No financial issue has dominated American states and cities
in recent years as much as the massive shortfalls in their workers’ retirement
funds, which have triggered battles between politicians and unions from New
Jersey to California and helped push Detroit into a record-setting bankruptcy.
On Wednesday, the U.S. Supreme
Court may have given governments a bit more of an upper hand.
The court ruled 5-to-4 that
government employees have a constitutional right not to pay union fees, dealing
a potentially heavy blow to the economic clout of the labor movement through a
decision that affects 5 million workers. That may leave unions with a weaker
voice in benefit and pay negotiations and curtail their power at the polls.
State and city pension funds were hit hard by the credit
market crisis a decade ago, when stock prices plunged. That’s left them with
about $1.8 trillion less than they need to cover all the promised benefits,
putting pressure on governments and workers to set aside more money to make up
Such unfunded obligations contributed to bankruptcies in Detroit
and Puerto Rico that left bondholders and pensioners squaring off in court. In
New Jersey, former Republican Governor Chris Christie fought with the state’s
labor unions over their benefits for years, even as his failure to make full
annual pension payments caused the pension system to fall deeper behind.
Illinois’s bonds have been downgraded to one level above junk because of
retirement system debt that stood at $137 billion by last June.
“The issue with resistance to alter pension agreements is a
big one in states with underfunded pensions like Illinois,” Daniel Solender,
head of municipal investments at Lord Abbett & Co., which holds $20 billion
of state and local debt, said in an email. “Up until now it has been unions
versus the government on these issues but if workers do not need to financially
support the unions and if they can act more independently, it might open the
door for more compromises.”
Union opposition to pension changes has been a major force
in Illinois. In 2013, Illinois lawmakers approved a restructuring of the
pension system, seeking to cut cost-of-living adjustments and raise the
retirement age for some workers. But unions sued, and the state’s supreme court
sided with unions, saying it illegally cut benefits protected by the Illinois
“This is historic win for taxpayers,” Governor Bruce
Rauner, a Republican, said in a Bloomberg Television interview from Washington.
“Taxpayers for too long have suffered from the excessive, unfair costs of the
unfair, conflicted relationship between government union leaders and the
politicians who they helped elect as well as negotiate with.”
While the legal obstacles haven’t changed, the Supreme
Court decision could chip away at the resources that unions can bring to such
fights. That could help states and local governments seeking to lower salaries
and reduce benefits.
“We expect the Supreme Court decision may lower public
union revenues, membership, and bargaining power in the 22 states that can no
longer allow mandatory fees,” Emily Raimes, an analyst at Moody’s Investors
Service, said in a statement. “These developments could change how state and
local governments set employee wages and pensions, resulting in a positive
long-term impact on government finances.”
for the original article from Bloomberg.