Suddenly newly elected Wisconsin Governor Scott Walker, someone few Americans had heard of two months ago, is the most controversial politician in the United States. The reason is that Governor Walker, in addition to demanding public employee givebacks to help solve a budget crisis, has also proposed limiting collective bargaining with unions to wages (New York State eliminated collective bargaining on pensions in the 1970s after soaring pension costs wrecked New York City), giving state residents the right to a referendum on wage increases if they exceed the inflation rate (a referendum is already required for any pension changes in San Francisco), no longer forcing public employees to pay union dues, and giving public employees the ability to de-unionize in an annual vote. The resulting controversy has been nationalized by the national press and politicians from both parties. Outside Wisconsin, the proposals are seen as an attempt to destroy public employee unions, and thus the Democratic Party those unions fund, leaving the wealthy the only remaining source of campaign funding in the country. So who is this right wing maniac, and why did Wisconsin vote for him?
Until the recent controversy, I hadn’t really heard of Scott Walker either. But in my job, I have written a quarterly report on economic, demographic and real estate trends in the Milwaukee Metropolitan Area, the state’s largest at 27.8% of total state population and its economic engine, for the past six years. And since Milwaukee County accounts for 60.3% of the Milwaukee MSA, I had heard of the Milwaukee County pension scandal – the scandal that made Scott Walker’s career and probably shaped his attitudes. Here is the backstory the mainstream media has failed to deliver.
Since the recent controversy hit, “Our State is not Wisconsin” has become a catch phrase in many Democratic leaning states, as if Wisconsin were a deep red Republican state like Wyoming. In fact Wisconsin is a “Blue State,” though not by much, and its electoral votes have gone to the Democrat in the last six Presidential elections. It is a state where contested elections are the rule. It is also generally thought of as a well-run “progressive state,” where taxes are tolerated but the government is actually expected to deliver public services. In FY 2007, according to Census of Governments data, it had the 14th highest state and local tax burden in the country as a percentage of its residents’ personal income, at 11.3% compared with a U.S. average of 10.8%, and with most of the tax burden falling at the state level rather than the local level, public services are much more equitable in Wisconsin than they are anywhere in the Northeast. (New York City’s state and local tax burden was 15.9% of city residents’ income at the time). Wisconsin is also the 17th most unionized state out of 50, between Massachusetts and Ohio.
But it is also a state with a troubled economy, an economy that has been troubled in the long term as well as in the short term. I would say it is like Upstate New York without the state funds transfers from Downstate New York. Of all the metropolitan areas I write about, Milwaukee has the highest percentage of its payroll employment jobs in the Manufacturing sector. Manufacturing made Wisconsin relatively well off, and unionization made that wealth relatively evenly distributed, back in the industrial era of the United States, as in the rest of the Midwest. In 1979, before the “deindustrialization” recession of the early 1980s and the Reagan era, Wisconsin’s per capita income was at the national average according to the U.S. Bureau of Economic Analysis, while the Milwaukee MSA was 13.9% above average. But manufacturing based economies have not fared will in the past 30 years, and by 2008 the Milwaukee MSA’s per capita income was just 6.6% above the U.S. average with the state as a whole 6.0% below average. The only part of the state holding its own is the Madison, Wisconsin area, home to the state capital and the huge University of Wisconsin, with a per capita income that is 10.0% better off than average (just as the Capital District is now the richest part of Upstate New York).
Needless to say, the recent decade has not been kind to America’s second coldest major metro. According to the Bureau of Labor Statistics, metropolitan Milwaukee had 42,100 (5.2%) fewer private sector jobs in December 2010 than it had in December 2003, the low December in the previous recession. And it had 15,000 fewer in December 2007, the most recent high for that month, than in December 1999, the previous high. The population has been stagnant, with the rise in the unemployment rate held down by the outmigration of those of working age, leaving behind pensioners. Milwaukee would love to have the sort of influx of college educated young people New York City has, to neighborhoods like the Lower East Side and Williamsburg, or at least to retain more of its own young people. It tries to appeal to them, while New York – with its government of, by and for senior citizens — sees them as cash cows. Perhaps Wisconsin’s 1950s blue collar image (as shown in this series of beer commercials) isn’t helpful, or perhaps it is the job market.
Most Wisconsinites are well aware they are not as well off as the used to be. In a typical but symbolically important story, unionized Harley Davidson workers, for the second time in a generation, had to agree to massive givebacks to save the company and their jobs – with a seven year wage freeze, the loss of 325 jobs, and more work assigned to part time and temporary workers. “It's a somber atmosphere today,” a union leader said. “Today I do not feel good. I believe that people voted what was right for them. I voted what is was right for me, but it still doesn't feel good. We gave up a lot.” Generally trends in temporary workers can be analyzed as the harbingers of trends in office-based sectors, so I was surprised to be told years ago by an official with the Wisconsin labor department in that state many temps work in manufacturing. Milwaukee is the home of temp work giant Manpower, Inc.
So what about that Milwaukee County pension scandal?
Milwaukee County, unlike most local governments but like some, has its own pension system. As in many places in the U.S., the 1990s stock market bubble made politicians think their pension funds were better funded than they actually were. “We doubled the sucker,” one of its pension officials said. “The return on investments has been 13% a year,” according to another. “The county has been doing so well it has gradually decreased its annual contribution to the fund, from $19.3 million in 1991 to $2.8 million in 1999 to zero in the current year. As county officials looked at this growing mother lode, they decided to cash in on it.”
Here in New York, the unions go up to Albany every year, promises of campaign contributions, offers of help collecting petition signatures, and threats of help for challengers in hand, and come back with more and more pension enhancements – often over the objections of the local officials who then have to raise taxes or cut services to foot the bill. While this still goes on in New York more than a decade after the first stock market bubble burst in 2000, it went on just about everywhere in the U.S. at the peak of that bubble – along with cutbacks in taxpayer pension funding. But the Milwaukee County pension deal had an unusual twist. Instead of the unions pushing for pension deals with the politicians, the politicians brought the deal to the unions. And the politicians believed they had structured the deal so they would be the greatest beneficiaries.
The County Executive “should he serve until 2008, his salary would peak at $168,110 and he would leave with an annual pension of $130,609. But Ament and his Director of Human Resources, Gary Dobbert, decided that wasn't enough. Last fall, during negotiations with the county employees union, they suggested a huge increase in the pension benefit for all employees, with the biggest break going to those employees hired before 1982. This favored group would be given a 7.5% increase in their annual pension for each year worked after 2000. This annual increase would continue until May 2004, which happens to be when the term for elected officials like Ament ends. Any employee who stays on until then thus gets a 25% increase in their annual pension.”
“Ament claims this benefit was something the county employees union demanded. ‘It was part of it,’ he says of their negotiation demands. But Wayne Krueger, who negotiated the new settlement for the union, was amazed management was offering this new benefit. ‘We felt all along, we don't believe what they're giving us,’ he says. ‘This is more than we were asking for. We viewed it as a golden parachute for long-term employees. But we weren't going to look a gift horse in the mouth. It's probably going to be pretty expensive for the county.’”
Most county residents had no idea what was going on, even though they were entering into an irrevocable “contract” that had to be paid no matter how dire the consequences. “The negotiations are typically handled privately. ‘For collective bargaining, you can go into closed session,’ says Robert Murphy, an aide to the county board. ‘The negotiations come under the personnel committee so it doesn't need to be discussed by the full board.’ Supervisor Kathleen Arciszewski, who runs the committee, was unavailable for comment. ‘It wasn't even debated on the county floor,’ recalls Supervisor Penny Podell, who says she voted for it as part of a larger package.” And the media did not report it.
But in October 2001, just after 9/11, a local blogger that I have been quoting broke the story that as a result of the deal, County Ament “helped create and then approved a plan that could result in him getting a lump sum payment of $1.6 million when he retires, plus an additional payment of about $37,000 per year for the rest of his life.” The result was a political firestorm that only got worse as the true cost of the deal overall became known.
“Now that the mainstream media is having a feeding frenzy over the pension story I first broke back in October, Milwaukee County Executive F. Thomas Ament has gotten religion” the blogger wrote. “Ament has proposed a rollback of the outrageous pension benefits owed to him and others. That sounds good, but it’s not likely to happen…”
“Pension benefits, once awarded, are not easily taken away, according to Nick Griefer, a policy analyst for the Government Finance Officers Association, a national organization that advises governments on fiscal matters. Griefer says that governments can always change the benefits for future employees they hire but have a more difficult time changing benefits given to current employees. Jake Lorentz of the National Association of State Retirement Administrators, agrees: ‘Usually, when benefit changes happen, it only affects the new employees.’”
In New York, for example, pensions are enhanced for those cashing in and moving out over and over again, and then wages and benefits are cut for new employees. The public employee unions then argue that they really can’t be expected to do very much work, since they are underpaid.
“Wisconsin statute 40.19 says that the once the legislature offers benefits to state employees, they ‘shall accrue as a contractual right’ and ‘shall not be abrogated by any subsequent legislative act.’ Terry Mason, Legislative Fiscal Bureau analyst, says ‘the statutes allow the legislature to take away benefits, but only if they give you something of equal value.’” In New York State, you can’t even do that. The New York State legislature could pass a bill requiring public employees to cover more of their pension costs, particularly given all the retroactive pension enhancements that have passed, but unions, politicians (who are almost all in their 50s or older), and the mainstream media all agree that to make up for the fact that older generations have made themselves better off, future generations alone should be made worse off.
The Milwaukee County Executive then did something that would be unthinkable in New York: he admitted he made a mistake and the pension enhancement was unfair. He asked his friends in the unions to help him correct it, just as New York Governor Cuomo is now asking his friends in the labor movement to give things back to preserve public services while not increasing New York’s nation-leading tax burden (or at least looking to limit the harm to the portion of the state outside New York City). “Ament said he blames himself, his staff and the county board. When Ament found out that upon retirement, he'd get a lump-sum payment of more than $2 million, his wife told him there was no way he'd ever see that money. She was right, but according to Ament, that conversation was about a month ago. It was only Tuesday that Ament did anything to give the money back. ‘The pension changes taken as a whole are simply too generous,’ Ament said. After huge controversy, Ament Tuesday said, the pension plan he signed in November of 2000 is out of control.”
But the unions were in no mood to give anything back. Why should they? They won, didn’t they? “Union leaders said they have a contract with the county that lasts until 2004 and while they will meet with county negotiators, they will not allow any changes in benefits — benefits they said they were assured would not drain the county's pension fund. ‘It was not for the union to turn down benefits being offered to us,’ Richard Abelsori of AFSCME 48 said. ‘No union official is in a position of saying ‘no this package is too rich, turn it down.’ It would be difficult for any union to do, but there were other people involved in checks and balances of county government that frankly, should have asked some of the hard questions.’” The unions had also agreed to lower wage increases in exchange for the pension deal, although that deal was worth many times the foregone wages.
A recall petition for the Milwaukee County Executive was circulated, something that – like real elections for most offices – we don’t have in New York. After trying to use the courts to block the recall election, he retired. “He said that he accepts responsibility for the lump-sum pension payout controversy…By retiring instead of resigning, Ament is eligible for his pension, but he won't take a lump-sum payout.” By then the cost of the pension deal had caused a fiscal crisis for Milwaukee County.
Enter Scott Walker.
Here is how one of his political opponents sized him up in 2003, after the young member of the state legislature had become the new Milwaukee County executive. “Most County leaders had seen Walker as the lunatic fringe of the right. A conservative Republican, no one ever imagined he would have a chance to win the heavily democratic Milwaukee County…Walker campaigned hard and promised that citizens would not, and should not, have to pay for the pension plan which had been enacted in 2000. Voters saw hope in this young man. He was young, well groomed, presentable, and affable. He seemed sincere and believable.” But he didn’t keep his promises, according to his opponents. “As County Executive, Walker hasn’t kept his promise that people would not ‘pay’ for the County’s fiscal woes.” Did Walker really believe that he could take back the pension deal so the people would not have to pay for it, or was he just saying so to get elected?
From what I can find out on the internet, Scott Walker is an average guy, no genius and, unlike most politicians, not a lawyer. A below average student, he was unable to complete college in four years and after obtaining employment he left school to start a family. He probably knows about as much law as I do. Perhaps he knows there is a rule against perpetuities, meaning contracts are not valid if they are supposed to last forever. Perhaps he knows that a contract is not valid unless each side gets a valid consideration in exchange for what they give up, which is why Mayor Bloomberg pays himself a dollar a year to be Mayor rather than nothing. Perhaps he knows that fraud invalidates a contract, meaning if the cost turns out to be radically higher than what was disclosed, this was known or should have been known, the higher amount cannot be collected.
If he knew these things, based on common sense he might not have believed that a pension deal between beneficiaries done in secret, with purported costs many times higher than disclosed, could be enforced against a general public that was not even aware of it and did not benefit from it, forever, no matter how great the cost. But he soon found out otherwise, because labor and pension law is very different – meant to protect workers from being cheated by corporations not citizens from being cheated by politicians and public employee unions.
Milwaukee County residents are fortunate that, as in most of the country, counties have relatively few responsibilities. Most public services are provided by school districts, other special districts, municipalities, and the state. But to the extent that the county provides public services, Scott Walker would spend the next eight years gutting them – all while increasing “spending.”
National Public Radio reported on the county park system: “Budget cuts have hit the park system in Milwaukee, Wis., especially hard. Long considered among the nation's finest, supporters now fear for its future.” Social services for the neediest were cut back. “Emergency shelters for the homeless and victims of domestic abuse are scrambling to reverse a cut in funding from Milwaukee County proposed by County Executive Scott Walker. The cut's timing could not be worse, shelter operators say, because private funds have tightened up and the sour economy has pushed more people onto the streets.” And the bus system was slashed, “The county has raised bus fares, cut service or both every year for nine straight years. Weekly pass prices have risen 57% in that time, from $10.50 in 2000 to $16.50 next year. The 2009 budget won't cut any routes, and supervisors overrode a Walker veto to restore part of Route 11, which had been eliminated in the 2008 budget.”
By 2006 Walker was proposing additional cutbacks, including a huge cut to the Milwaukee art museum. He was constantly trying to get ahead of costs, but always failed, and ended up with budgets balanced with gimicks. Meanwhile, the public employee unions “fought for the people” by protesting against the cutbacks in services that were needed to pay for their own pension enhancements. “Their clear message to the 19 County Board members in attendance: raise property taxes the maximum 4.2%, underfund the county's pension contribution, and restore the positions of parks and skilled trade workers, security and maintenance people, paralegals and others.” Just as NYC’s public unions will be holding protests against the cuts in services required to pay for their retroactive pension deals, while pretending they have nothing to do with each other.
Since the pensions were guaranteed, underfunding the pension funds would not reduce the liability, but would merely mean that future residents of the county, perhaps poorer as private sector income continues to fall, would have to pay more. “Walker this year has proposed full funding of the county's fast-growing pension liability. That would eat up more than $50 million and avoid interest costs associated with underfunding the pension plan. The Finance Committee went along with most of that amount but lopped off $3.5 million. Underfunding the pension system in a given year does not reduce individual pensions.” Just as the State of New York has allowed the state and local governments outside New York City, whose pension contributions are a fraction of those New York City taxpayers are forced to make, to avoid making their required contributions and “borrow” from the pension funds instead – potentially forcing New York City residents to pay for suburban pensions someday, was well as for its own city workers who live in the suburbs.
County workers, meanwhile, said the were “tired of hearing Walker blame the pension deal for budget cuts.” Here in New York, meanwhile, no member of the press or politician talks about the retroactive pension enhancements of the past 15 years, because they all want to cut wages and benefits for new hires only. But while the unions might or might not be required to hear about the pension deals, they still have to be paid – irrevocably indefinitely. Then again, in Milwaukee County those responsible for the pension debacle were all Democrats, creating an opening for a Republican like Walker to make hay by talking about it. In New York (and in most of the country), both political parties and certain independents are in on all the deals.
In spite of Walker’s attempts to fund the pension fund and pay down debts, the cost of the 2000 deal kept exploding. In 2007, the state’s leading newspaper, the Milwaukee Journal Sentinel, won a Pulitzer Prize for uncovering one small part of the repercussions – the ability of part time parks workers to increase their pensions by buying back years of work. “Workers ranging from gardeners and grass-cutters to county government's highest-ranking officials have tacked on extra years of service by taking advantage of uncommonly generous ‘buyback’ practices that convert ineligible service into pension-worthy time. By purchasing credit, in most cases for seasonal or part-time county stints worked in their youth, employees are getting five- or six-figure pension gains over a retirement lifetime. They can retire earlier with full benefits, and some qualify for free lifetime health insurance because of their buybacks.” (In the 2008 pension deal for New York City teachers, in contrast, teachers who qualified were allowed to retire years earlier without buying back any years of contributions).
“Keith Brainard, a national retirement association official who tracks service-purchase programs, said he had never heard of a public fund granting such large retroactive benefits based on a buyback. ‘That sounds like a benefit designed by and for participants,’…The Journal Sentinel analysis calculated that participating workers collectively stand to receive a $49.5 million to $52 million boost over their lifetime. That's an average of $140,000 a person. In the top third of gainers, workers can expect 25% to 100% annual pension gains from buybacks. The middle range is 5% to 25% gains.” No one is releasing any calculations of what all the pension deals of the past 15 years have cost in New York. Their announced cost: nothing.
In a trend similar to Republicans blaming President Obama for the economy he inherited, by 2007 people were starting to blame Walker for the pension mess after year after year of cutbacks even in a good economy. A right wing think tank noted that “the 2007 county budget will be swimming in red ink, in spite of the fact that the county will be collecting the maximum amount of sales tax revenue and close to the maximum property taxes allowed under Wisconsin law. The 2007 deficit will be $81 million, and will grow by more than $40 million annually. If left unchecked, the deficit could grow to $250 million by 2011. The growth of tax receipts simply cannot keep pace with fringe benefits, which are at 61% of salaries this year and will be over 100% by 2010.” It called for “a temporary oversight board to rectify the county’s fiscal mismanagement,” which would have stripped authority from County Executive Scott Walker.
After the Journal Sentinel article broke, the blogger who originally broke the story but somehow failed to win the Pultizer Prize assigned Scott Walker some of the blame. “On the latest pension scandal, the worst that can be said about current County Executive Scott Walker is that he moved slowly. Walker took office in Spring, 2002, but it wasn’t until 2005 that the pension board voted to put a sunset on the buyback program for seasonal or part-time work. Walker always seems to drag his feet when it comes to cleaning up the county’s pension system,”
Having been stonewalled and protested against by the unions for seven years, Walker tried something new in 2009. He sued the actuarial consulting firm that had failed to oppose the Milwaukee pension deal. “Milwaukee County, its Pension Board and Employee Retirement System claim that Mercer Inc.'s negligence and intentional acts led to the inclusion of overly expensive elements in the county's 2000-'01 county wage and benefit package. The county is seeking more than $100 million in damages plus more in punitive damages. Its experts have suggested the full cost of the ‘backdrop’ lump sum and related benefits may even reach $900 million. The county is a $1.4 billion a year enterprise. Key bits of evidence include the failure of Mercer consultants to speak up at an Oct. 27, 2000, meeting of the county's Pension Study Commission. The county's lawsuit argues the Mercer employees should have contradicted a presentation stating that the backdrop would not cost the county anything and admitted that they hadn't yet studied the backdrop's cost.”
Again, was Walker disingenuous or naive? Everyone knows that like accountants, bond raters, appraisers, stock analysts, and executive pay consultants, pension actuaries are paid to justify whatever whoever is doing the paying wants. As independent actuary John Bury put it “In the private sector a Defined Benefit plan needs to be certified by an Enrolled Actuary (EA) as to its funding. There are no laws for funding public plans, only accountants’ suggestions. I would not eliminate the need for an EA but rather add to it by certifying any actuary qualified to work with government plans as ‘Proficient In Municipal Plans’ (PIMP). This would alert the client, the participants, and the public that this individual not only possesses the requisite actuarial knowledge to handle the work but, more importantly, lacks the ethical and moral bearings to stand up to politicians who would do whatever they damn well please.”
hIn any event, Walker ended up settling the case. “Milwaukee County and human resource consultants Mercer Inc. agreed to a $45 million settlement and the county is dropping its claims that Mercer didn’t warn the county about the full cost of a pension plan approved in late 2000. The county expects to keep about $32 million of the settlement, which would go toward the pension fund.” In the end Walker ended up adding debt to the county, after having worked to pay the debt down, to restore the pension fund to health.
Then, last year, Scott Walker ran for Governor. His opponent, the Democratic Mayor of the City of Milwaukee, pointed out that he had failed to solve the pension crisis without adding the coda – because the unions had an irrevocable, legally ironclad deal and whipped his ass. “In Milwaukee County, Scott Walker borrowed $400 million, and passed the pension debt onto the next generation.” His opponent also had support from the White House. But Walker was elected anyway. “Walker inherits a $2.7 billion budget shortfall and a host of campaign promises that will be difficult to keep given the state's ongoing economic struggles. Wisconsin's unemployment rate is 7.8 percent, nearly double what it was four years ago when Doyle won re-election.” As mentioned, that relatively low unemployment rate has only been made possible by a big drop in the labor force as the young move away. Wisconsin had had a Democratic Governor for eight years.
So why did Wisconsinites vote for Scott Walker? Well, they had been hearing about the pension scandal – with those at the state’s center feeling the consequences – for nine years. Nine years of grinding cutbacks in public services even as private sector workers struggled. Since the recent union bargaining rights controversy erupted, the propaganda has called any discussion of the fairness of all the retroactive pension deals of the past 15 years an attempt to divide the middle class. As if it had been something other than an attack on the other part of the middle class for those who already had the richest retirement benefits to take more for themselves. In addition, the business community in Wisconsin probably lacks the obscene wealth and arrogance we find on Wall Street. And to ordinary private sector workers, while the growing diminishment of the American standard of living due to the power of the wealthy seems like an assault, the diminishment of the quality of life and standard of living due to the retirement enrichment of public employees seems like a betrayal. They voted for an average guy who was against that betrayal and did not come from a wealthy background himself.
Still, most of Wisconsin is in better shape than Milwaukee County. Taking all of Wisconsin’s state and local pension plans together, in FY 2007 (see spreadsheet) according to the Census of Governments taxpayer pension contributions equaled 10.0% of public employee wages and salaries, compared with a 9.5% U.S. average and 20.8% for New York City – which will rise to 40.0% next year. Pension payments were 4.0% of Wisconsin public employee pension plan assets, high given that was the peak of another stock market bubble but lower than the 4.9% U.S. average or the 6.7% for NYC at the time. On the other hand, the state’s public employees contributed just 0.4% of their wages to the pension plans that year, second lowest in the country. The national average was 4.5%, with 2.5% for New York City – most of that contributed by younger workers on the wrong end of recent pension enhancement deals.
So is Scott Walker trying to do what he is trying to do because he is enraged at the public employee unions? Perhaps not. Recall he is a right wing Republican, someone who believes that in a just society people would have to make it on their own, based on what they could afford to pay for, without relying on public services and benefits. The fact that ordinary people were ripped off – “spending” apparently increased 35.0% in Milwaukee County during his tenure even as he borrowed money and cut services – probably just confirms what he had always believed. That the public sector is nothing but a ripoff by powerful people. And the Milwaukee County pension scandal made his career. So perhaps he isn’t angry at the public employee unions after all.
I, on the other hand, am angry at the public employee unions, particularly after that 2008 pension enhancement for NYC teachers that is redestroying the schools at higher levels of taxes and spending. Would they give anything back to avoid harming those worse off? No, but they will readily agree to lower wages and benefits for future workers as part of deals that allow them to either get more or do less themselves.
As the consequences of these deals and debts play out, might New Yorkers become willing to vote for someone like Scott Walker? The way this country is going, and in particular with how much worse off younger generations will be because of what older generations have grabbed for themselves at their expense, in the end people might be ready to vote for someone like Mussolini.