The Ethics of Municipal Pension Plans Revisited
Four years after I wrote a blog post entitled <a href="http://www.cityethics.org/node/133" target="”_blank”">The Ethics of Today's
Municipal Pension Plan Problems</a>, according to <a href="http://www.nytimes.com/2010/09/11/opinion/11kramer.html" target="”_blank”">an
op-ed piece in the New York Times</a>, New Jersey agreed with the
S.E.C. never again to fraudulently hide <a href="http://www.nytimes.com/2010/08/19/business/19muni.html" title="Times article on New Jersey’s settlement with the S.E.C. on pensions" target="”_blank”">its
underfunding of the state’s public pension system.</a> And the
Republican candidate for New York state comptroller asserted that — if
you do the math the way any ordinary financial analyst or economist
would — <a href="http://www.nytimes.com/2010/09/02/nyregion/02pension.html" title="Times article on candidate’s assessment of state pension fund" target="”_blank”">
New York’s pension system is underfunded by tens of billions of dollars</a>
and that, as a result, the state is essentially insolvent.<br>
<br>
Here's what I wrote four years ago:<ul>
If a municipality uses the sort of calculation that actuaries use,
where it is assumed that all bumps, no matter how big, will be smoothed
out over time (and that the plan will never go bankrupt), then everyone
will feel good, including voters and municipal bond rating agencies.
However, if the municipality uses the sort of calculation employed by
financial analysts, everyone would be worried and the town's bond
rating would go down, all in the name of honesty. So as New York City's
chief actuary recently wrote, cities will continue to say that the
earth is flat, and people will nod their heads.</ul>
But as I also wrote, this is not just an issue of honesty. There are
two more insidious things going on. One is the fact that the pension
mess we're in is a way for elected officials to make government
employees (and themselves, of course) happy without letting the public
know how much it will cost them in the long run. It is, in other words,
a way of putting the private interests of government officials and
employees ahead of the public interest. And it is a transparency issue.<br>
<br>
The other thing going on is a battle among generations. The Baby Boom generation, with
the support of the Greatest Generation, have used the government
pension system for their benefit, to the detriment of the younger
generations. The more this fact is made public, the more the younger
generations will understand that they are being taken advantage of, and
the more politically involved they will become. So it is in the personal
interest of the older generations to use valuation methods that hide
the problems involved in government pension plans.<br>
<br>
The author of the op-ed piece, chair of the body that oversees New Jersey's government
pension system, notes that it isn't just about pensions. "Hidden
underfunding of public employees’ health retirement costs is even
greater than that of their pensions."<br>
<br>
He concludes that "the social contracts that exist today in many places
among taxpayers, beneficiaries of public services and public employees
need to be renegotiated before a crisis arrives." This cannot be done
unless local government officials across the country put their personal
interests aside and raise these issues openly and honestly. And the
older generations can help by asking themselves not what can be done
for them, but what they can do for their children's and grandchildren's
generations. If they see the discussion of pensions and health as a
threat to their rights, the battle will be an ugly one.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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