New York Civic: It Can’t Happen Here By Henry J. Stern

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Stern_HenryJ McMahon Says Mayor is Liberal on Pensions; He Likes 401(K) Plans

Mayor Bloomberg's proposals to reduce the cost of pensions for city employees came under fire today not only from public employee unions, city government's perennial adversary in matters of wages and pensions, but from a conservative analyst as well.

E.J. McMahon, who writes op-eds for the New York Post and articles for other publications, complains that the mayor's goals are too modest. He wants New York City to switch from defined benefit plans to defined contribution plans. That would be a complete reversal of current pension policies, and would require amending the New York State Constitution.

Under "defined benefits", if you work for the city, enroll in the pension plan, and subsequently retire, you will receive a defined percentage of your wages as a pension. The percentage increases for each year of the employee's service. In Tier One, the most generous plan for regular employees, the percentage was 2.2% per year for the first 25 years on the payroll, and 1.7% per year for years 26 and upward. The plan is weighted to encourage, but not require, retirement after 25 years, because the rate of increase declines by 28% after the first quarter century. The deadline for enrolling in Tier One was June 30, 1973, over thirty-seven years ago. It was followed by Tier Two and a series of less generous formulas because of recurring financial crises faced by city government.

At the same that percentages were held flat or decreasing, some pensions were increasing because of numerous "sweeteners" – bills adopted by the New York State legislature providing additional benefits to various categories of employees – giving others the opportunity to buy into the plan, and adding coverage to specified groups at the behest of lobbyists for union locals. What was taken away with one hand could be restored by the other, and the outcome was a high percentage of endorsements of incumbents by labor unions. Rule 21-O explains the obvious: "One hand washes the other." I learned that ancient maxim from the late Mary Perot Nichols, city editor of the Village Voice in its early years, the 1960's.

The pension system came to grief with the sharp decline in the stock market in late 2008, which also led to the collapse of the Madoff pyramid scheme. People withdrew their money from Madoff to cover losses on their portfolios of stocks which were considered legitimate but whose values were in part based on misjudgments, not the same as, but comparable to the fictions that Madoff concocted to conceal his peculation.

Their failing stocks did, however, actually exist. In another distinction, no government agency deemed Madoff too big to fail. Settlements of hundreds of millions of dollars have been paid by banks which knew or should have known that the junk they were selling was not too different from Madoff's fictional inventory.

The relationship this has with the pension funds is that government is responsible for the pension funds earning enough to fulfill their obligations to retirees, present and future. If the pension funds, of whom State Comptroller Tom DiNapoli is the sole trustee, do not earn sufficient money on their investments, government must make up the balance. The worse economic conditions are, the larger the deficit will be and the greater the sum that will be required to make the fund whole.

Mayor Bloomberg said Wednesday in the State of the City address that New York City paid $1.5 billion for pensions in 2001, and now over $7 billion is projected for pension expenses in 2011. The rate of increase is described as unsustainable, and indeed it is. Even if the rate of increase declines, as it must, the sum of money needed to subsidize the pension fund is likely to continue to climb.

McMahon, a conservative analyst and frequent author on city and state financial problems, wants the city to switch to a defined benefits system, in which the employee gets back only what he has put in, plus interest, dividends and whatever increase may have come through rising prices. Although this would control the city's costs, the pensioners are left to dine, eat, skimp or starve, depending on the vagaries of stock prices and whatever benefits are received through social security and Medicare (if they are over 65). Defined contributions are particularly vulnerable to inflation; money that is paid in during early years is more valuable than it is when it is taken out many years later.

McMahon believes Bloomberg erred by not demanding defined contributions. In theory, the argument can be justified in terms of the city's inability to pay more. In today's world, we believe a decent retirement income is justified after a lifetime of work, and to rely on the stock and bond market to provide the necessities of life has a Dickensian attitude we find difficult to accept in the 21st Century. On the other hand, defined contributions work well in other jurisdictions, and the expense can be alleviated by requiring employee contributions.

The fact that there does not appear to be the remotest chance of such a plan being enacted is not sufficient to disqualify the proposal as an option. The Legislature will have to be pressed hard to enact any pension reform over the anticipated objections of their major funders: public employee unions and their political action committees. Hopefully, Mayor Koch, who was recruited for the task by Mayor Bloomberg, may be of assistance in helping win public support for modifications of the existing system, which imposes burdens on the many for, in some cases, the unjust enrichment of the few.

Pensions are a dry and dusty subject, unless you receive or desire one. People reasonably fear the loss or diminution of benefits they have always considered their due. The area will require considerable scrutiny and, preferably, a bi-partisan approach if one can be attained.  There are undoubtedly abuses of the system which should be corrected, and it will be interesting to see if legislative leaders can persuade union leaders to accept any modifications of existing law, even to correct the most serious iniquities and abuses in existing procedures, such as excessive overtime and fraudulent disability claims, which have been approved wholesale.

First in Albany, we shall see what happens to the budget that Governor Cuomo will propose February 1. Then there is ethics reform, which is a no-cost item, at least to the State. It may cost certain legislators plenty. Don't forget redistricting, which if done honestly will imperil some sitting ducks who may, if justice is done, be rendered lame.

Some legislators may be in particular need of the pensions we are discussing, but with the Constitutional bar to impairing previously granted rights, their own benefits will not be impacted, even if their day-to-day living expenses are provided in state facilities.

Henry J. Stern writes as StarQuest. Direct email to him at Peruse Mr. Stern’s writing at New York Civic.  

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