Pension Fund Boards and Conflicts of Interest
Who should be on a local government pension board? Should conflicts of
interest be taken into account? These two questions are closely
interrelated, because the common answer seems to be that those with the
greatest conflict are also the most appropriate members.<br>
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There are two values at odds here: letting employees and retirees
manage their own pensions, and the public interest in having tax
dollars handled by disinterested and competent individuals.<br>
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<a href="http://www.cityethics.org/node/454">Click here to read the rest of this blog entry.</a>
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The first question is, are pension funds the property of employees and
retirees, or of citizens? The answer is, both, but in
completely different senses. If everything goes well, then once tax
dollars become part of a pension fund, they're no longer of interest to
taxpayers. But when things go wrong, as they have been recently,
taxpayers are the ones who pay.<br>
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The decision to appoint pension boards that consist primarily of
employees and retirees assumes that everything will go well, an
irresponsible assumption. After all, why should local government
employees and retirees -- knowing, in most cases, that their pensions
will be paid no matter what, and lacking financial knowledge and
experience -- why should they do the best job possible?<br>
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The essential question is, Is it appropriate to dispense with conflict
of interest protections for pension boards and other pension-related
decisionmakers that are provided for all other boards and decisionmakers?<br>
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There is another issue: pension policies and rules. For example, should
employees be involved in deciding when an employee vests? And what
about overtime decisions, especially when they affect, as they so often
do, the amount of the final pension? How often are overtime and
staffing decisions handled by employees themselves?<br>
<br>
<a href="http://telegraphjournal.canadaeast.com/article/322174" target="”_blank”">An
opinion piece in the New Brunswick </a><span><a href="http://telegraphjournal.canadaeast.com/article/322174" target="”_blank”">Telegraph
Journal</a> </span>shows serious concern for conflicts on the Saint
John pension board (for news background, click <a href="http://telegraphjournal.canadaeast.com/search/article/323345" target="”_blank”">here</a>).
Legislation guarantees that nine of the 12 members be city employees,
leaving the council with only three representatives. "This biases
the decision-making process toward offering higher benefits to
employees and creating more serious financial liabilities for the
city," the article states. The article goes on to say that the
council neither takes control of the process (handing this off to
senior staff, who are themselves city employees), nor does it seek an
independent review of pension operations or hire an independent
mediator to discuss options with city employees. In fact, until
he resigned from the pension board this week, the city manager was both
pension board member and the staff member who made recommendations
about pensions to the council. Of course, he recommended for his
successor the deputy city manager, whose conflict of interest is just
one degree of separation away from his own.<br>
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Shockingly, when a council member proposed independent review of the
pension situation, the pension board filed a defamation lawsuit against
him. He is no longer a member of the council.<br>
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Pensions are serious business. It is arguable that conflict of interest
rules should be stricter rather than looser when it comes to
pensions. In other areas,<span><span><span> </span></span></span>the
principal argument against strict conflict of interest rules is that
local government needs expertise. With pension boards, the situation is
the opposite: those with conflicts are the ones without
expertise, and the unprofessional are chosen over those with knowledge
and experience.<br>
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A result can be serious losses, as, for example, has been seen in
Massachusetts according to <a href="http://www.boston.com/news/local/articles/2008/05/29/pension_losses_mou… target=”_blank”">a
recent article in the Boston <span>Globe</span></a>.
There, the issue is whether pension funds should be handled by local
officials at all, or at the state level, where there is both more
expertise and fewer conflicts of interest.<br>
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<a href="http://www.pittsburghlive.com/x/pittsburghtrib/s_563986.html" target="”_blank”">An
article in the Pittsburgh <span>Tribune</span></a>
shows another side of unprofessional self-management of pension funds.
Two Detroit pension funds are investing in a casino operation in
Pittsburgh. The vice president of the police officers association, who
is also a police pension board trustee, said, "In the gaming industry,
they're always booming. It's a very sound investment."
Other members of the boards felt it was risky. One said, "Anything with
gambling is like gambling." But the majority of both boards
overrode these concerns.<br>
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This is a complex issue, and I am doing no more here than raising it.
Others' experiences and thoughts would be welcome.<br>
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Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>