Legal Commentary

It is now a staple news item that the political winds have shifted against public employees: Everyone -- from Democrats like N.Y.'s Andrew Cuomo to Republicans like N.J.'s Chris Christie -- is piling on, while conservative onlookers cheer.

As readers of this blog may know, I tend to think that this scrutiny of public labor costs is a good thing. But even a good thing can spawn a lot of petty, misguided invective, and there has been no shortage of mean-spirited vitriol cast at public sector unions during this latest set of subnational budget crises.

So, after the jump, here are three rules I observe when talking about public-sector pensions that, I hope, help me steer clear of some of the more histrionic tropes of anti-union rhetoric without compromising on what generally is regarded as my conservative sympathies for cutting back on this budget item.

1. Rule #1: Avoid question-begging comparisons with the private sector.: It is now a standard line that public-sector workers' pensions are larger than those of their private-sector counterparts. In conservative circles, this is taken to be prima facie evidence that the public-sector worker is overpaid. But, of course, one could just as easily conclude from the same comparison that a demoralized, de-unionized, private-sector labor force is under-paid in deferred compensation.

Take, for instance, the fact that public-sector workers are more likely to receive defined-benefit plans rather than defined-contribution plans. This fact can be proffered to show that the public sector is getting a sweet deal. But switching to defined-contribution plans (as Michigan did for its public employees) is not an unadulterated benefit: As Michigan discovered, such a switch can create a class of economically insecure retirees who no longer act as economic anchors for their communities.

In short, one cannot derive an "ought" of proper pay from the "is" of either private or public salaries. One needs a normative theory of proper compensation before one can conclude that public-sector pensions should go down rather than concluding that private-sector pensions should go up.

Rule #2: As a general matter, governments' pension liabilities should be treated with the same respect as other future liabilities based on governmental promises such as bonded indebtedness. Since the days of the Federalists, most conservatives take the contract clause of Article I, section 10 pretty seriously and believe that governments should pay their debts rather than default on their bondholders, even when the debts were issued for silly purposes. Conservatives should extend the same courtesy to pension obligations created by collective bargaining agreements: If conservatives would be leery about a governor's unilaterally announcing that their state will not make a scheduled bond payment, then conservatives ought, to precisely the same extent, be queasy about governors' announcing that they are re-negotiating their governments' pension obligations.

Parity for bonds and pensions does not mean that the latter can never be re-negotiated. At least 173 years of doctrinal and constitutional protections for popular sovereignty have led to strict limits on subnational governments' liabilities to bondholders and other investors. Since Taney's 1837 opinion in Charles River Bridge Case, it has been the general view that subnational governments are not bound by contracts with investors unless those contracts unmistakably impose an obligation on the government. This "unmistakability doctrine" equally limits governmental exposure to non-vested pension liabilities. The cases are legion that, prior to a pension's vesting for a particular employee, most governments' general commitments to pay pensions (or other deferred compensation) do not amount to unmistakably clear commitments not to re-negotiate such compensation for future retirees under Article I, section 10. (For a typical example, see the First Circuit's McGrath decision).

State courts have reached varying conclusions about how "unmistakable" a collective bargaining agreement must be to qualify as a binding commitment not to modify non-vested pension liabilities under their respective state constitutions. The important point is that conservatives who feel solicitude for re-paying bondholders cannot consistently bay for default on public-sector unions' collective bargaining agreements: We conservatives need a similar attitude towards both sorts of future liabilities.

Rule #3: The strongest objections to the pension liabilities created by agreements with public-sector unions are process-based, not substance-based, objections. It is common to argue that public-sector pensions are "too high." The difficulty with this sort of rhetoric (as I have observed before) is that market society gives us precious little practice in figuring out what constitutes a "just wage," deferred or otherwise. "Should" New Jersey cops draw a median pay of $90k -- that is, more than the pay of most White House policy analysts? As a moral matter, I guess it depends on whether they are risking their lives on the beat or writing traffic tickets from those little three-wheel scooters. It also depends on what sort of stimulus boost New Jersey will enjoy from high public-sector pay and a myriad of other factors that are essentially impossible to evaluate. In short, moralistic rhetoric about high compensation is essentially meaningless, because there is no benchmark for a "just wage" in a market society.

There are, however, criteria for sensible compensation-setting procedures. In competitive labor markets, that procedure is competition among employers: we normally operate according to the principle of "to each according to his threat advantage." I do not worry whether I, as a NYU law prof, make too much money, because, if my current or prospective students do not want to pay what I make, then they can easily enough transfer to, or accept offers from, Columbia, Fordham, Brooklyn, or Cardozo. The competitive nature of the law school business absolves me of the need to justify my pay, given that students can vote with their feet.

There is less foot-voting in the public sector, requiring some alternative process by which to set deferred compensation. The current procedure involves public elections of officials who negotiate on behalf of service consumers with service providers. This process works fine for highly visible officers -- say, the President or Attorney General or Congress -- because such salaries are highly salient to the public. (As a consequence, the salaries tend to be low compared to analogous private sector positions: Imagine paying the managing partner of a major law firm the paltry 200k that the Attorney General of the United States draws).

The problems with the bargains struck by this political process for less visible salaries -- cops, teachers, sanitation workers, and the like -- is that the process is insufficiently visible to insure that the taxpaying public will stand by the bargain that is struck. Instead, bargains for pensions are negotiated that are not funded. The reasons for the disparity between the negotiated bargains and the public's willingness to pay for them when the bills come due are hardly mysterious: Future liabilities do not affect current tax bills, so the public pays little attention to the liabilities that their agents incur to buy labor peace. The public sector, of course, pays close attention (just as you or I would) to the details of their deferred compensation. Rational politicians and labor negotiators, therefore, cast labor costs forward on to future taxpayers in the form of generous deferred compensation, simply because this is the politically easy thing to do. In a comment on one of my earlier posts, Joseph Slater observed that arbitrators in a plurality of states must consider factors like "the amount of pay it takes to get and retain competent employees." These substantive criteria, however, will place no real constraint on pay just so long as taxpayers are inattentive and public sector unions are closely attentive.

The goal, therefore, should be neither to lower or raise public sector pay. The goal, instead, should be to create a more transparent process of negotiation to insure that public sector's deferred compensation matches real voter demand for the public sector's services at the moment that the bargain is concluded. Why not use the procedures for approving bonded indebtedness as a model? Since the 19th century, state constitutions have required referenda to approve bond issues over a certain level (usually measured against percentages of the jurisdiction's property tax valuation) as a way to avoid the sort of inter-temporal externalities that elected leaders are prone to impose. True, there are ways to evade these limits, but these evasion techniques usually involve identifying some revenue stream from which the bonds will be re-paid, thereby limiting the exposure of the government.

Why not likewise hold referenda on collective bargaining agreements in which the public is supplied with a fiscal note explaining the magnitude of the future pension liability being incurred? I do not pretend that such a procedure is a magic bullet and am happy to entertain alternative procedures. The important point, however, is that the public sector's deferred compensation ought to be the subject of a transparent, salient, and robust public debate in which the public sector unions are enlisted to pitch their services and requested compensation to the taxpayers when the compensation package is being negotiated. One advantage of such an open process would be that the public sector would have more of an incentive to play an "outside game" of persuading the taxpayers that higher pay will produce more professionalism and better services rather than an "inside game" of focusing on legalistic collective bargaining arcana about "steps," "lanes," "parity," and the like. After all, unless the public sector can "sell" the voters on the idea that their deferred compensation package is really necessary to get high-quality services, it really will not matter how solid their legal case might be for enforcing the pension bargain: Elected state judges are likely to bend to the current mood and allow re-negotiation.

So why not make the pitch to the voters up front, publicizing the details of the deal while it is being negotiated to assure passage in a referendum vote? A benefit of this transparency is that it would enlist the public sector to devote more energy to explaining to the public how higher compensation can buy better services -- a critical function in an anti-statist nation where public services tend to be under-valued. Such a highly publication ratification of a deal would also induce judges to take more seriously the idea that the taxpayers must stick by their bargain.

In short, all of the energy being devoted now to excoriating the public sector's past deals would be better spent on figuring out how taxpayers and service providers can bargain more transparently in the future. Public sector unions are no more greedy or corrupt than the rest of us: They will take what they are offered, just like you and me. The difference is that the negotiating process will put the public sector on both sides of the table so far as deferred compensation is concerned, because elected officials will tend to discount excessively the burden of future liabilities. Rather than scream at unions or try to wriggle out of old, bad, but arguably binding bargains, it is time for intelligent conservatives to think about procedures that can reduce that excessive discount.