Foxes are guarding the pension henhouse

There’s nothing more infuriating to public sector unions than when state and local governments attempt to scotch decades of deals made with the unions in order to shore up virtually-insolvent pensions.

So it wasn’t surprising when Illinois affiliates of several unions, including the American Federation of State County and Municipal Employees, the National Education Association, the Service Employees International Union and the American Federation of Teachers, came together in January to sue the state for daring to address its pension woes by passing a modest reform plan.

As far as the unions were concerned, it was an outrage that the Land of Lincoln was addressing its $95 billion in underfunding – the nation’s second-largest tally of pension liabilities after California – by reneging on its “promises.”

The state would be requiring government employees to retire at age 60 instead of 55, still five years earlier than the average retirement age for private-sector workers. Workers could also no longer use their sick and vacation days to boost their already-generous annuity payouts.

Proclaimed Michael Carrigan, the president of the AFL-CIO’s Illinois affiliate: “[Government workers] will not stand by while politicians try to take away their life savings”.

All the puffery would be convincing except for one inconvenient fact. The unions themselves are as much to blame as the politicians for the mess the state pensions, and their rank-and-file members and pensioners, are in.

The AFSCME affiliate controls six of the state employee pension’s 13 board seats. This includes three current and former local presidents, along with the head of its unit for retired rank-and-file workers. Add in the presence of Danny Silverthorn, an appointee of Gov. Pat Quinn who formerly ran another union, the West Central Building and Construction Trades Council, and public-sector unions have ensured their sway over the pension’s affairs.

Meanwhile the NEA affiliate, the Illinois Education Association, along with an affiliate of the American Federation of Teachers, hold full sway over the Teacher Retirement System’s (TRS) operations. Cindy Klickna, the president of the NEA affiliates, holds a seat, as does Marcia Boone Campbell, the secretary-treasurer of the AFT chapter.

Thanks to the fiscal fecklessness that AFSCME, NEA, and other public-sector unions, Illinois has managed to make its own pensions even more virtually-insolvent than those of other states. The TRS alone is officially underfunded to the tune of at least $56 billion, and more-likely to be $76 billion in the hole, or 36 percent more than reported, according to an analysis by Dropout Nation using a formula developed by Moody’s Investors Service.

As for the state’s pension for other civil servants? It is officially $23 billion in the red – and more likely, $30 billion, or 30 percent higher than reported.

All across the country, public-sector unions effectively control what are supposed to be government-controlled pension systems. They have helped pile up long-term liabilities that are ultimately borne by taxpayers. Thanks to state and local laws, along with the massive campaign largesse, public sector unions are often the ones truly in charge of overseeing government pensions.

Chicago’s collection of pensions are in as much a state of virtual insolvency as that of the Illinois state government. The Second City gained some help last week when the state legislature passed a bailout plan for two of its pensions. The Public School Employees’ Pension and Retirement Fund of Chicago, which officially reported a deficit of $8 billion in 2012 – and is likely underfunded to the tune of $11 billion – is, for all intents and purposes, a division of the AFT’s Chicago local, which controls eight of the 12 seats on its board.

The California State Employees’ Retirement System, the nation’s largest pension, is another government annuity system that is effectively controlled by unions. Five of the 13 seats on CalSTRS board – including that held by the board president – are controlled by an SEIU affiliate, the California State Employees Association, and the California School Employees Association, the nation’s largest union for school district workers who aren’t teachers.

When you factor in the presence of state officials such as Comptroller John Chiang and Treasurer Bill Lockyer – both of which owe their elections to support from CSEA ($40,700 in donations in 2010 alone), the two unions have virtual control over the fund.

Meanwhile in Massachusetts, the SEIU’s locals there control two of the five seats on the board that oversees the state’s civil servants’ pension, while another union, the Retired State, County And Municipal Employees Association, holds a third seat. The dominance of unions over the pension is one reason why the civil service pension is underfunded to the tune of $28 billion – more likely $38 billion.

With states facing at least $914 billion in unfunded liabilities, according to the Pew Charitable Trusts, cost-cutting governors, along with government reform and school reform advocates, have pushed aggressively to overhaul pensions.

Public-sector unions have pushed back just as hard. For the past two years, the AFT has run what can best be called an enemies list of money managers whose executives have either backed school reform initiatives or other efforts not to its liking.

One money manager on this year’s list: GCTR, the Chicago-based money manager formerly ran by Bruce Rauner, the Republican nominee for Illinois governor, who has run afoul of the union for founding a collection of charter schools – and aroused the ire of nearly every public-sector union for his support for replacing pensions with 401-K-like defined-contribution plans.

But for decades, unions haven’t had to resort to such tough tactics to keep pension trustees and state governments in line. Why? Because they have been the ones running the show in the first place.

Thanks to state laws, which often require a certain number of pension trustees to be elected by public employees. Because civil servants are often forced by law to become members of public sector unions, outfits such as AFSCME and NEA effectively control who gains seats on pension boards.

In Illinois, for example, AFSCME regularly informs rank-and-file members on who to choose for seats on the state employee pension. The AFT’s Chicago local’s control of pension seats goes even further: It even holds the elections for pension trustees, with its governing coalition all but assuring that its top players win their spots.

The role of public-sector unions as major players in state and local politics, both through their vast campaign war chests and the armies of workers they deploy on behalf of their favored politicians, has also allowed for them to control pension affairs. AFSCME spent $35 million during the 2011-2012 election cycle, according to the National Institute for Money in State Politics, while the NEA spent $70.1 million, the single-largest spender among public-sector unions.

Even in states where pension trustees aren’t chosen by employees, unions can use their cash hordes to maintain influence. In New York State, public-sector unions accounted for 13 percent of the $3 million raised in 2010 by Thomas DiNapoli, who, as comptroller, serves as sole trustee over the Empire State’s pensions.

For AFSCME, NEA, and AFT, in particular, influencing all aspects of pension operations have proven to be beneficial to them. The grand bargain is that they collect millions in union dues in exchange for ensuring that the rank-and-file gain perks such as generous pensions and the ability to retire earlier than would be possible in the private sector.

But governors and legislators are starting to face the reality that defined-benefit plans are unsustainable. They have taken steps to force government workers to stay on the job longer, cut back pension benefits for younger workers, and force those nearing retirement age to contribute more to their retirements.

These steps, which will become more-aggressive in the next decade, have put unions on the defensive because they can’t assure members that they can keep their end of the bargain. At this rate, public sector unions may not even be able to get allies on pension boards or statehouses to do their bidding much longer.


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