The Fiduciary Duty of Government Consultants
<a href="http://www.cityethics.org/content/functional-definition-government-empl…; target="”_blank”">A
recent City Ethics blog post</a> discusses the value of a
functional definition of a government employee with respect to
government ethics. That is, a private individual who does government
work for the government has the same obligations to the community as
a government employee.<br>
<br>
Since a government employee's obligations derive from a fiduciary
duty to the community (see <a href="http://www.cityethics.org/files/lgep1-0%20-%20Robert%20Wechsler.htm#Int…; target="”_blank”">the
discussion in my book <i>Local Government Ethics Programs</i></a>; scroll
down a half page after clicking), it is fair to say that a private
individual doing government work has the same fiduciary duty with
respect to that work.<br>
<br>
<a href="http://dealbook.nytimes.com/2013/10/22/case-in-detroit-highlights-costs…; target="”_blank”">A
front-page article in yesterday's New York <i>Times</i></a> presented an
interesting scenario with which to consider this issue in a
different context. The question here is, Does a government consultant have a fiduciary duty to the city that goes beyond
conflict of interest matters?<br>
<br>
A firm that provided ongoing actuarial advice to Detroit's pension trustees said in <a href="http://www.gabrielroeder.com/wp-content/uploads/2013/10/PressRelease201…; target="”_blank”">a statement</a>
that it "is not a fiduciary or member of the board of trustees for
either of the Retirement Systems, and therefore, it does not vote on
matters of governance for the Funds and does not make decisions of
any kind on behalf of the Retirement Systems."<br>
<br>
In other words, it uses the term "fiduciary" with respect to the
obligations of a trustee, which it was not, rather than with respect
to the obligations of a government consultant, which it was.<br>
<br>
This firm played the same role in San Diego, a much wealthier
city that had a pension crisis a few years ago. Former SEC chair
Arthur Levitt was brought in to deal with the crisis. According to
the article, Mr. Levitt said that, “Of all of the [pension] board’s
advisers, [this firm] was most qualified to understand, and explain
to the board, the basic conceptual mistake” it was making. By
failing to do so, and giving the pension fund “sound” annual
valuations, “[the firm] facilitated the perpetuation of the
underfunding scheme and breached [its] professional obligations.”<br>
<br>
The firm's lead member working in both San Diego and Detroit told
the <i>Times</i> that the cause for the pension crisis in San Diego was
faulty thinking about pension math. “A 7-year-old child could
understand this. It’s laughable that this could happen, but it did.”<br>
<br>
In other words, the pension crises of San Diego and Detroit (and the
same mistake appears to have been made in such places as New York
City, Phoenix, San Jose, Tampa, Illinois, Indiana, Texas, and
Mississippi) are based on the ignorance of and/or
pressures placed on pension trustees. San Diego came close to filing
for bankruptcy, and Detroit is currently in bankruptcy proceedings.<br>
<br>
I think that a pension consultant has a fiduciary obligation to do
everything possible to prevent such severe harm to a community,
especially when it's so clear a case. If pension trustees will not
listen to reason, a consultant should tell high-level officials how
irresponsibly the trustees are acting. If high-level officials don't
want to deal with the matter, the consultant should resign and make
a public statement that it can no longer advise a board that will
not listen to its advice and instead is acting in ways that will
cost the city billions of dollars. This is not confidential information; it is information that is essential to the community.<br>
<br>
The firm's lead member says that the actuarial community has not
been “as explicit as we could have been” about unsustainable pension
costs. The actuarial community needs to provide written guidance to
actuarial consultants on how to fulfill their obligations as
government consultants in such situations. Associations whose members act as consultants in other areas should do the same thing.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
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