based on merit instead of automatic raises which would potentially increase the value of the services provided to taxpayers while lowering costs and rewarding the best performing workers. Increased control over health benefits would also save taxpayers money. For instance, management would pick a uniform insurance policy that would apply to both themselves and workers, and employees would pay at least 20 percent of premiums. Union members now pay 10 to 20 percent of health premiums. Also, unions would have less control in demanding work force size requirements thus creating workforce efficiencies and lowering total payroll

While I’ve pointed out many of the issues we encounter today as a result of the collective bargaining process, I think it’s important to look at both sides and also acknowledge the positives. Collective bargaining often helps resolve differences sooner, preventing strikes and improving training and working conditions, which can help keep costs down over time. However, we have to weigh the pros and cons as taxpayers, business owners, home owners and financial advisors and ask ourselves if fiscal irresponsibility is healthy under any circumstance?   Do the pros outweigh the cons? And is collective bargaining right for the times we live in today?

States need to be able control costs and operate at least at a break even. Secondly, there needs to be a system of checks and balances for any process to ensure arms length bargaining. In only those situations do all parties benefit….Company /Government, Employees/Unions and Consumers/Taxpayers.

When artificially high revenue occurs from businesses colluding or from taxpayers and consumers paying artificially higher costs due to collective bargaining practices, an unhealthy economic environment results for all consumers/taxpayers. We create a house of cards instead of a strong foundation for the future. With better checks and balances for collective bargaining, costs should go down for taxpayers. More importantly, states that have Right to Work laws and limitations on collective bargaining will attract a greater number of businesses to invest in those states. This should improve tax revenues and increase employment in those states…both positives.

The financial markets have always preferred arms length arrangements in any business arrangement. This in essence is what free markets are about. Only in an environment where no side as an artificial advantage can parties negotiate the best terms for all.. Both sides win and ultimately the consumer/ taxpayer receives its best value.

When free market conditions improve the financial markets should see this as a positive and improve overall values because of the intrinsic value created by health economic political landscape. Governments operating in the black should improve credit quality of bonds and strengthen state and local government bond markets. With Government Agencies operating in the black, they will be in a better position to reinvest in infrastructure enhancing opportunities for businesses in that sector.

Governments can better offer incentives and create regional development to incubate new businesses while creating an environment to attract and keep more business in the US. This further enhances equity investing across the board but especially in small to mid-sized companies. Finally, if governments can operate in the black, pay fair wages and use some of the “in the black” funds to enhance quality life and business environments, increased tax revenues should occur. At some point, instead of increasing tax burdens ultimately in the future, governments can lower taxes which would benefit individuals and businesses. With more money for consumers to infuse and businesses to reinvest, better long term market growth can be achieved.

In conclusion, I think it is important that we examine this issue without bias to the union or non-union employees involved. That’s a hard thing to do when the parties at the center include teachers, firefighters, police and other neighbors, friends, relatives and community members we rely upon and admire for the important work they do. However, there are times when you have to step back and view an issue in terms of what is in the best interest of all the people served by that community, state or federal government.

I think it’s safe to say that our public school teachers would prefer an equitable resolution as much as, if not more than anyone. Without public school funding, the issue of teacher pay and benefits resolves itself--if there’s no money to keep the lights on, there’s no money to pay salaries or benefits. Both union and non-union employees are taxpayers, have children in our public school systems, depend on police and fire services and drive on the same public access roads. More importantly, we all share the burden of escalating deficits well into the future.

Securities offered through LPL Financial. Member FINRA/SIPC.