My nominee for Pay Czar: David Stern

Dan Proft Nov. 14, 2010, 2:31am


I do not think government functionaries should set private sector salaries or that U.S. policymakers should be adorned with the appellation properly reserved for Russian autocrats.

But, if I did not believe in free markets and free minds, NBA Commissioner David Stern would be my choice for "Pay Czar."

Stern is in the midst of a negotiating a new collective bargaining agreement (CBA) for the four hundred some odd millionaires in the NBA. Stern's position is that the league needs to reduce player salaries by one third (some $750 million) and consider contraction, which would close down a franchise or two in order for the NBA to be a self-sustaining business model.

Amid the anticipated hue and cry from the players, and likely from a Bentley dealer or two, Stern said simply, "We have shown the players the facts, and at our current level of revenue devoted to players salaries, it's too high. I can run from that, but I can't hide from that, and I don't think the players can either. Those are the facts."

The Need for a Stern Conversation with Public Sector Unions

This is the exact conversation the President, Congress, governors and state legislatures around the country need to have with the public sector unions (AFSCME, SEIU, NEA/IFT) post haste.

Unlike Stern, the politicians and the public sector unions have tried to run and hide from the facts, and that's what has produced our present dystopia, punctuated by a trillion dollars worth of unfunded public pension liabilities and a state that expands headcount even while the private sector contracts.

For example, according to a Heritage Foundation study, since January 2008 the United States has lost 7.8 million private sector jobs. During the same time period, the federal government has added nearly 200,000 jobs (not including the temporary census workers).

And what of those federal jobs? Earlier this year, USA Today did a comparison between federal employees' compensation and that of workers in private industry for job types that exist in both sectors. The newspaper found that federal employees earned more than their private sector counterparts in 80 percent of the 216 different occupations reviewed.

That disparity increases when one takes into account the full compensation packages (health care and guaranteed pension benefits) enjoyed by those in the public sector that do not exist in the private sector.

Once upon a time, public sector employees traded a lower compensation package for job security. They no longer have to make such a tradeoff.

In fact, while it might have a been a Great Recession in the private sector, it has been nothing short of the best of times in the public sector.

From December 2007 through June 2009, USA Today found that the number of federal employees making six figures increased by 46 percent. The number of federal employees making more than $150,000 more than doubled during the same time period.

Lest the well-heeled members of the fourth branch of government worry, the increased compensation does not come with any increased uncertainty about one's long-term employment.

According to the Bureau of Labor Statistics, from January 2008 to January 2010, the first two years of the Obama administration, the average unemployment rate for government workers (at all levels) was 3 percent as compared with an average unemployment rate for private sector workers of 7.9 percent.

The Incubators of Unfunded Pension Liabilities

It is not only the federal government that has been running from the uncomfortable facts resultant from their profligate ways. The 50 states have collectively racked up unfunded public pension liabilities north of $1 trillion.

Some are worse than others, but the dynamic is the same: public sector unions vs. private sector producers.

As one financial blogger put it, "From a fiscal point of view, of the 50 US states, we really have 30 Portugals, 10 Italys, 10 Irelands, 5 Greeces, and 5 Spains."

Illinois: The Bad Example

One of those Greeces is the State of Illinois, home to the nation's largest unfunded public pension liability and, correspondingly, the nation's worst bond rating.

Two Illinois anecdotes illustrate what is happening at the state and local levels of government.

First, the city of Joliet, Illinois. The median household income in Joliet is $47,000. The average salary for City of Joliet employee is $83,500. When you include the guaranteed health and pension benefits, the average City of Joliet worker costs Joliet taxpayers $125,000 annually. Families who are making $47,000 are financing guaranteed benefit levels of $125,000. Not only is this unsustainable; it's morally wrong.

Second, the Illinois Teachers Retirement System (TRS). This is a $33 billion pension fund that some 365,000 teachers and administrators rely on. If you know one of those 365,000 people, you might want to let them in on this: TRS is less than 40 percent funded. This year TRS sold $3 billion of its investments (10 percent of the fund's assets) to pay current year obligations. This is the very real beginning of a death spiral for that fund. And when TRS becomes an acronym that stands for AIG, who do you think will be squeezed for another bailout?

Is it any wonder that Illinois has experienced the largest exodus of productive people since the Israelites fled Egypt?

Public Workers Not Bad, System Fixed

The statistics and stories recounted above might leave you with the impression that public sector workers have done something wrong, or even that they are bad people. Neither is true.

Humans in the public sector are behaving the same way that humans do in the private sector-namely, as profit maximizers. Why should they turn down a defined benefit pension or free health care after 20 years of service in the government? They're trying to cut the best deal they can for themselves and their families, as anyone would. I do not blame them in the least.

The problem at every level of government is public sector unions elect their bosses. Unlike in the private sector, the public sector unions are on both sides of the deal.

The public sector unions finance the campaigns of the politicians who, once elected, serve as the management with whom they negotiate their collective bargaining agreements. The interests of the public sector unions are represented on both sides of the table-and the interests of taxpayers are not.

Politicians have a short time horizon (the next election) and so are generally amenable to making deals that serve to curry political favor rather than serve to keep solvent the unit of government under their charge.

Everyone knows the obligations imposed and the costs incurred are not feasible long-term, but that is treated by both sides as somebody else's problem.

The Un-Fix

I am generally not a fan of campaign finance strictures other than full disclosure. However, I am a fan of rooting out conflicts of interest.

In that spirit, Illinois recently passed a campaign finance law that prohibits businesses that do, or even bid on, more than $50,000 in business with the state from making political donations to candidates for the offices that control said state business. So, for example, firms that build public roads cannot make donations to candidates for governor.

This should be extended to public sector unions in Illinois and used as a template for other states to adopt. This is a "go forward" solution to eliminate the inherent conflicts of interest that unfairly enrich the public sector unions.

Before public pension funds are turned upside down and the pockets of taxpayers are turned inside out, policy leaders in Washington and the 50 states need to echo what David Stern is doing in the NBA. They need to show the public sector union bosses the financial realities of life and suggest they choose to be part of the constructive restructuring of costs required.

Otherwise Stern may not be the only one looking at contraction.

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