Money is what drives all major election campaigns. In the run up to the 2012 presidential election, sharp knives have already been drawn on the issue of corporate and union contributions. In addressing this issue, virtually all roads lead back to the much-contested Supreme Court decision in Citizens United v. Federal Election Commission, which made it unconstitutional for the federal government to restrict any “electioneering communication” to the public by a corporation or a union within 30 days of a primary or general election.
Judging from the near hysterical response to this case, one might have thought that all corporations were devils, such that their total exclusion from political discourse should be required. But even if those radical critiques of Citizens United are mercifully put to one side, a more serious issue remains. Is it possible, in dealing with this issue, to retain some semblance of the balance of power between corporations and unions? In principle, that outcome is fairly inferred from the majority view in Citizens United. It is a generally salutary principle that in any area of political contention, the federal government should not tilt the table in favor of either side. But in the struggle between management and labor, the execution of this particular plan runs into a set of technical difficulties, given that corporations and unions are, as will become clear, organized under very different principles.
Pension Funds and the First Amendment
In a recent op-ed in the New York Times, Harvard Law professor and former assistant General Counsel of the Service Employees International Union (SEIU) Benjamin Sachs makes the provocative case that current public employee pension fund practices violate free speech. One key component of both Citizens United and the larger body of First Amendment law is that no individual should be forced to support political organizations or causes against his or her will. In Sachs’s view, that position applies to the contributions that public employees are required to make to their own pension funds as a condition of their employment.
In order to see how his argument works, it is necessary to distinguish first, as Sachs does, between two different types of pension programs. Under defined contribution plans, such as the TIAA-CREF, which are held by most faculties in universities, the employer makes a specific contribution to the separate pension plan of each faculty member, who can then invest it in whatever fund he or she chooses. In these cases, the employees take ownership and control over the fund, bear all the risks of a market downturn, and keep all the gains of a market rise. The obligation of the employer ceases once the contributions are made, and the employees gain protection by choosing the mix of funds, debt or equity, domestic or foreign, in which they invest.
These plans have gained much traction in recent years, because they get the employer out of pension management early on. The plans in question are portable, so that they can move with the employee across jobs. The employee is also in a position to invest in either funds or corporations that represent his or her views. The problem of political accountability under Citizens United is thus at an end.
A defined benefit plan operates in quite a different fashion. In these cases, the employer announces to employees that they will receive certain pensions at certain times. The pension amount is determined by a formula that considers salary, length of service, and age. In these cases, the employer turns over specific amounts of cash to third parties to manage the investments, subject to this caveat: If the specified funds and the earnings produce amounts of money in excess of those needed to fund the future pension plans, the employers may usually withdraw some or all of the excess. Conversely, if the funds in question fall short of what is needed, the employer is required to contribute fresh funds to make up for the shortfall. Simply put, the risks of profit and loss in defined pension plans lie with the firm, not with the employee, as they do in defined contribution plans.
At this point, Sachs makes a conceptual leap that the moneys contributed to the pension plans “belong to” the employees, such that when this money is invested in corporations, it runs afoul of the Constitution. In his words, “requiring public employees to finance corporate electoral spending amounts to compelled political speech and association.”
There are, however, two major difficulties with this position. The first is that it is not clear “whose” money is invested in these various corporate ventures. That attribution of ownership problem is always ticklish in the case of divided control, which is what we have here. Surely Sachs’s objection should not apply to any excess contributions that are returned to the public employer, for example. Nor is it clear what accounting conventions should apply to new contributions from the employer’s coffers in the event of a shortfall—which is today the far more likely situation.
Sachs proposes that these pension plans negotiate “opt out” rights with corporations that reflect the amount of money that they spend on political activities, and make appropriate refunds to the pension plans. But why on earth would any corporation agree to a system that would plunge it into an accounting quagmire with dozens of different pension funds, from which there is no escape? Nor is it necessary, even on the shaky assumption that the dollars in these pension plans do belong to the employees.
The funds in question do not have political agendas. They tend to create diversified portfolios, so that the political activities of these corporations, if any, are likely to cut in more than one direction. We know that individual public employees in defined contribution plans pay little or no attention to politics. Why force the employees in the defined benefit plans to waste their precious resources in seeking to isolate and evaluate the political activities of the hundreds of firms in which they invest?
The Critical Difference Between Unions and Corporations
In part, the answer for Sachs comes from the presumed parity between the positions of management and labor. As a matter of First Amendment principle, unions are not allowed to coerce their dissenting members into making political contributions. The reasoning here highlights the critical difference between unions and corporations.
Corporations are organizations that are formed by unanimous consent. Hence, those people who sign on agree to the terms of the corporate charter, including the corporation’s decision to make, when necessary, political contributions. Under this system, those individuals or institutions that do not like the direction of the corporate activity are free to protest through usual shareholder mechanisms, and to sell their shares in a public market. CalPERS, the California Public Employees' Retirement System, has long taken a strong pro-union stance on matters of corporate governance. With that guardian in place, why worry about the thousands of choices of individual public employees? In contrast, for the most part, corporations are reluctant to make high-profile political contributions and issue controversial political statements, which have the capacity to alienate not only their shareholders, but also their consumers.
Unions run on different principles. Under current labor law, unions are selected by general elections, and the union election winners can bind the dissenters. The way this works is neatly illustrated by the recently decided Supreme Court case of Knox v. SEIU, which gave rise to a complex accounting dispute that shows just how complicated these issues can get. Under basic California law, public unions work under what is known as an “agency shop.” Here, individual public employees can opt out of the union, but they are not allowed to avoid paying those “chargeable” expenses that are needed to govern the day-to-day activities of running a union.
The decisive argument has long been that non-union workers are not allowed to free-ride off the labors of the union that improve their wages, pensions, and other benefits. At the same time, the union must make some arrangement so that non-union members may, within thirty days of receiving an accounting, opt out of making contributions to the political activities of the union. In the conventional case, an annual audit determines the anticipated political expenditures for the coming year by looking at the actual outlays of the present year.
The union situation poses far greater First Amendment risks than conventional defined benefit plans. Once any money hits union coffers, everyone knows who controls it and how it will be spent. For example, in Knox, after the thirty-day notice period in 2005, the SEIU imposed an additional special levy for a “fight-back” fund to resist certain anti-union measures that then-Governor Arnold Schwarzenegger had placed on the ballot. Without the opt-out arrangement, the workers who would rather do without union membership will now be forced to contribute to the very programs that perpetuate union strength.
Knox is not easy to resolve under the current rules. Under pressure, the SEIU acknowledged that ultimately it could not keep the money of the dissenters for the fight-back fund. It arranged for the payback to be done in two stages. First, SEIU agreed to let 28,000 dissenting public workers to pay only the chargeable fraction (about sixty percent) into the special fund. Second, it gave a credit for the remainder in calculating the chargeable rate for the next year.
In the dissent, Justices Stephen Breyer and Elena Kagan bought that arrangement, but, speaking for the majority, Justice Samuel Alito concluded that no fancy accounting should be tolerated when it is clear from the get-go that the entire contribution will be used for political purposes. In addition to his ruling on the narrow issue, Justice Alito hinted broadly that the opt-out procedure itself might not be sufficient to protect the interests of dissident public employees in routine cases. Here is a modest revolution in the making. A First Amendment requirement that workers “opt-in” to those payments sets the benefit of inertia against the SEIU and could easily result in a major diminution of union membership of the sort found in Wisconsin after its labor reforms.
What accommodations does the First Amendment require? It is unclear. But there is one modest way to duck the issue: These financial anomalies quickly disappear by getting rid of the agency shop altogether. That outcome is best achieved by having state and local governments take the principled position that public employers represent the state’s taxpayers and citizens, and not their employees’ unions. Given that obligation, no state entity should ever voluntarily cede collective bargaining rights to workers that will enable them, often with the implicit threat of strike, to extract monopoly rents from the public at large. Ironically, the weaknesses in Sachs’s argument pave the way to a discussion of rather more volatile issues.
Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).