The Ethics of Municipal Pension Plans Revisited

Four years after I wrote a blog post entitled The Ethics of Today's Municipal Pension Plan Problems, according to an op-ed piece in the New York Times, New Jersey agreed with the S.E.C. never again to fraudulently hide its underfunding of the state’s public pension system. 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 — New York’s pension system is underfunded by tens of billions of dollars and that, as a result, the state is essentially insolvent.

Here's what I wrote four years ago:

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.

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.

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.

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."

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.

Robert Wechsler
Director of Research-Retired, City Ethics

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