Miller Time
Tonight with dinner, I will be drinking a bottle of Miller Lite. I got the six-pack last week, before I had even heard about the strikes, because it’s the most affordable semi-decent beer I could find. The fact that it comes from Milwaukee and is the last good union-made macrobrew from the US is simply coincidence.
However, it’s definitely a coincidence worth noting, especially given all the rhetoric and heated debate surrounding Wisconsin Governor Scott Walker’s proposal to the Wisconsin state legislature that increases public sector employee pension contributions to 5.6% of required vesting and 12.6% of the cost of health insurance premiums. These moves would seem shrewd, even though their estimated $300 million in savings over two years would only go part of the way towards closing the state’s projected two-year budget shortfall of $3.6 billion[1].
But the real kicker was the move to propose legislation that would scrap decidedly more Democratic public sector unions’ rights to collectively bargain. Somehow police and firefighters’ unions were excluded, though Walker, while bellicose, probably wouldn’t have been elected if he were politically tone-deaf. In any case, this move will not produce any immediate short-term budgetary savings. As Paul Krugman notes in the New York Times, it amounts to little more than a political power play[2].
Granted, I’m not a huge gung-ho union guy. And I do think there are some less than perfect teachers, and redundancies in certain areas where unions should give way and let some downsizing occur. But the broad-sweeping assertion that only a heavy dose of union busting will restore Wisconsin’s fiscal sanity isn’t supported with any hard data.
According to Cato Institute tax policy studies director Chris Edwards, “Wisconsin is just one of several states where legislatures, empowered by Republican victories last fall, are finally tackling one of the root causes: the ability of public-sector unions to squeeze taxpayers for exorbitant benefits[3].” In a separate study, Edwards cites Bureau of Labor Statistics data showing that union state and local employees were compensated an average 1.42 times more than non-union state and local employees.
But so what? Firstly, unions have much greater concentration in high-skilled professions, so the comparison is pretty apples-and-oranges. Secondly, unions are much more prevalent in urban areas, which have a much higher cost-of-living and wage premium[4]. Thirdly, higher compensation does not mean you are contributing to a higher budget deficit. Governments can adequately compensate their employees, and still live within their means, by actually raising the money needed to hire skilled professionals.
Budget-Busting Unions: Hot Air and Hard Facts
But at some point, it is a waste of time and energy to hash out the rhetorical arguments trumpeted by fiscal liberals and conservatives every time that a substantive economic issue miraculously graces our national headlines. If the situation in Wisconsin illustrates anything, it’s how both sides of the fence are willing to hurl statistical junk into their neighbor’s yard just to make theirs look a little neater by comparison.
Let’s start with Scott Walker’s side of the fence. From where he stands, the proposal to strip some public employees of their collective bargaining rights makes sense, in that the more that these unions push for higher wages and more generous benefits, the more difficult it will be for his government to find funding for other programs without having to raise taxes on an increasingly shrinking base. According to this argument, instead of taking a stand against public worker compensation packages that they knew future governments couldn't afford, politically savvy leaders in states across the country elected instead to keel over to union demands, and only now are the chickens coming home to roost.
But to say that the data backing up this claim is spurious would be an act of generosity. My favorite “proof” of the above theory is the following chart published in the Washington Examiner, a conservative daily in the nation’s capital, using data from the Bureau of Labor Statistics, US Census and the Tax Foundation[5]:
What this chart shows is a strong positive relationship between the percentage of each states’ public sector workers who belong to a union, and the levels of their unfunded state debt per capita. By this measure, it would appear that public sector unions are preventing states from balancing their budgets.
Except for one small problem. “State debt” is a measure that is completely unrelated to states’ ability to balance their budgets. Its two principal components are the payments due on bonds and notes that states sell to investors to raise capital for public works projects, and more recently, the value of their unfunded pension liabilities[6][7]. In fact, the National Association for State Officers has found that 42 out of 50 states keep an entirely separate budget for their capital planning expenditures[8]. A high state debt per capita simply means they are raising more capital to build roads, schools, bridges, water treatment plants, parks and museums. It has no relation to whether they are raising enough revenue to pay for their immediate operating expenses, i.e. whether they can balance their books. For that, you’ll want to look at their deficit.
To examine these claims a bit further, I took the same state worker unionization rates that Edwards uses based on the BLS data, and matched it with data from the Center on Budget and Policy Priorities states’ combined FY 2010 gap between projected expenditures and revenue before an official budget was adopted for that year (June 2009) and at mid-fiscal year (December 2009)[9].
I found that there was, in fact, some degree of correlation between the percent of a state’s workforce that was unionized, and their FY 2010 total budget gap[i]. The chart below plots the total FY 2010 deficit as a percentage of each state’s total budget on their percentage of public sector unionization. We see that there is clearly some kind of a relationship between higher rates of unionization and higher percentage deficits for FY 2010, but with tons of variation.
For instance, Connecticut has a 27% FY’10 deficit and is 64% unionized. North Carolina has a 26% FY’10 deficit, and is 8% unionized. So obviously there are some other factors at play here.
A two-variable log-on-log regression shows that the relationship between these two variables is slight but significant. The slope of the best-fit line is .317, which indicates that a 20% change in the rate of public sector unionization of a state’s workforce correlates with a 6.34% (not percentage point) long-term decline in its budget deficit as a portion of its overall outlays.
In Wisconsin’s case, this would indicate that if Walker’s proposed union-busting had hypothetically taken place 18 months ago, and decreased the state’s rate of public sector unionization by 20% before June 2009 (from 52% down to 41.6%), it would have correlated with to a decrease in its deficit from 24% of the total FY 2010-11 bi-annual budget, to about 22.5%. This would reflect a two-year savings of some $200 million of the $3.2 billion combined deficit through FY 2011. Halving Wisconsin’s rate of public sector unionization to 26% would have correlated with a decrease in the state’s deficit down to 20.2%, a two-year savings of some $507 million. While this is a lot of money, the state’s would still have to come up with another $2.7 billion by July 2011. And this is a very generous estimate, considering that Walker’s measures, while drastic, will probably not lead to public sector unions contracting by half.
Next, I added some other variables to my dataset, to see how states’ levels of public sector unionization impact their budget shortfalls when controlling for other factors. These include the average rate of unemployment in 2009[10], the change in per-capita GDP between December 2008 and December 2009[11], December 2009 per-capita enrollment in Medicaid[12], and a dummy for whether they offer public workers optional or mandatory defined contribution pension plans[13].
The rate of unionization has a coefficient of .177, meaning that if Wisconsin’s public sector unionization rate had been cut in half in by June 2009 from 52% to 26%, its deficit would have gone down to 19.4%, a savings of $613 million for FY 2010-11. Having a defined contribution pension plan (Wisconsin currently used defined benefit) correlates with an average 6.7 percentage point decrease in the rate of combined state deficits to total outlays, an additional two-year savings of $893 million. The coefficient for economic growth is -1.3, meaning that if Wisconsin had 2.1% economic growth instead of a 2.1% decline, this would have reduced the projected deficit by $728 million.
Thus, even if Wisconsin had somehow experienced an unrealistically severe decline in union membership, an uptick in economic growth, and switched to a defined contribution pensions, these three factors would only have only reduced its two-year deficit by a combined $2.2 billion. The state would still have had a $1 billion problem on its hands for FY 2010-11, while crippling its unions in the process.
So what lessons can be taken from this exercise? For one, it suggests that even if the Wisconsin Republicans’ legislation generates an unprecedented mass exodus from public sector unions, this would still save less money than a return to modest economic growth, or switching to defined contribution pensions. It would fall well short of the “major savings” that Walker’s supporters anticipate. Apparently, it is not only immoral, but also seemingly impossible for states to balance their budgets on the backs of the middle class.
Educational Effects: No Impending Disaster, Just a Lot of Real Pain
You really have to wonder whether results that indicate an average annual savings of $307.5 million in a state that spent $13.5 billion for FY 2010-11 would have been worth the damage that Walker’s bill will likely wreck on Wisconsin’s public schools.
Granted, I do not agree with the argument that Wisconsin is on the brink of becoming “Wississippi”, with educational attainment levels sinking to those of the southern states where collective bargaining is prohibited. There is simply too much that separates Wisconsin from these states to suddenly make them comparable thanks to any single piece of legislation. But if the initial data serve to tell a tale, it’s that while Walker opponents are probably wrong to point to an impending disaster, things will most likely get worse before they get better once the Democratic legislators are returned to Madison.
The most commonly cited statistic is that the five US states that explicitly ban teachers from collective bargaining – Texas, Virginia, North Carolina, South Carolina and Georgia – are all in the bottom seven in terms of combined SAT/ACT scores. But this is not the case when comparing the SAT scores by themselves, with data from each states’ college board[14]. By this measure, these five states do a little better. Georgia and South Carolina stay near the bottom, at 47th and 48th place, respectively. Texas ranks 45th, while North Carolina and Virginia improve significantly, rising to 39th and 33rd, respectively.
As an alternative indicator of success, I also look at each state’s high school graduation rate from the 2010 US Census[15]. Texas ranks dead last here, at 79.6%. South Carolina is 40th, at 83.2%, while North Carolina is 38th, at 83.6%. Georgia ranks 35th at 83.9%, while Virginia skyrockets to 30th at 85.9%. Wisconsin, by comparison, still finishes second for SAT scores, and 13th for graduation.
But to really see whether public school teacher unionization makes a difference, I need to control for other factors. I use 2009 per capita GDP as a control variable to proxy for each states’ existing level of income, alongside a dummy variable equal to one for the five states that explicitly prohibit collective bargaining for public school teachers, and .5 for states where collective bargaining is permitted but not required. I also include a separate dummy equal to one for states in the southeastern region, to control for any regional effects these states experience, independent of their respective policies on collective bargaining.
Interestingly, in all four regressions, the indicator for banning collective bargaining has a negative effect on test scores and graduation rates, but is never statistically significant at 10%. I also test for the effects of higher class size on test scores and graduation rates, since eliminating collective bargaining rights will, in all likelihood, mean fewer teachers and bigger classes. I insert a variable measuring each state’s class size in 2010 from the National Center on Educational Statistics[16]. For test scores and graduation rates, the effect of larger class sizes is negative in all four regressions, but again, never statistically significant at 10%.
Thus, while states that do not require collective bargaining and that have large class sizes do appear to lag behind in terms of educational indicators, they are not so far behind that it can be said with a significant degree of confidence that Wisconsin’s educational system will unravel from the legislation. However, it’s certainly no stretch to say that the state’s educational system will suffer to some degree.
This fact was illustrated to me by an old college friend who currently teaches Milwaukee Public Schools, who described the bill’s consequences for those practicing her profession, and the children they work with. “Before the ‘budget repair bill,’” she told me, “my highly successful inner city school announced that it would be removing seven teaching positions. That means a 30+ to one (student-teacher) ratio. If his bill is passed and collective bargaining rights are removed, the ratio could easily go up to 40 or 45 to one. I love teaching,” she added, “but I don't know that I will love it in a few years if this bill passes.”
Tread Lightly, Young SlyWalker
My findings thus don’t provide a clear picture of what will happen to Wisconsin’s educational system as a result of Walker’s budget. But if they point in any direction, that direction is down. My findings also suggest that future savings from repealing collective bargaining will probably come up well short of anything meaningful enough to justify their corrosive effect on its public schools.
I think that a relevant question at this point becomes why Wisconsin’s Republicans would pursue such a scorched-earth policy, without having examined other opportunities to generate significant budgetary savings without tanking the state’s educational system. As my friend at Milwaukee Public Schools told me, while she and her husband will most likely have to move into a one-bedroom apartment to save money, these are sacrifices she is willing to make to continue teaching. But without collective bargaining, “you potentially take away things like eight hour days, student-teacher ratio, sick days, vacation time, and many other things that guarantee respite from a demanding job and help keep one ready to return day after day with gusto.”
So then why not look into other concessions that could save money, without putting these teachers, and the state’s entire future, at risk? For instance, in Maryland, the state government closed a $1.6 billion budget gap for FY 2012 (relatively the same size as Wisconsin’s) using measures that have not aggravated those charged with the duty of providing education to its young citizens. Like in Wisconsin, these include increasing pension contribution and retirement contribution costs, but in the past have also included furlough days, which, while unpopular with public sector workers, generated far more savings up front for the state, without creating any Haymarket-style showdowns.
Since Wisconsin’s pension calculations are based on the discounted rate of what 60% of workers' present earnings are worth upon retirement, changes could also be made to the calculations that determine the value of these “present earnings”. The state currently calculates teachers’ “annual salaries” as the average of their three highest paid years upon retirement[17]. Significant savings could be realized from calculating this amount according to an average of their five or seven highest paid years upon retirement, which in any case seems like a more fair determination of what they were paid during the course of their tenure.
In addition, unionization isn’t the only reason for teachers’ inflated pensions. Another is that they are an expense paid for by the state, but based upon salaries negotiated with local governments. Since locals don’t bear the cost of the pensions based on these salaries, they don’t push for concessions, leaving states with the mop and bucket. Passing a portion of the cost of teachers’ pensions on to the local governments would be another effective way for Governor Walker to short-term savings, address long-term pension cost issues, and avoid dismantling public workers’ right to negotiate. As would switching to a defined contribution pension plan, as per my findings above, and (gasp) not passing tax cuts amidst a $3.6 billion shortfall.
Maryland Governor Martin O’Malley best summed up my point in his interview with CNBC’s “Squak Box”, when he stated that, “We’re having to ask our unions to do more on pensions, we’re having to ask everybody to sacrifice, but we’re not doing it by vilifying public employees. We’re doing it by bringing people together around the truth and the math and the imperative of moving forward out of these difficult times[18]". This effort has clearly paid off, with the state’s Triple-A bond rating affirmed today by all three major ratings agencies[19].
As Scott Walker sends his state troopers to round up the Democrats, he would do well to try and bring his employees around the table, and figure out methods for all parties to make concessions that do not involve the strong-arm tactics he's put on the table. Or he can use his party’s electoral gains to remain obtuse towards the needs of teachers and public school students alike, when more effective and less confrontational methods for balancing his state’s budget are plainly available. But if his state remains immersed in gridlock as useless salvos fired from both sides over the next four years in place of a consensus that actually help Wisconsin stay out of the red while investing in its future, Walker will have no one to blame but himself.
[7] Only recently did Moody’s decide to include unfunded pensions as part of this figure (http://www.nytimes.com/2011/01/27/business/27pension.html)
[9] excluding North Dakota, Montana and the District of Columbia
[10] From the Bureau of Labor Statistics: http://www.bls.gov/news.release/archives/srgune_03032010.pdf
[11] From the Bureau of Economic Analysis: http://www.bea.gov/newsreleases/regional/gdp_state/2010/pdf/gsp1110.pdf
[12] Medicaid enrollment stats from the Kaiser Foundation: http://www.kff.org/medicaid/upload/8050-02.pdf , population statisctics from the 2010 US Census: http://www.kff.org/medicaid/upload/8050-02.pdf
[13] From the National Conference of State Legislators: http://www.ncsl.org/Portals/1/Documents/employ/StateGovtDCPlansSept2009.pdf
[i] An issue with this method is that it uses cross-sectional data, which only provides a snap shot of states at one moment in time. It would be far more useful to look at panel data to see how changes to the rate of public sector unionization over time and across states has led to changes in deficits. In the interest of my own time and sanity, I’ve decided not to do that. However, if prior year data on state public sector unionization rates do become available, it would definitely be worth the time to update these findings.
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