Public Employees Unions Facilitate Corruption

Right From the Start

At a social gathering recently I was asked why I was so hard on the public employee unions and said hardly a word about the private sector unions. Had I had the May 31 edition of the Wall Street Journal in hand, I would have given them the AP article:

“A federal judge on Tuesday sentenced the former head of the nation’s largest public pension fund to 4 1/2 years in prison in a case in which the pension fund CEO acknowledged accepting more than $200,000 in bribes and trying to steer investments to help an associate.”

The very existence of public employee unions with their mandatory dues requirements used primarily for political purposes commands corruption absolutely. (For today we will leave aside the fact that such mandatory dues payments violates a person’s First Amendment rights – including the right to not associate politically with others.) The recent incident involving Federico Buenrostros, the former chairman of CalPERS (Californian Public Employees Retirement System) and the indictment of former board member Alfred Villalobos (now deceased due to suicide) was just the most recent evidence of such corruption. A July 21, 2014 article by Randy Diamond in Pensions & Investments noted:

“Former CalPERS CEO Federico R. Buenrostro’s guilty plea earlier this month revealed new details and disclosures in the corruption scandal that engulfed the nation’s largest defined benefit plan.

“Sources say his admissions could result in expanded criminal charges for his co-defendant, former CalPERS board member Alfred Villalobos, from whom Mr. Buenrostro admitted he accepted $200,000 in cash bribes. Mr. Villalobos became a placement agent once he left the board of the California Public Employees’ Retirement System, Sacramento.

“The federal charges against both men were narrowly focused and did not address the bribes.

“Another possibility, the sources said, is that federal prosecutors could seek indictments against two former CalPERS board members, Kurato Shimada and Charles Valdes. They also could enlist former board members and former clients of Mr. Villalobos to testify against him.

“Mr. Buenrostro in his July 11 statement in federal court said two unnamed board members received valuable casino chips before voting to approve a contract with a pharmacy benefits administrator. Sources said he was referring to Messrs. Shimada and Valdes.”

The corruption investigation resulting in Mr. Buenrostro indictment and conviction spanned over a decade, involved countless officers and employees of CalPERS, and millions of dollars paid in fees to so-called “placement officers” and could not have dragged on this long and with this limited of criminal prosecution without the tacit consent of the public employees unions whose members are the singular beneficiaries of CalPERS and whose political muscle is instrumental in determining the directors managing CalPERS. They are also instrumental in the decidedly political use of CalPERS investments to reward the left and punish the right.

There have been at least five people implicated in this CalPERS scandal – all were directors or past directors of the CalPERS fund – several for well over twenty-five years. They scratched each other’s backs for decades.

So let’s go over this again. In the normal course of private sector business, workers banded together in unions to bargain collectively with management regarding benefits (wages, benefits, and working conditions). There was a perceived balance – withholding of labor vs. withholding of benefit increases. There were other balances; labor leaders needed to satisfy their members to retain their positions. Management needed to satisfy their shareholders to retain their positions. Labor needed to ensure that benefit demands did not destroy the business by creating undue financial burdens. Management needed to ensure that business growth would absorb the benefit demands. These latter two issues became even more relevant when unions (or their pension trusts) became major shareholders in the business through ESOPs and/or union pension plans. On the whole the system worked with the exception of sporadic violence during labor disputes.

But the whole system of balance goes out the window with public employee unions. There is the assembly of workers in a union but there is no management. Rather the unions bargain with elected or appointed public officials. Because the public employee unions spend so much of their mandatory dues on politics in states without a public employees right to work law (e.g. Washington, Oregon, California, etc.) they have become the predominant political funding source for Democrats who command virtually every statewide public office along with the city and county offices in the major urban areas. (A combination of teachers unions, the SEIU and the AFSCME provide the overwhelming majority of political contributions for Democrat candidates and add to that by paying for polling, candidate recruitment, issues research and advocacy, get out the vote programs, voting analysis and a myriad of other programs that assist Democrat candidates. In contrast candidates other than Democrats have to use campaign contribution to fund the same programs and information.) The end result is that the unions are bargaining with the very people whose campaigns they paid for. Management is not responsible to a “shareholder” group – like taxpayers – rather they are responsible to the people who fund their campaigns – the public employees unions.

But that is just the beginning. The government is not a “profit” driven enterprise. It is not even a sales or service driven enterprise. It is an enterprise that is funded annually by compulsory taxes levied at the point of confiscation and backed by the reality of criminal prosecution and imprisonment. The amounts collected have nothing to do with the number or quality of services consumed – in fact, quite the opposite – those who consume the most services are likely to be the same people who pay the least in taxes while those who consume the least services are likely to be those who pay the most in taxes. As a result there is no incentive to limit or reduce costs – i.e. public employee wages and benefits. If the increase in benefits exceeds the amount of available revenue, the government simply increases taxes and fees to the level necessary to fund the increases.

As an added bonus increases in wages and benefits for public employees result in increased dues for the public employees unions and, therefore, increased funds available for campaign activities for Democrats.

It is not a difficult trick to increase taxes on the minority of people who pay the majority of taxes. In doing so government avoids the unpleasant task of asking those who receive the benefits to contribute more in taxes. Oregon’s distinctively uber left demonstrated that in 2010 with Measures 66 and 67 and they are working on it again with the new Initiative 28 – all were/are backed by the public employee unions. It is this warped view of responsibility coupled with the fact that they are using other people’s money that promote the spectacular growth in the number of and benefits for public employees over the past several decades.

Which brings us back to the corruption inherent in the administration of such things as the public employees retirement systems. You might think that of any activity to be guarded by the public employees unions and the elected and appointed Democrat officials it would be the retirement funds for public employees. Well you would be wrong and nowhere more so than in Oregon. Virtually all states with public employees pension plans utilize a “defined benefit” rather than a “defined contribution” plan. A defined benefit plan obligates the government to pay a fixed formula pension (usually based on longevity and pay grade) regardless of how much is contributed or the investment earnings of those contributions. (A defined contribution plan obligates the entity to pay a fixed amount into a fund and the payments from that fund to employees are based on the performance of the investments of those payments – much like an Individual Retirement Account.) The point being that regardless of the performance of the public employee retirement system pension funds and regardless of the performance of the individuals charged with administering the fund, the government remains obligated to pay a minimum fixed amount.

So, if as in the CalPERS scandal somewhere between $14M and $50M in “fees” were paid to the miscreants by the other miscreants, no problem. The state remains obligated to pay defined benefits and the taxpayers will foot the bill. Likewise, if CalPERS decides to invest in some politically correct entity (green energy, solar energy, the home for one-legged chorus girls, etc.) which provides less than a market return, no problem. The state remains obligated to pay. If CalPERS decides to hire 2,000 people when only 1,000 are needed, no problem. The state remains obligated to pay. If the public employees unions are instrumental in determining who is appointed to the board because they have funded the campaigns of the Democrats who make those decisions, and those appointees fail in the fiduciary duties, no problem. The state remains obligated to pay.

Without a system of checks and balances, accountability is impossible. Without accountability incompetence and waste permeate a system. Without accountability, greed and corruption permeate a system.

Welcome to government dominated by the public employee unions.