What’s really behind the NYC pension crisis?

The NY Times has a long story today on the woes of New York’s municipal pension system which explains that despite sharply higher contributions on the city’s part its pension hole just keeps growing. The problem, the story outlines in great detail, is that the pension system’s managers have not been able to match the aggressive investment assumptions necessary to keep the system well-funded. Fair enough, but that’s not quite the heart of the problem…just a symptom of it….

When you peel away all of the issues with pensions in NY, what’s behind the mess in NYC–and the growing pension crisis afflicting the budgets of municipalities throughout NY state–is a system that put the granting of pension benefits in the hands of state legislators in Albany and for some 30 years has forced  local governments to pay the bill. That’s been a prescription for disaster in many places (think Rahm Emanuel badgering Illinois legislators over pension reform) for obvious reasons (politicians love to grant benefits that someone else has to pay for).

While there are now lots of things wrong with the way NYC manages its pension system today, many of them are attributable to adjustments the city has made over the years to try (sometimes desperately) to bolster its pension system in the absence of genuine reform from Albany. You can’t really understand the mess in NY state and NYC and in places like Illinois or New Jersey without always keeping in mind that legislators in these places first took the prerogative for granting benefits for themselves and then made the systems unaffordable for those who must pay for them.

Ironically, NY state first went down this path in a burst of reform. In the early 1970s,  pensions in New York municipalities were collectively bargained between workers and governments. Enough unions took advantage of their bargaining power to pile on new benefits to the point were local budgets quickly came under duress.

A state commission studying government pensions issued a report on the growing problems in 1973, focusing especially on NYC. The commission recommended taking pensions out of the collective bargaining process and placing all new state and local workers in a uniform pension system with similar benefits. NYC would get to keep its massive pension system, but the state legislature eventually took over the granting of benefits. “The recklessness with which New York City expanded its pension commitment to its unionized public employees…has now had its inevitable aftermath,” the Times wrote back then.

This new effort created genuine reform that lasted for about half a heartbeat, until unions figured that they merely needed to direct their lobbying and pressure tactics toward Albany, rather than mayors and city councils. One result is that a succession of NYC mayors from both parties  fought with the state legislature over growing pension benefits, often to no avail.

Ed Koch blasted the state legislature in 1983 (just seven years after the city went to the doorstep of municipal default) for adding millions to the city’s budget through enhanced benefits. Even the threat of municipal layoffs didn’t deter legislators.

As time went by the legislature kept heaping on the benefits and Koch got progressively grumpier and more confrontational , even threatening in 1988 to publish a list of Albany legislators from NYC who voted for pension enhancements and what that cost city residents. Back in 2005 Koch explained to me what happened next that year, as the unions illustrated their power over legislators in Albany:

“They sent [labor leader] Barry Feinstein to see me. He told me that there was nothing I could do to stop the bill, but that the legislators didn’t like my publicly criticizing them. So he offered to reduce our costs by about $70 million by delaying the legislation for a few months and told me that I should take the offer, because there was nothing else I could do. I hated it, but I knew he was right. These guys are untouchable, so they do what they want to.”

David Dinkins, Rudy Giuliani and Michael Bloomberg all in turned  complained justifiably about this state control of a crucial item in their budget. Yes, these mayors also did things that exacerbated the crisis (when market returns were good, Rudy took pension holidays; Bloomberg’s big pay increases boosted pensions), but fundamentally the problem has been that legislators in Albany (a place that is rarely mentioned these days without being preceded by the word “dysfunctional” ) have had control of this crucial budget item for decades.

You’ve had versions of this problem in other deeply troubled places. In NJ, for instance, as state legislators increased pension benefits to unaffordable levels, they simply stopped make contributions from their budgets into the system, but required municipalities to make their  contributions. For years, municipalities were paying up to 90 percent of their annual required contributions while the state paid almost nothing. Municipal officials rightly complained that if the state was paying its bills, too, legislators would understand how expensive pensions had become and fix them.

Even in places like California where municipalities were given the option of opting out of higher benefits offered by the state, the pressure on mayors and councils was enormous. California increased benefits in 1999 for state workers and two years later passed legislation allowing municipalities to adopt the new benefits. Localities fell to union pressure like dominoes. Even places that resisted, like San Jose, wound up losing the struggle when arbitrators ruled that they needed to provide benefits equal to what surrounding municipalities were providing.

In New York, it’s true that the pension system is fragmented and not well managed, as the Times points out. It’s also true that the city can’t lower its investment assumptions too much more without incurring big new required contributions into the pension system. And it’s true that the pension system is already investing in some alternative, risky investments that shouldn’t be a part of a portfolio of guaranteed benefits like a pension system.

But the real message in New York, where first municipal officials and then state legislators have conspired to inflate pensions beyond affordable levels, is that defined benefit retirement systems where pensions are guaranteed and taxpayers are the ultimate backstop are irresistible vehicles of irresponsibility for politicians and unions.

 

 

 

 

 

Comment (1) Add yours ↓
  1. Joel L. Frank

    The City borrows $15.3 billion dollars of the voluntary retirement savings of its teachers and other participants of the TRS/UFT 403(b) savings plan. The City pays 7.0 percent to teachers and 8.25 percent to the other lenders. The interest bill for the last fiscal year is in excess of $1 billion. See TRS Fixed Return Fund.

    Q.: Why does the City borrow at these rates when rates of 0.5 percent are readily available?

    JOEL L. FRANK
    PENSION COLUMNIST
    THE CHIEF-CIVIL SERVICE LEADER
    277 BROADWAY
    NYC 10007

    August 8, 2014 Reply

Your Comment