Rahmbo Takes on Public Worker Unions

PODCAST
Steven Malanga talks with Josh Barro about his new PublicSectorInc.org article, "Rahmbo Takes on Public Worker Unions."

Public employee unions in Chicago are up in arms about a new campaign ad being run by Rahm Emanuel, President Obama's ex-chief of staff and the frontrunner in this month's mayoral race. The city's police and fire unions joined AFSCME to release a statement calling the ad "offensive." The head of the Chicago Fraternal Order of Police called the ad "a travesty."

What does the ad say? That "city government is not an employment agency," and, when Rahm is mayor, "everybody that works for the city government [will know] that they're actually a public servant." Stunning sentiments, indeed.

Emanuel has never been one to shy away from confrontation, and in this mayor's race he's run head-on at Chicago's public employee unions. He's raised the hackles of the city's teachers' union by backing aggressive school reforms. He's earned the enmity of the police and fire unions by insisting that pension benefit changes for current employees be on the table in the city's coming fiscal restructuring. And he's made many classes of public workers nervous by calling for "charter agencies" that enjoy the sort of bureaucratic autonomy used by charter schools--as in practice, that has often meant employing non-union labor.

Emanuel isn't just surviving as he takes on these entrenched interests, he's thriving. The two most recent public polls of the race, sponsored by the Chicago Tribune and Chicago's local ABC affiliate, have Emanuel leading a six-candidate field with 49 percent and 54 percent, respectively. His closest opponent, Gery Chico, a former chief of staff to Mayor Richard Daley, is under 20 percent. If Emanuel manages to squeak above 50 percent, he'll win the mayor's race outright next week. Otherwise, he'll be heavily favored in an April runoff.

That he has not been endorsed by a single public employee union makes Emanuel's lead all the more remarkable. The police and fire unions endorsed Chico, with the president of the local Fraternal Order of Police saying that Emanuel's pension reform position was of "the utmost concern" to the union. Chico and all the other major candidates support a "two-tier" pension reform that would only impact newly-hired workers--and therefore take decades to actually affect the size of benefit checks being mailed.

The Chicago Teachers' Union hasn't yet announced its endorsement, but previously indicated that it would endorse either ex-U.S. Senator Carol Moseley Braun or City Clerk Miguel del Valle. These candidates lag badly in the polls--Moseley Braun's campaign imploded after she accused a minor opponent of being "strung out on crack"; more recently, she may or may not have compared Emanuel to Hitler--but both Emanuel and Chico favor the expansion of charter schools, leaving the teachers' union with few appealing options.

AFSCME and the SEIU have sat out the race entirely, perhaps seeing no viable, union-friendly candidate. Instead, AFSCME is focusing its resources on electing friendly candidates to Chicago's City Council. You wouldn't know it from the way Daley has run the city for the last twenty years, but Chicago actually has a weak-mayor form of government, so electing a union-friendly Council could be an effective way to block Emanuel's agenda. This gambit isn't terribly likely to succeed--like Daley, Emanuel will probably have a friendly majority on the Council--but it's a more viable strategy than trying to win the mayor's race.

Emanuel does have support from some private-sector unions, including the Teamsters and the Plumbers', Bricklayers', and Ironworkers' locals. This alignment is similar to that in New York State, where Governor Andrew Cuomo has clashed with public worker unions as he seeks to close a large budget gap without raising taxes. The Committee to Save New York, a coalition organized to defend the governor's budget agenda from union criticism, counts among its members various figures from New York's banking and real estate industries--and the president of New York City's Building Trades' Council. As in New York, private sector unions in Chicago understand that a sustainable city budget helps to create jobs in construction and other private industries.

Indeed, Emanuel's strong polling numbers despite opposition from public worker unions signal a growing public understanding that the way governments do business in union-dominated blue states is unsustainable. For the last several years, Chicago has held together its budget only with a strategy of selling valuable city assets and using the proceeds to pay for current year operations. That cannot go on forever.

A report out Monday from the Civic Federation, a Chicago-based think tank, puts the challenge facing the city's next mayor in stark terms. In Fiscal Year 2011, which ends in July, Chicago faced a $650 million budget shortfall. But only about 15 percent of this gap was actually closed with spending reductions. The gap was closed mostly with one-time revenues, particularly proceeds from selling the Chicago Skyway toll road and city-wide on-street parking. In the case of the parking deal, the city sold seventy-five years of parking meter revenue, and spent 93 percent of the proceeds from that sale to close just three years of budget gaps.

This cannot go on, as the asset sale money is running out. It will likely be all gone within the next eighteen months. Once that happens, the only ways out will be spending cuts or tax increases--and fresh off a 66 percent rise in the state income tax, there is little appetite for tax increases in Chicago. Since about 83 percent of Chicago's Corporate Fund (the local equivalent of a General Fund) is spent on employee compensation, spending cuts will have to include cuts in spending on public workers.

In coming years, rising pension contributions will widen the city's budget gap. Last year, Illinois's legislature approved a law that will force the city to adequately fund its police and fire pension systems. For decades, the city's contribution to pensions has been fixed at a low level, unlinked to the actual funded status of the systems or the performance of the assets they hold. As a result, the funds have become severely depleted and would run out of money within a decade without policy change.

The new law will require the city to make the actuarially required payment to fund the system fully within thirty years--and to raise city property taxes by about 60 percent in order to do so. Daley screamed bloody murder about this new law and its effect on the city's tax burden, but he did not have an alternative plan to make the pension funds solvent.

For reference, the pensions being supported by those payments are generous. Chicago's police pension system allows for retirement after twenty years of service, with a pension reaching 75 percent of salary with retirement at twenty-nine years and one day. Because retirement income is not taxed in Illinois, this is effectively an 80 percent-of-salary pension. This deal only looks affordable because city taxpayers aren't actually paying for the pensions they're promising--and that party is about to stop.

Only putting benefit reductions for current workers on the table is a plausible way to relieve the burden pensions place on taxpayers--though Chicago's dire fiscal situation likely means that tax hikes and pension cuts will probably be a yes/and proposition rather than an either/or one.

Ironically, Chico is running an ad that simultaneously attacks Emanuel for wanting to raise taxes, and touts Chico's own police and fire union endorsements. (Emanuel has proposed a plan to expand the sales tax base and cut rates 20 percent, which he says would be revenue neutral, but he has not announced which specific services would be newly taxed. Chico and other opponents have dubbed it "the Rahm tax.") Chico may oppose a sales tax expansion, but if as mayor he would unwilling to touch pension benefits for current city employees, he'd be under far more pressure to raise taxes than Mayor Emanuel would be.

The current poll numbers are a sign that city taxpayers understand that tradeoff--that the only way to avoid an absolute tax explosion will be to take on the sacred cows in city government, including employee pensions. On February 22, we'll learn whether Chicago's voters give Rahmbo a chance to try his hand at that.

Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute and a regular contributor to PublicSectorInc.org. He is most recently the author of the Manhattan Institute report "Unmasking Hidden Costs: Best Practices for Pension Transparency". He writes bi-weekly on fiscal issues for RealClearMarkets.com and has written for publications including the New York Post, the New York Daily News, National Review and City Journal.