Even an Unnecessary Crisis Created an Opportunity to Apply the Shock Doctrine:

The U.S. States' Fiscal Crisis and the Attack on Collective Bargaining Rights of

Public Employees

Jeffrey KeefeRutgers University

Great Recession 2007-?

• Great Recession officially began in December 2007 and ended in June 2009, according to the NBER.

• Over the course of the recession, the nation’s gross domestic product (GDP) went from $13.4 trillion during the fourth quarter of 2007 to $12.8 trillion in the second quarter of 2009, a decline of 4.1 percent.

• Since the official end of the recession in June 2009, the GDP has reversed its decline and as of the first quarter of 2011, it surpassed pre-recession levels.

Recession Ends Without Jobs Recovery

• Total private employment declined by 10% (a loss of 11.7 million jobs) from June 2007 to January 2010.

• In April 2013, private employment had partially recovered but was still down 3% (3.4 million jobs).

• Lagging the decline in private employment, state and local government employment began its decline in July 2008 and has continued to decline through April 2013, with a loss of 726,000 jobs (3.7% of employment).

State Budget Problems Emerge in 2008

• During the 2009 fiscal year, 43 states faced budget gaps totaling more than $60 billion (National Conference of State Legislatures 2009).

• By December 2008, 22 states had made or announced cuts to their expenditures totaling $12 billion.

• By July 2009, 42 states had made cuts to their expenditures totaling more than $30 billion, and 30 states had increased taxes or fees to boost their revenues

7

Source: National Governor’s Association, Fiscal Survey of the States Fall 2012

States’ Budgets Changes

Source: National Governor’s Association, Fiscal Survey of the States Fall 2012

Pro-Cyclical State Revenue Changes

Source: National Governor’s Association, Fiscal Survey of the States Fall 2012

Pro-Cyclical State Budget Cuts

Report of the State Budget Task Force July 2012

Federal Support to States Declines in 2011

• The ARRA provided increased grant funding for education, Medicaid, transportation, energy, water, and other programs.

• Most provisions of the Recovery Act expired in 2010 but some were extended in August 2010 to provide education and Medicaid assistance to States in 2011.

• The total fiscal relief provided to the states by the Recovery Act was $141.1 billion from 2009 to 2011.

• In 2011, Federal aid to states decreased by $1.6 billion from 2010.

• In 2012, state annual appropriations were estimated to decrease by $25 billion from 2011.

Did State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act • The American Recovery and Reinvestment Act

(ARRA) of 2009 included $88 billion of aid to state governments administered through the Medicaid reimbursement process.

• Baseline econometric specifications suggest that $100,000 of marginal spending by states increased employment by 3.8 job-years, 3.2 of which are outside the government, health, and education sectors.

• Gabriel Chodorow-Reich, Laura Feiveson, Zachary Liscow, and William Gui Woolston August 2011

Do US Elites Want Full-Employment?

• 2010- Record Profit Share, Declining Labor Share• 2013 Record Stock Market Valuations• 2009- Record Low Bond Rates• Little Inflation• Decline in Federal Budget Deficits• Labor Costs Decline• No Restructurings or Indictments for Too Big-To-

Fail Banks or Bankers

What Do You Do, If You Are a Republican Governor in 2010

• State Faces a Massive Revenue Shortfall• Oppose any Federal Stimulus• Refuse to Increase Taxes or Fees• Advocate Tax Cuts to Restore the Economy• And States Are Constitutionally Required to

Balance the Budget?

New Jersey Republicans Devise a Governing Strategy

The election of Chris Christie in 2009 challenges how to govern

without revenue

New Jersey Employment 1990-2011Peak June 2007 4.16 Million

January 2011 3.76 Million Loss of 400,000 Jobs

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

3,900

4,000

4,100

4,200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Christie on the Attack

• Christie portrayed overpaid public employees as the chief cause for rising property taxes and the only fair solution was to roll back taxes by insisting public employees accept less.

• His anger and outrage was focused on the 200,000-member NJEA. On April 5, 2011 on national television, Christie described the New Jersey Education Association leaders as a "group of political thugs."

• In June 2010, he eventually passed a state budget with the help of a stunned Democratic majority legislature that capped property taxes at 2% annual increases for three years, and greatly reduced the state’s support for schools and municipalities.

24

It's time: Freeze N.J. public workers' pay, change bargaining rules. Star-Ledger Editorial Board/The Star-Ledger. Feb 28, 2010

In the Fall of 2010 NJ Reform of Collective Bargaining

• Both Governor Christie and the Star Ledger targeted collective bargaining for reform.

• Their concern, however, was not basic collective bargaining rights, but police and fire interest arbitration.

• They argued interest arbitration produce exorbitantly expensive contracts, because arbitrators were giving greater weight to community pay comparisons rather than the government’s ability to pay when fashioning awards.

• They sought a series of reforms, including capping wage increases to 2% per year.

• The reforms were enacted into law in December 2010

Narrowing the Scope of a Narrow Scope Collective Bargaining Law

• Pension were never covered by collective bargaining

• In June 2011, employee contributions were significantly increased for all defined benefit plans.

• Health Insurance was bargainable, but in June 2011 legislation structured employee contributions for the next four years effectively removing health insurance from bargaining.

• Democrats insured employee contributions were progressive ranging from 10% to 35%.

27

Rank 2

Rank 2

Rank 1

New Jersey Top Ranked State for Citizen Earnings

$68,080

$67,035

$50,740

$54,117

$49,194

$38,611

$85,761

$63,366

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000

MEDIAN HOUSEHOLD INCOME, 2007

Maryland

New Jersey

United States

PERSONAL INCOME PER CAPITA

Connecticut

New Jersey

United States

MEDIAN Family INCOME, 2007

New Jersey

United States

Source Statistical Abstract of the United States

The Spring Offensive of 2011

And the Public Responses

Wisconsin’s Budget Repair Bill

• The most onerous collective bargaining law was passed in Wisconsin as part of the "Budget-Repair Bill" introduced on February 15, 2011.

• The Wisconsin law for non-public safety employees limits bargaining to only one subject: wages, which is limited to only base wages and excludes any other wage or compensation issue.

• The law also requires annual union certification elections by bargaining unit, prohibits dues deduction by any public employer, prohibits union security clauses, mandates one year non-renewable contracts, repeals interest arbitration, outlaws all strikes, and repeals collective bargaining rights for the University of Wisconsin System faculty and academic staff

Ohio SB5

• The Ohio State Senate passed SB 5 with a vote of seventeen to sixteen, and then the bill passed the House by a margin of fifty-three to forty-four.

• After reconciliation, it was signed into law on March 31 , 2011, by newly elected Governor John Kasich.

Michigan 2011

• Michigan Local Government and School District Fiscal Accountability Act of 2011 (Malin 2013) that was signed into law by newly elected Republican Governor Rick Snyder on March 16, 2011.

• It permits the governor to appoint an emergency manager who, among other things, has the power to reject all or part of a collective bargaining agreement upon finding that there is a financial emergency.

• Additionally, the emergency manager can remove elected officials, privatize services, and sell public assets

What Did the Public Think?

Are Public Employees Overpaid?

Gallup: More Americans Back Unions Than Governors in State Disputes by 48% to 39%

68%

63%

58%

33%

WSJ/NBC

2011 Polls on Public Employees and Collective BargainingAcceptable Unacceptable Too High Right Too Low Favor Oppose

Compensation:Freeze Public Employee Pay 58% 40%Increase Employee Contributions for health care 63% 34%Increase Employee Contributions for pensions 68% 29%Public Employee Pay 26% 36% 25%

Favor Oppose Favor OpposeDo you Favor Cutting Public Employee Pay and Benefits 37% 56% 44% 53%Favor Public Employees Paying More for Pensions and Benefits 63% 31%

Public Employee Collective BargainingEliminate bargaining over health care and pensions* 33% 62%

GovernorsUnionsWho Do You Support on Proposed Restrictions of CB 39% 48%

Favor Oppose Favor OpposeTake Away Some Collective Bargaining Rights 33% 60% 33% 61%

Walker UnionsSupport for Governor or Unions in Wisconsin 31% 42%

Support or oppose limiting collective bargaining for public employees 45% 42%

WSJ/NBC 2-2011 Pew 2-2011NY Times/CBS 2-2011 Gallop/USA 3- Quinnipiac 2-

Summary of National Polls Spring 2011

Labor’s Response

Collective Bargaining?

Five Dead in Ohio

• The repeal of Ohio Senate Bill 5 appeared on the November 8, 2011, general election ballot.

• Senate Bill 5 was defeated by a margin of 2,145,042 (61.3)% to 1,352,366 (38.7%).

• Senate Bill 5 would have greatly limited the collective bargaining rights of Ohio's 525,000 state and local public employees.

Wisconsin Recalls

• The enactment of the law lead to numerous political and legal battles between the Governor Scott Walker, and a reinvigorated labor movement in coalition with many community organizations.

• Walker survived a recall vote in June 2012; however, the majority of the state Senate switched back to Democratic control through the recall process

Michigan’s Referendum

• While the opponents won the referendum, to end Michigan Local Government and School District Fiscal Accountability Act of 2011

• Governor Snyder then used the lame duck Republican legislature to pass a modified Emergency Manager Law, and the City of Detroit has since been placed under its requirements.

• Referendum on a Constitutional Amendment to include collective bargaining rights failed.

• The lame duck legislature passed a Michigan Right to Work Law.

• The City of Detroit has filed for Bankruptcy challenging its pension obligations for current and former employees

Michigan’s Clever New Law

• The new bill offers financially troubled local governments the ability to choose from four options: accept an emergency manager, undergo bankruptcy, enter into a mediation process, or join the state in a partnership under a consent agreement.

• Choosing one of these options is mandatory if the local government meets the Bill's criteria, it is not allowed to opt out of the program.

• Though the Bill’s governor oversight is essentially what voters rejected during the 2012 general election, the new bill is not subject to referendum because it contains appropriations in the form of providing for emergency managers' salaries.

Why the Criticism of Public Employment and Employees?

Is There Too Much Government?

Government Employment as a Percent of Total Employment

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

Federal, State, and Local Government Employment 1955-2010

Federal Government

State Government

Local Government

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

State and Local Education Employment as Percent of State and Local Employment

State Education

Local Education

0%

10%

20%

30%

40%

50%

60%

State Education Local Education

Public Sector Total Compensation Compared to Private Sector Compensation in 2009:

Three Sources - American Community Survey, Merged Outgoing Rotation, Current Population Survey, and Public Use Microdata Series, Current Population Survey

-6%

-3%

-1%

-8%

-5%

-2%

-4%

-1%

0%

-9% -8% -7% -6% -5% -4% -3% -2% -1% 0%

PUMS CPS

MORG CPS

ACS

LOCAL

STATE

ALL

Public Sector Wages Compared to Private Sector Wages in the US in 2009:

Three Sources - American Community Survey, Merged Outgoing Rotation, Current Population Survey, and Public Use Microdata Series, Current Population Survey

-6%

-8%

-7%

-9%

-10%

-9%

-4%

-8%

-6%

-12% -10% -8% -6% -4% -2% 0%

PUMS CPS

MORG CPS

ACS

LOCAL

STATE

ALL

Private Sector and State and Local Employee Compensation ComparisonsStriped Compensation Bars Statistically Insignificant

-5.81%

-4.65%

-6.71%

-8.50%

-12.7%

-6.4%

-11.4%

-8.7%

-12.3%

-20.0%

-3.6% -3.3%

-8.7%

-10.7%

-2.6%

-1.18% -0.9%

-5.6%

-3.6%

2.3%

-5.9%

-2.9%

-7.9%

-15.6%

0.0%

-2.1%

-4.8%-3.5%

-20.00%

-18.00%

-16.00%

-14.00%

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

Hourly Wages Hourly Total Compensation

51

New Jersey Private and Public Employee

Compensation ComparedProfessor Jeffrey Keefe, Ph.D.

School of Management and Labor RelationsRutgers University

52

Are New Jersey Public Employees Overpaid?

• Compared to Whom?Similar New Jersey Private Sector Employees

• What do we need to make a comparison?Wages and Salaries are InsufficientEmployer Cost of Employing a Worker

• How Should We Make the Comparison?

53

How Should We Make a Comparison of Employee Cost?

• Full-Time Workers• Similar Education Level – Starting Point• Wages and Benefits Costs• Organizational Size Matters for Benefits• Hours of Work

54

Comparing Education and Earnings of Full-Time Workers in Organizations with

100 or more Employees:

Highest Degree Earned

Earnings Return to Education Compared

Private Employment

Public Employment

Public to Private

Less than high school 0% 6% 2% -187%High School 31% 27% 22% -18%Some College 46% 15% 12% -19%Associates 58% 8% 6% -17%Bachelors 86% 28% 32% 13%Professional Degree 131% 2% 3% 47%Masters 105% 12% 20% 70%Doctorate 114% 2% 3% 12%

College Plus 44% 57% 23%

55

Comparing Public-Private Wage EarningsFull Time Employees in Organizations with

100 or More Employees

Annual Wages by Education Private Public public/privateAverage Wages $69,979 $56,694 -19%

Wages by EducationLess than high school $27,719 $41,000 32%High School $44,760 $44,050 -2%Some College $53,901 $47,567 -13%Associates $56,181 $50,916 -10%Bachelors $89,041 $56,641 -57%Professional Degree $175,141 $79,330 -121%Masters $107,328 $69,171 -55%Doctorate $108,528 $109,482 1%

56

Search for Valid and Reliable Benefits Datato Estimate Employment Costs

• Bureau of Labor Statistics (US, DOL)• National Compensation Survey• "Employer Costs for Employee Compensation,

December 2009" with unpublished detailed compensation data for the Middle Atlantic Census division. (New Jersey, New York, and Pennsylvania.

• These data are unpublished Bureau of Labor Statistics figures.

57

Employer Costs Breakdown from the National Compensation Survey

Private PrivateEmployees Employees

All Organizations Organizations State andPrivate with 100 plus with 500 plus Local

Employees Employees Employees EmployeesTotal Compensation 100.0% 100.0% 100.0% 100.0%Wages and Salaries 69.2% 67.1% 65.4% 63.1%Total Benefits 30.8% 33.0% 34.6% 36.9%Paid Leave 7.3% 8.3% 9.3% 8.0%Supplemental Pay 3.6% 4.0% 4.8% 0.9%Insurance 8.0% 8.8% 8.9% 12.9%

Health 7.4% 8.2% 8.3% 12.7%Retirement and Savings 3.7% 4.2% 4.5% 8.6%

Defined Benefit 1.6% 1.8% 2.0% 7.9%Legally Required 8.2% 7.7% 7.1% 6.5%

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Standard Earnings Equation Estimates

WagesTotal

CompensationNJ Public Employee -11.23% *** -9.15% **

State Gov Employee -5.99% * -5.64% *

Local Gov Employee -14.18% *** -11.13% ***

Control VariablesEducationOrganizational SizeGenderRaceDisabilityExperienceYearPooled Crossed Section 2004-2009IPUMS CPS

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Annual Hours of Work ComparedPublic Employees Work Fewer Hours Per Year

Hours of Work Private Public public/privateAverage Hours of Work 2,187 2,051 -6%Less than high school 2,092 2,072 -1%High School 2,124 2,064 -3%Some College 2,135 2,004 -7%Associates 2,139 2,087 -3%Bachelors 2,226 2,007 -11%Professional Degree 2,467 2,243 -10%Masters 2,294 2,057 -11%Doctorate 2,362 2,311 -2%

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Work Hours Adjusted Earnings Equation

WagesTotal

CompensationNJ Public Employee -3.58% * -1.61%

State Gov Employee 1.48% 1.83%

Local Gov Employee -6.59% ** -3.55%

Control VariablesEducationOrganizational SizeHoursGenderRaceDisabilityExperienceYearPooled Crossed Section 2004-2009IPUMS CPS

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Metropolitan Area Ranking of New Jersey Secondary School Teachers by Median Pay

Rank AREA_NAME Median12New York-White Plains-Wayne, NY-NJ Metropolitan Division$66,44032 Trenton-Ewing, NJ $61,92033 Newark-Union, NJ-PA Metropolitan Division $61,86050 Ocean City, NJ $59,23064 Edison, NJ Metropolitan Division $57,78066 Wilmington, DE-MD-NJ Metropolitan Division $57,77092 Atlantic City, NJ $54,640

169 Allentown-Bethlehem-Easton, PA-NJ $49,210

Occupational Employment Statistics 2008342 Metro Areas in USA

62

Debunking the Myth of the Over Compensated

Public Employee

Professor Jeffrey Keefe, Ph.D.School of Management and Labor Relations

Rutgers University

Prepared for the Conference:Public Sector Employment in Times of Crisis

University of Richmond School of Law

Fiscal Crisis of the States F2012

• States’ Budget Deficits for Fiscal 2012 $103 BillionSource- Center of Budget and Policy Priorities

• States’ Tax Collection Reductions $101 BillionSource- US Census of Governments

• States Rely on Taxes for 50% of Revenue

• End-American Recovery & Reinvestment Act of 2009

The States’ Fiscal Crises?

STATES CONTINUE TO FEEL RECESSION’S IMPACT

By Elizabeth McNichol, Phil Oliff, and Nicholas JohnsonMarch 9, 2011

Center on Budget and Policy Priorities

Why Rising Costs?Increased Educational Requirements of

Governmental Employment and Outsourcing of Low Skilled Jobs

1960 1970 1980 1990 2000 2010Real Annual Earnings $35,843 $43,194 $39,105 $45,010 $47,982 $51,552

College Graduates Plus 22.0% 34.4% 38.8% 41.6% 45.2% 53.7%

State Budget Shortfalls of $112 Billion

Employment Stability in Public Sector

Rational Human Resource PolicyOr

Excessive Compensating Differential?

Is Public Sector Employment Stability Worth 15%?

Job Openings and Labor Turnover Survey

Involuntary Separations

Estimated Compensating

Instability Earnings

Differentials

Predicted verses

Estimated Layoffs and Discharges JOLTS CPS

Years 2001-2009 Average Results Variance Arts, Entertainment, and Recreation 49% 5% -23% Construction 45% 22% -3% Accommodation and Food Services 22% -22% -25% Real Estate and Rental and Leasing 20% 9% 9% Retail Trade 20% 0% 0% Nondurable Goods Manufacturing 17% 10% 13% Transportation, Warehousing and Utilities 17% 10% 13% Durable Goods Manufacturing 16% 14% 17% Natural Resources and Mining 16% 26% 29% Wholesale Trade 15% 12% 17% Information 13% 15% 22% Educational Services 12% -17% -9% Health Care and Social Assistance 10% 5% 15% Finance and Insurance 9% 20% 30%

Compensating Differential for Employment Stability?

• The finance and insurance industry, which should have the largest job-stability penalty, has the third largest premium.

• The accommodation and food services industry, which should have a large instability premium, in fact, has the largest penalty.

Unemployment by Education Level(employees age 25 years and older)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Unemployment Rate by Educational Attainment

Less than High School High School Some College Bachelors or More

Are Public Employee Pensions Underfunded by $300 Billion?

Actuaries vs. Finance Economists

Are Public Sector Retirement Benefits Too Good? Source: Employee Benefit Research Institute. EBRI's estimates for 1985-2010 were done using Department of Labor and Current Population Survey data.

DC Plans

Any Plan

DB Plans

Any Plan

DB Plan

DC Plan

Private Sector Pensions

GAO Funded Status of State and Local Pension and Health Benefits 2008• Most state and local government pension plans have

enough invested resources set aside to keep up with the benefits they are scheduled to pay over the next several decades, but governments offering retiree health benefits generally have large unfunded liabilities.

• Many experts consider a funded ratio of about 80 percent or better to be sound for government pensions.

• We found that 58 percent of 65 large pension plans were funded to that level in 2006, a decrease since 2000.

• Low funded ratios would eventually require the government employer to improve funding, for example, by reducing benefits or by increasing contributions

State and Local Funding Ratios

State and Local Pension Funding

Public Employee Pensions

Dispute Over Investment Discount Rates

Financial Economics• Risk-Free Discount Rate of 10 Year Treasury 9/2/11• 2.02%

Actuaries and Pension Investors• Portfolio 60% Stocks and 40% Corporate Bonds• 8% Average 30 Year Return• 11% S&P Stock Return 1950-2009• 6.2% Corporate Bonds 1926-2005

Example on the Importance of Discount Rates

• Future Value at 2%• If I invest $10,000 a year

for 40 years toward my retirement and earn 2% a year on my investments, how much will I have when I retire?

• Future Value at 8%• If I invest $10,000 a year

for 40 years toward my retirement and earn 8% a year on my investments, how much will I have when I retire?

$2,590,565$604,020

In Most States Public Employee Pensions Are Not A Subject of

Collective Bargaining

Invidious and Envious ComparisonsAs the Private Sector Defined Benefit Plan

Disappears

Impending 401K Risk – People Out Live Their Money

Survey Top Coding Understates Private Sector Compensation

In the Winner Take All Economy Public Employees Do Not Get to

Play the Game

Source: Piketty Thomas and Emmanuel Saez. 2003. “Income Inequality in the United States.” The Quarterly Journal of Economics. 118. no. 1 (February), pp. 1-39.

The richest 1 percent of tax filers claimed 80 percent of all income gains reported in federal tax returns between 1980 and 2005

Family Income Growth by QuintileTwo Postwar Periods

Quintile 20% 40% 60% 80% 95%1979-2009 6% 15% 23% 34% 46%1947-1978 100% 108% 115% 110% 103%

58% of Real Income Growth Since 1976 Went to Top 1%

Top Decile Wage Income Share 1927-2007Picketty and Saez

20.0%

22.5%

25.0%

27.5%

30.0%

32.5%

35.0%

37.5%19

27

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

Sh

are

(in

%)

US Income Growth Captured by Top 1%

Are Public Employees Overpaid?

Occupational Controls?

Dissimilarity of Private and Public Sectors’ Occupational Structures

• Dissimilarity Index .59• ½ SUM (pri /PR – pui / PU | • Using American Community Survey 6 digit Standard

Occupation Classification.• Observations 3,359,739• 89% Are Classified in an Occupation

Occupational Controls & Public-Private Pay Differentials

Blinder-Oaxaca Decompositions ofPublic-Private Wage Differentials

With Occupations and Human Capital