Public Employees Unions & Bankrupt Governments

We may soon see a wave of city and county governments file for bankruptcy in the near future. Bankruptcy gives the local municipal governments the means to deal with a significant source of their problems with their budgets.

See: Bankruptcy talk spreads among Calif. muni officials

Despite its stigma, bankruptcy has paid an important dividend for Vallejo: It has forced public employee unions to the negotiating table, providing city leaders an opportunity to rein in compensation, which city officials said accounts for more than three-quarters of Vallejo's general fund spending. City Councilwoman Stephanie Gomes said the effort has led to concessions from three of four city unions.

Like Vallejo, Los Angeles is suffering from weak revenue at the same time the cost of its pensions and other retirement benefits are rising. Former Mayor Richard Riordan said those factors put the government of the second largest U.S. city on track to declare bankruptcy between now and 2014.

Riordan sees bankruptcy as a necessary tactic for squeezing concessions from the city's public employee unions. It could also pave the way for 401(k) retirement accounts for new city workers instead of defined pension benefit plans with escalating costs, he said.

"The threat of bankruptcy is really the only way you're going to get them to make major changes," Riordan recently told Reuters.

The public employee's unions are the most powerful lobbies in existence. They own most (particularly the blue) local governments, lock, stock and barrel. They are an organized block of votes and campaign contributions that dominate local elections. They get their people out to vote. They control huge heaping gobs of money that get donated to (almost exclusively Democrat) campaigns. They are the deciding factor in blue districts. They own them.

The end result? The municipalities that have been generous with the compensation packages that they have given to their public employees unions are now broke. There is little or nothing left in the private sector to loot. Their economies are in the toilet, the rich are fleeing the state, and the low end private work force that remains earns next to nothing and pays next to nothing in taxes.

In such circumstances, filing bankruptcy can look like a good idea.

Too bad it won't work.

Dealing the unions a setback only leaves them in place to again manipulate elections so that they can again vote themselves ever larger portions of the public purse. So long as Public Employee Unions are able to influence local politicians, they will own those politicians. Nothing will really ever change.

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See Also: Soak the Rich, Lose the Rich

We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.

See Also: Best and Worst States for Business 2010

How is it that the nation’s most populous state at 37 million, one that is the world’s eighth-largest economy and the country’s richest and most diverse agricultural producer, a state that had the fastest growth rate in the 1950s and 1960s during the tenures of Democratic Governor Pat Brown and Republican Governors Earl Warren and Ronald Reagan, should become the Venezuela of North America?

Californians pay among the highest income and sales taxes in the nation, the former exceeding 10 percent in the top brackets. Unemployment statewide is over 12.2 percent, higher than the national average. State politics seems consumed with how to divide a shrinking pie rather than how to expand it. Against national trend, union density is climbing from 16.1 percent of workers in 1998 to 17.8 percent in 2002. Organized labor has more political influence in California than in most other states. In addition, unfunded pension and health care liabilities for state workers top $500 billion and the annual pension contribution has climbed from $320 million to $7.3 billion in less than a decade. When state employees reach critical mass, they tend to become a permanent lobby for continual growth in government.

Are we having fun yet?