On June 27, the U.S. Supreme Court ruled in a 5-4 decision that government workers who choose not to join a union cannot be forced to pay for the cost of collective bargaining. Predictably, opinions on the ruling split along political lines, with liberals disparaging the decision as a result of President Trump’s appointment of conservative Justice Neil Gorsuch while conservatives hailed the decision as a major victory against labor unions and the Democratic Party.
The Janus v. AFSCME ruling, however, has been overly politicized. Rather, it is a groundbreaking economic event that will fundamentally affect the fiscal condition of 22 involved states and the retirement security of some 5 million public workers across the nation.
Here is why. In his opinion in the decision, Justice Samuel A. Alito Jr. cited Illinois’ “$160 billion unfunded pension and retirement healthcare liabilities” for siding against the unions. As stifling as the Illinois liability is, it’s only a fraction of the nation’s total of $1.4 trillion in public pension liabilities.
According to the Illinois Economic Policy Institute, public sector unions across the U.S. should expect to lose 726,000 members in addition to revenue as a result of the ruling. With fewer members and less money, unions will hire fewer representatives and take fewer cases to arbitration.
There is a raft of scholarly research indicating a negative relationship between unionization and the public pension funding status. In the 1990s, Wharton School economist Olivia S. Mitchell compared the unionized and nonunionized public employees and found that unionized public employees’ pension plans of were less likely to be fully funded. More recently, a study by the Brookings Institution found that collective bargaining requirements “significantly and substantially” reduces employee contribution and increases taxpayer burden for keeping the system solvent.
These academic findings seem consistent with Maryland’s experience where the unions still hold a lot of weight. The Maryland State Education Association is the biggest state union with more than 74,000 members, and collected $19.6 million in dues in 2016. The Food and Commercial Workers Local Union 400 had more than 27,000 members and collected $17.4 million in 2016.
As of June 30, 2017, Maryland had an unfunded pension liability of approximately $19.7 billion, for a funded status ratio of just 71.8 percent. This means every household in Maryland would owe about $10,000 to maintain the state pension system. Meanwhile, the taxpayers’ contributions to Maryland’s pension plans have more than doubled in just a decade from just $834 million in fiscal 2007 to $2.037 billion in fiscal 2017. In addition to making annual required contributions, the state had to make two additional payments of $75 million to address the underfunding in 2015 and 2016.
Pension reform is desperately needed to increase the employee contributions for state workers’ pension plans or to switch to defined contribution 401(k) style accounts. However, unions have made it extremely difficult to renegotiate bad pension contracts to adjust spending for Maryland. When pension reforms were passed in 2011, public workers descended on Annapolis for the largest political demonstrations in decades.
It is no wonder that politicians had difficulty saying no to the labor unions’ demands.
The Supreme Court’s decision is not a direct political move against the labor unions. It is simply an acknowledgement that the special relationship between the labor unions and the union-friendly politicians are major drivers of the nation’s pension shortfall.
Ultimately, Maryland’s $19.7 billion pension gap and the nation’s $1.4 trillion pension gap are fiscal problems that must be resolved with a sound and unbiased macroeconomic decision. The Janus v. AFSCME decision brought the politicians one step closer to being able to make such impartial decisions by reducing the influence of their union backers.
• Carol Park is a senior policy analyst at the Maryland Public Policy Institute.