 Aloha and welcome to Ehana Kako. We're here every week on the Think Tech Hawai'i broadcast network. I'm Kili Ikeena, president of the Grassroot Institute. Well, we live in paradise and we have beautiful land, scenery, people, places, wonderful opportunities, the world flocks to Hawai'i, most often though for vacation and not really to live here and make a living. One reason, the high cost of living and an increasingly growing part of the high cost of living is the cost of labor here in Hawai'i. Today we're going to talk about something that is a fact of life in Hawai'i and that is the public sector employment that takes place with public sector unions. We're not here to criticize the existence of unions but ask the question how long can we go on funding our public sector employment? How sustainable is it given the current model? The problem is not that our public sector workers make a great deal of money and comprise a great deal of the expenditures of government. The problem is the way we pay them, which is on the backs of everyone including public sector workers, the backs of taxpayers. There's probably no one who knows this more than Stephen Greenhut, a national expert on public employment and we're privileged to have him with us today. Stephen is with the R Street Institute. He's also been a writer for the San Diego Tribune Union for Reason Journal and other publications. He's written a couple of very intriguing books and you can tell how intriguing they are by the titles. One of them is Abuse of Power, How the Government Misuses Eminent Domain. That was back in 2004 but more recently he wrote this title, which is germane for today's topic, Plunder, How Public Employee Unions Are Rating Treasuries, Controlling Our Lives and Bankrupting the Nation. That said, regardless of the truth of it, I said here in Hawai'i, Stephen, we still love our unions and our union workers. Please welcome to the program Stephen Greenhut. Aloha, welcome to Paradise Stephen. Thanks for having me. That may be a devastating thing to hear. Welcome to Paradise because you're fairly young at this time. But Stephen, thanks a lot for the work that you do. I appreciate it greatly. Tell me, how did you get started in your interest in public sector employment? I was a columnist at the Orange County Register and I was writing a weekly column and daily editorials and I kept finding that there were a lot of issues that all came back to the same theme, which was public sector unionization, which there's a big difference between public sector unions and private sector unions. Even the FDR and other famous Democrats question the, you know, how wise it was to have public sector unions. Well, you know, that's interesting because sometimes people don't realize that there is a difference between public sector unions and private sector unions. And in terms of paying for the labor and the benefits, what's the fundamental difference between the two kinds of unions? Well, the taxpayers fund everything that the government does. So in the private sector, you can't kill the host. If you're, I grew up in a union area in Pennsylvania and in the private sector, you know, there was always a realization that you have to help make the enterprise succeed. And I think that has led to, you know, a better situation in terms of labor relations. And the public sector, what I find happening is the unions will elect a politician to an office, city council, county board of supervisors, state legislature, and then the unions negotiate, they represent the workers, and then the unions negotiate essentially with themselves. And it becomes this one way ratchet. And often the legislators will partake in some of the benefits that the unions are able to get. And there's nobody at the table representing taxpayers. So this is a problem here because the taxpayer doesn't get represented in this formula. And ultimately, the taxpayer is the one who pays for the salaries and the benefits. Right. Because everything on, you know, if you were where I grew up, US Steel Company, and there were some others and there were some, you know, there were some issues that people could raise about private sector unions. But that company had to make a profit for everyone to succeed. And here, the public sector, the money just comes from the taxpayers. So we create this one way ratchet. There's more and more pressure for tax increases. And what concerns a lot of people, I found in California, a lot of liberals and conservatives are pushing for pension reform and public sector reform, because what it's doing is it's obliterating public services. If you run out of money, something has to happen. So what happens? The services get cut. Sometimes in the areas I've covered, we've had cities that have gone bankrupt. So you're talking about the sustainability issue. In other words, there are certain goods we get from the way in which we fund public sector workers. But if we're running out of money, if the cost is so high, we ultimately are going to be cutting public services. And that means we're also potentially cutting public sector jobs. Well, yeah. But that's one of the issues. I mean, there was one city manager in California who, in frustration, he told the newspaper, he said, well, cities have become pension providers that provide a few public services on the side. That's not how it should be. And the other thing, another point that I make a lot, and I do in my book Plunder, is the public sector unionization makes it impossible to reform things. And we see it in the state capital in California. I know the politics are rather similar here. The unions basically control the place. So whenever there's something like a reform of education reform, some of the schools, especially the ones that cater to the poorest students, they get the worst teachers. They're the dumping ground. And you can't reform those things because of the opposition from the unions. We see this on police abuse issues. And I've written extensively about that. Often it's there's a small number of police that commit problems or the source of many problems and settlements with cities. You can't get rid of them. And that's because of many of the union protections. So you're right, there's the sustainability, but it's not just a financial issue. It's also a public services and the government isn't here to be just a source of employment for people. That's not what the government's supposed to do. It's supposed to provide services. It's supposed to take care of the infrastructure in California, infrastructure is crumbling. We never have, you know, I don't live that far from the dam that was was having some failure issues not that long ago. Well, there's always money to give raises to public sector workers and there's never money to maintain our infrastructure. So it's a public service issue. It's also a fairness issue. You know, in some cities that I've covered the the the average public sector worker makes multiples if you include their benefits of what the average person and that's not how it's supposed to be. So there are myriad issues. It's not just a sustainability issue, but it is of course a sustainability. Well, I'm glad you clarified that because these issues often work in counterproductive ways. For example, teachers who are highly devoted to their work for the most part and I think for for the most part people don't go into public school teaching unless they have a level of dedication to education. They see the problem of a lack of services and resources to carry out their mission and so they go to bat for higher wages by calling upon taxpayers legislators to increase taxes and so forth and yet the fiscal side isn't necessarily going to translate into solutions for the operations of the schools because as you point out union worker benefits and work rules and so forth may prevent the kind of reforms that are needed. So how do you do you see this circle throughout the country? Oh yeah, it's everywhere now. It's obviously in deep blue states like California and Hawaii and Illinois and New Jersey where unions have more power. It's more pronounced than in some of the right to work states in the deep south, but it's the same idea. And what a good example of what you were just talking about, I've covered many school bond issues when I was at the Orange County Register local school bond. So what happens is the teacher's unions and the locals will say, hey, we don't have money to repair these crumbling schools and often they are crumbling schools. So what happens if they float a bond? And then as soon as the bond passes they pass a project labor agreement which then gives all the work essentially to the unions and that that shaves 30% of the money that just throws it away. Now okay, I could see if you're a union member you say, hey, now I'm going to get the job and I'm going to get the extra money, but it reduces the amount of money that goes to the actual school facilities construction. And it's a good example. So all these work rules, all these union work rules, all these special privileges such as the PLAs, it just makes it harder and harder to improve the infrastructure. And the goal of the public sector is to provide services. It's not to provide good jobs for people. Now a booming economy in the private sector is what's supposed to provide good jobs for people. Well you know, on that point let's talk a little bit more about the sustainability financially. Sure. Of what's going on. Right now it's no secret that our states are struggling with unfunded liabilities particularly in terms of union public sector pension programs. What's going on there? What's the relationship between the pension programs and massive unfunded liabilities in the state? Okay, well and for listeners who aren't as familiar, an unfunded liability is really a debt. It's the amount of money that we're sure to pay for all the promises. We the government are, you know, the taxpayers, we're sure to pay all the promises made to current workers and retirees. So Hawaii's system is 54% funded. Now let me just stop you there for a moment. 54% funded. Now we may get used to hearing that when it comes to government pension programs, but in the private sector, suppose you had a private insurance program that you'd been contributing to. How funded are they typically in comparison? Well as I understand it, a private insurance program should be fully funded. Fully funded and sometimes well beyond that. I know mine is several percentage points well beyond fully funded. And the reason is an unfunded liability, that's the portion that the taxpayers have to pick up. Now I hear from union people say, oh well, you know, these systems are self-sustainable. Well no, the unfunded, when there's an unfunded pension liability, that means it's not sustainable. Anything less than 100%, that means that portion, the taxpayer is going to have to pick up the slack. Now there's a game that goes on, because now in my 401k style program, what happens is I put in some money, the employer puts in some money, if the stock market goes up, I get more money in my account and presumably can retire with more. If it goes down, oh well, I might not be able to have as nice of a house in retirement or whatever. And it's different in the, that's because it's defined contribution. So the amount, the employer knows how much he has to contribute, that's defined. And the defined benefit, that's what the public sector has. That means the employee is promised a rate of return based on a formula. So that, that promise, they can't take that away, that's what you're going to get. So the money has to come from somewhere. There's an obligation to pay that promise. That's great. The taxpayers have to pay that promise regardless of what happens in the market, regardless of the performance of the portfolio, regardless of a whole myriad of other factors. Exactly. So the money, the pension funds take the money and they invest it. And then they predict a rate of return. Now in California it was, it was 7.75%. They just reduced it to 7.5. And then they're going to reduce it to 7 in, in several years, presumably. Now first off, that's a really aggressive rate of return. I mean, if most of us knew a place we could put our money and get a guaranteed amount like that, we would just do that and not bother doing what most of us do, which is invest in different, in different things. So, so they play the game. It's a political decision what the rate of return is going to be. So in California we've had some of the actuaries arguing that it needs to be much lower than that. Some argue it needs to be closer to the treasury rate, you know, which is a risk-free rate. Instead, so, so they, they assume this large rate of return and then have to make increasingly aggressive investments to, to meet that. Now in California, the last year I think was less than 1% rate of return. That means the unfunded liabilities, which is just a fancy word for debt. And the unions will tell you, oh, it's not a real debt. Oh, it's a real debt. If, if it's not a real debt, then we, we wouldn't presumably have to pay for it. In some states, in fact, the, the state constitution requires that that debt be paid for prior to other expenditures. Well, it's going to really fall on the backs of the taxpayers. Yeah, it's, it is the, it's the preeminent thing that has to be paid. So everything else gets cut after that. So what we get is this, if you lower the predicted rate of return, that unfunded liability number goes up. So it's variable. In California, I've heard anything from $160 billion to a trillion dollars. It all depends on what your guess at the future rate of returns, which, which what it's doing in California and it will do here in Hawaii is the local governments are going to have, they have to pay more. They have to contribute more to the pension system. And sometimes they're contributing 50% of an employee's pay just to pay for that pension contribution. That comes right out of the height of services. Now at the state level, the state generally doesn't contribute a ton in California. It's a few billion dollars. It's not insignificant, but the real problem is at the local government. Well, Stephen, when we take a, after we come back from a break, I want to ask you what some of the solutions are. My guess is Stephen Greenhut, an expert in public sector employment. And we're going to take a look at some of the ways we can get out of the unsustainable situation we're in in paying for wages, benefits for our public sector workers. We'll be right back on Think Tech Hawaii's Ehana Kako after this short break. Aloha. My name is Carl Campania and I am the host of Think Tech Hawaii's Education Movers, Shakers and Reformers. I invite you to come watch our show on ThinkTechHawaii.com. You can also see our shows on YouTube as well. You can Google search those. I appreciate the time. I hope that you do join us as we learn about education, about the educational system here in Hawaii, what the challenges are, what the benefits are and how much our kids are learning. So thank you. Hope you join us. Hello. My name is Crystal. Let me tell you my talk show. I'm all about health. It's healthy to talk about sex. It's healthy to talk about things that people don't talk about. It's healthy to discuss things that you think are unhealthy because you need to talk about it. So I welcome you to watch QuokTalk and engage in some provocative discussions on things that do relate to healthy issues and have a well-balanced attitude in life. Join me. Welcome back to the second portion of Ehana Kako for this week. I'm Kili Akinah with the Grassroot Institute. I'd like to say a big mahalo to the Think Tech Hawaii staff, to Jay Fiedel and everyone who works in this studio producing about 30 to 35 hours of original content every week. You can see it at ThinkTechHawaii.com These programs cover everything from politics to music to the arts, travel, business, sports, ethics, technology, science, you name it. ThinkTechHawaii is covering it and we're glad to be part of that program. My guest today, Stephen Greenhut, is an expert in public sector employment and there's no secret to those of us in Hawaii that we've got to revamp our system. We've got important public services. We've got valuable public employees and we've got the general public who all may suffer unless we find a more sustainable way to fix the system, especially the way we can afford pensions and other benefits that go to private sector workers, public sector workers. Now, we're going to go back to Stephen because I've got an interesting question I do want to ask him. He's come up with several solutions based upon best practices across the nation. But first, let me ask you Stephen as we come back into this final segment. What are some of the things that Hawaii really needs to look out for? As you've seen, some horror stories, if you will, taking place with the management of public sector benefits and salaries across the nation. What we've seen is an incredible amount of spiking, pension spiking. That's when public employees at the last year or several years of their service will engage in certain enhancements. You get special management pay for being a manager. Sure. Or it's ridiculous. It's just ways to gin up the final payment. There are all sorts of... I wrote about some... Everyone in one police department was getting these promotions. So there were so many people promoted to a higher level position that you didn't even know who was really serving in that position. It was just a way to permanently enhance their benefits. So the incentive system kind of promotes this kind of gaming of the system. That's right. It's gaming. And we see the disability system. In the private sector, if I'm disabled, it's an insurance claim where in the public sector it goes to a board, which is usually dominated by public employees and the standards are much lower. So we have something in California called chief's disease. Virtually every police chief retires with a disability and that protects 50% of their pay from taxes. So we see these kind of things doubling and tripling up. The LA Times just had a story about a police official who he had a pension from one fund and then he got one from another and then he was getting another salary and he's pulling down almost $500,000 a year. We have these programs where people are able to bank some of the retirement while they're still working and they walk away with million-dollar payouts in California that your average pay-and-benefit package for firefighters over $175,000 a year and some of that's playing around with overtime. There are all these things and it costs the public. I mean, when you look at the amount of money and these benefits are going to be paid until the person passes away and his or her spouse passes away. So these are dollars that go on for a long time and I had some folks, it was a union guy I was on a program and he was saying, well, police die three to five years after they retire. That's why they get such lush pensions and then I did all the research with the retirement system. It turns out the longest living category of public employee is a police officer followed by a firefighter. They live to be in their mid-80s. So I wish everyone a long, healthy and prosperous life but the fact is actuaries have to consider how long they're going to live and these are massive payments and they're million airs pensions. Consider how much money would you need in the bank to have a $150,000 retirement at age 50 until you're 85 and until your spouse passes away? Quite a few millions. Yes, it would be in some cases, $8 to $10 million. And then compare that to the private sector in Hawaii, private sector workers are among the lowest paid in the nation. So some guy or woman who's working really hard on a low-paid job has to work harder and then has to suffer with worsening public services. It's a fairness issue too. You come from California, Orange County where you saw an entire county go bankrupt because of its fiscal practices not being sustainable. Now, while states don't go bankrupt, they have other ways of feeling the pain. Are there union workers, public sector union workers across the nation who are getting nervous themselves about the sustainability of their benefits? Well, some, there are too few. I mean, in Orange County's bankruptcy in 94 and I came to Orange County after that and but that was a unique set of circumstances that wasn't related. It was related to investments but not pensions. When I was down in Orange County and I'm in Sacramento now, there was a union official who was supportive of some reforms. I've met some union officials who are supportive of modest reforms. But the system needs more than modest reform. It needs major reform and you're rarely going to get a union worker. Not too many politicians are willing to do it. They have to pay a price. Well, give us some of these impossible solutions. What would be one way that we could fix the system so that it's sustainable for union workers but it doesn't break the backs of public taxpayers? Well, as far as solutions, the thing with solutions and people always say, how come you don't have more solutions? Well, you and I could probably sit down and come up with some technical solutions, right? You basically have to reduce the amount of payouts. Right. I think even Governor Brown in California once proposed a blended system where part of it would be a 401K style program. At least this way, the agency knows how much they're going to be on the hook for. So moving to more of a defined contribution type system, you could end pension-spiking practices. You could transfer the disability system that we discussed to more of an insurance type program. There are all sorts of ways of just basically trimming the amount of benefits, increasing the contributions from the employees. A lot of times the union say, hey, these systems, as I mentioned, are self-sustaining. Well, let's make them actually self-sustaining. So if the system has a large liability, then the beneficiaries should be paying more. There are a lot of those types of things. Now privatization is another really good thing in Sandy Springs, Georgia, which privatized its city government. They don't have unfunded pension liabilities. Well, and that's a very interesting case and point. We've actually sent our research director here at the Grassroot Institute to Sandy Springs to do an extensive study and those of you who are interested in knowing about it can go to our website, grassrootinstitute.org and watch a very fascinating documentary about Sandy Springs, the city that privatized everything virtually. 95% of its services are actually contracted out. And as a result, it's making a profit, which is incredible. So how does this work? Now I don't see this as an immediate solution in Hawaii, but maybe there are some sectors where we could see this taking place, like our public hospitals and so forth. But what happens when the city and county or the state government are no longer the employer, but they contract out the entire service to a firm that gets it by competitive bid and the firm is the employer? Right, they can't, they can't run up unfunded pension liabilities is the main thing and often you'll find that they'll provide better services. Now I worked years ago when I was a young man, I worked on a military base that was, it had three private contractors who, it was a testing facility and they each had a different portion of the contract and every five years it went out to competitive bid. And those contractors wanted to make sure they were lean and provided the best possible services. So there's a competitive factor. Now privatization isn't the true private sector, it's not a competitive, it's partially competitive, but you don't have a willing buyer or a willing seller, you live in the city, but I do believe that there are certain services that have to be done by the public sector. These are really good ideas, but the point it's going to make is we could come up with solutions, the problem is political. And so I think we first have to deal with political solutions. And one of those solutions it deals with how unions are able to raise money and fund political campaigns. So, you know, paycheck protection it's been called in the past or there's a court case that's winding its way up to the U.S. Supreme Court that would limit the ability of unions to just take money mandatorily from their employees because then they're able to use the bulk of that money. Some of it goes to collective bargaining, but they're able to, you know, there's one, they're supposed to in California certainly. And I think, yeah, nationwide, they're not allowed to use all the money for politics. You're allowed to opt out, essentially, but there's a case that would challenge that ability. But the point is, if the unions didn't have such an easy time taking money from their employees and the government does it for them, they wouldn't have as much money to spend on politicians and on politics and that might make it easier to reform some of these things. So, I think there's a political problem before we even get to the solutions because we've been, now in California we've had initiatives that have passed and then the courts have thrown them out because we have something called the California rule which means you can't cut back public sector benefits even going forward. So I worked once for a place where I had a small pension and I got a pension and as of today they ended that pension and I got a lower rate starting tomorrow. They're not taking anything away from me, it's just future earnings. If I don't like the deal I could get a job somewhere else. That's not allowed in California which means the only reforms we're able to do are ones for new hires. So that's not going to start paying off for 30 years until those new hires start retiring. Well as we wind up how long can we sustain this in our country as you look across the nation at some point we're going to hit a breaking point and when do you anticipate that may occur and how do you think we'll be able to respond to it? You know that's, I don't know, I mean what I see happening which I think is in some ways the worst of all worlds is just a slow steady destruction of public services and we had a burgeoning pension reform movement in California and a lot of folks at the time were thinking we're going to have we're going to have a day of reckoning and we're going to fix this and that whole reform movement kind of fizzled out after taxpayers agreed to a tax hike but the problem is it's hard to get to that we're not at that point where everything's going to explode. Fascinating, Steven what's the full title of your book Plunder? Plunder, how government employees are public employee unions are raiding treasuries controlling our lives and bankrupting the nation and people can get that on Amazon it's too long on the subtitle Oh very good thank you for being with us thanks for being in Hawaii I look forward to the consultations we're going to have here and some of the presentations and appreciate your work well thank you Aloha well my guest today Steven Greenhut of the R Street Institute has been sharing some of his insights that he gets from observing public employment across the nation again the issue is not that public employees don't deserve good pay and benefits they certainly do but we've got to come up with a way of being able to provide them and ensure public services as well as to ensure the full value to taxpayers that's one of the tricky problems as Steven points out of a world that is full of politics we are in a political world let's see what we can do to help make it produce the outcomes that are good for everyone I'm Keena with the Grassroot Institute we'll be back next week on Ehana Kako which means let's work together until then signing off from the ThinkTekawaii broadcast network Aloha