Collective Bargaining: Impact on Taxpayers and Financial Markets

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Frank Fantozzi, CEO of Planned Financial Services

NEW YORK (TheStreet) -- With many states in a budget deficit position, collective bargaining has become one of the primary targets in helping to bring state budgets under control. The move, however, has clearly polarized various groups. For example, I received an email from one of my nonunion clients who believes Ohio's Senate Bill 5, which calls for the elimination of state collective bargaining rights, will negatively impact teachers' rights without substantively addressing budget shortfalls.

The question has to be asked: How long can states continue to operate in deficit mode, passing on future and exponentially larger obligations to the next generation without repercussions?

In most states, while the private sector has reduced compensation, eliminated jobs and -- essentially -- frozen the creation of new jobs due to the deep recession, public sector jobs have multiplied and total compensation has increased. In addition, while private sector employees are employed at will, public employees enjoy the benefit of rules that govern civil servants, including teachers, which make it difficult to terminate their jobs if they are underperforming. Also, much of their compensation and job security is tied to tenure, not performance.

Once Detroit's automakers were able to compete based upon consumer habit and tradition, since there were no real challengers. However, over time, quality decreased, prices increased and profit margins shrank. Ultimately the U.S. auto industry fell prey to more efficient foreign competition and had to restructure.

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In the private sector, management is accountable to shareholders, unions are accountable to management and companies are accountable to consumers. When we, as consumers, grew tired of overpriced and underperforming Detroit cars, we bought elsewhere.

A concern with public sector collective bargaining is that no such system of checks and balances exists. Since politicians and school boards have little negotiating power, public sector union demands are routinely met. There is no "consumer" check in place to say, "Listen, we think your product lacks quality and is expensive, so we will go elsewhere." So it became easy for politicians, municipalities and school boards to pass the problem on.