One Small Step

Pension Reform Agreed Upon,

But Will the Promises Be Kept?

By Henry J. Stern
October 28, 2011

The city's antiquated pension system has long been in need of streamlining and updating. The agreement reached yesterday by Mayor Bloomberg, Comptroller Liu and leading labor unions provides hope that 2012 will be a year of pension reform, but such hopes have previously arisen and been dashed on the rocks of political reality.

New York City employees have different pension plans, all under the management of the City Comptroller: the Employees' Retirement System (NYCERS), the Teachers' Retirement System (TRS), the Police Pension Fund Subchapter 2, the Fire Department Pension Fund Subchapter Two, and the Board of Education Retirement System (BERS). Each pension fund is financially independent of the others and has its own board of trustees, which include city officials and relevant union leaders. In general, the city and the unions have roughly equal authority over the funds.

Sometimes the city and union leaders work jointly on pension matters, while at others they are in disagreement, a difference largely based on the relationship between the mayor and the comptroller at the time.

Historically, the city's mayors and comptrollers have been at odds more often than they have been united. The comptrollership has been used as a stepping-stone for mayoral candidates and under those circumstances it is not uncommon for the mayor and the comptroller to disagree on issues.

The last comptroller, Bill Thompson, left office in 2009 after a close but unsuccessful effort to defeat Mayor Bloomberg's bid for a third term. The subsequently disgraced and convicted Alan Hevesi sought the mayoralty in 2001, but ran a poor fourth in the Democratic primary, losing to Mark Green, Freddy Ferrer and Peter Vallone, who all lost to Bloomberg.

Liz Holtzman was defeated for reelection as comptroller in the 1993 Democratic primary by Hevesi, who raised integrity issues against her. She never ran for mayor, but was defeated as the Democratic nominee for U.S. Senate in 1980 by Al D'Amato and in the 1992 Democratic Primary for Senate by Robert Abrams. Her predecessor as comptroller, Harrison J. Goldin, made a bid for the office in 1989, finishing fourth in the Democratic primary behind Richard Ravitch (3rd), incumbent mayor Ed Koch (2nd) and David Dinkins, the eventual mayoral winner. Goldin had succeeded Abe Beame, the only comptroller in City history to ascend to the mayoralty since Consolidation in 1898.

It is one thing for public officials to disagree on a policy issue, a frequent occurrence, but another to be in chronic dispute on questions of investment and expenditure of public funds, in situations in which the outcomes can result in financial gaps of millions of dollars in return on investments. The hydra-headed current system leads to such results.

The relationship between third-term mayor Mike Bloomberg and first-term comptroller John Liu has been particularly chilly. Although they cannot run against each other in 2013 they clearly have different visions as to what the city should do in the interim.

Liu has been in full-fledged campaign mode for the 2013 Democratic nomination for Mayor from the day he took office 22 months ago. His initial act was to publicly decline a mayoral invitation to lunch on his first day in office, which, though not substantial, set a tone of antagonism over a non-issue. There are other issues, great and small, where the two men have differed. One chronic bone of contention deals with the comptroller's issuing reports faulting the conduct of a mayoral agency. The press asks the mayor to respond, and he generally does.

Whatever justification for a particular dispute it seems clear that the mayor and the comptroller are often on opposite tracks in their judgment of the city's financial crisis and the way for it to dig itself out of the mess. The mayor sees the solution as based on reducing expenses and increasing renevue with an economy that gets better, while the comptroller believes the city can survive the recession by continuing to spend as it has done in the past.

Of course, all this may change in the next few months, since new economic data is constantly arising and influencing the stock market, corporate earnings, and tax receipts. The financial situation may improve, or deteriorate.

The tentative agreement reached yesterday between the mayor and the comptroller will require considerable fine-tuning in addition to approval by the State Legislature in Albany. It is by no means complete and dispositive of the main issues that have arisen. It does indicate a desire to reach common ground and the recognition that the city's urgent and continuing fiscal troubles require more savings to be made without endangering the pension system.

Some watchers believe that the decisions announced yesterday are not real, but a paper gloss over a more severe situation designed to buy a few months breathing room in which city and state officials will work out a more comprehensive reform. Of course, if the financial situation improves over the next several months to the extent that these measures will not be fully required, so much the better.

The working agreement announced yesterday will require the relinquishment of some authority by the comptroller, who now possesses almost plenary authority in making investment decisions for the $120 billion that remains in the city's pension accounts. It is a rare for public officials to spontaneously limit their authority in any way, unless they are required to do by law enforcement or other external authorities.

Liu has been under fire in the press in recent weeks for alleged fundraising irregularities, including taking campaign contributions from certain donors under the name of others in order to increase the amount of matching funds he would receive from the city's Campaign Finance Board. If he made concessions as the result of current political weakness, it remains to be seen whether he will adhere to them when his own situation improves.

It should always be remembered that every high political office is but a few steps from the grand juries' chambers in the county court houses. The higher one rises in the system, the more vulnerable one is to accusations of various types of misconduct.

The trouble is, as we say in Rule 32, that some of the charges are likely to be true.

The Wages of Sin

Pensions for Crooks:

Are They Justifiable?

One of the perennial questions that arises in government is whether dishonest public officials, if convicted, should forfeit their pensions. There is considerable sentiment that an officeholder, whether elected or appointed, who has betrayed the people he was paid to serve faithfully should not be rewarded after he leaves government, because he did not deserve the compensation he received from the state or the city while he was enriching himself.

The pension forfeiture has been a powerful incentive over the years to keep police officers honest. A crooked cop is one of the worst enemies of good government, since physical protection is a basic service provided by local government, and officers who take bribes either to protect wrongdoers or to enforce the law not only violate their oath of office, but they undermine both the concept and the reality of equal justice under law.

The issue becomes murkier when we consider the different varieties of criminal conduct. For example, some acts which are clearly crimes are unrelated to the employee's official duties. A city worker kills his wife, and is sent to prison. All during his career, he has been making contributions to the pension fund. Those savings should, in fairness, go to his children, whose mother is dead and whose father is in jail. His crime should not impoverish the innocent children, who have already been victimized. This leads to questions of where to draw the line.

The case of former Supreme Court Justice Victor Barron of Brooklyn, who continued to collect an $89,094 pension during the two years he was imprisoned for demanding a substantial bribe from a litigant in order to settle a case that was before him, was considered particularly offensive. While the state was paying for his room and board in prison, it was also compensating him handsomely for what had been corrupt service. Who knows how many other bribes Barron received before one lawyer complained to District Attorney Joe Hynes, who subsequently launched an investigation?

Is a public pension a form of deferred income, which vests in the pensioner's family, or is it a reward paid at the conclusion of one's public service for faithful performance of duty? There is a provision under which city employees can defer income to 401(k) accounts, and that money is clearly theirs, except that it may be used to pay a fine. As to the justification for forfeiture of a pension, which is primarily the city's money, the case is perhaps murkier.

One great advantage of the city's right to deny a pension to a dishonest employee is that it enables lesser settlements to be made in cases of misconduct. There are some sins or indiscretions or serious errors of judgment for which a fine of thousands of dollars would be an appropriate penalty. That could provide for the recovery of misappropriated funds and serve as a deterrent to others not to engage in similar misconduct. If the pension were to be immune from recapture, there would be no incentive for the employee to pay or settle the claim against him; he could simply retire and collect his ill-gotten gains for the rest of his life, as could his wife, if she were his beneficiary. They could laugh all the way to the bank, or to Florida if they wanted their income to go farther.

There is a great variety of crimes that have been committed by public employees, both on the job and off the job. For instance, a social worker or HRA manager may wrongly certify someone as eligible to receive benefits. If this is done because the employee mistakenly believes the applicant is entitled to or worthy of benefits, whether food stamps, rent reduction, monthly subsidies, or enrollment in a particular program, that is one kind of error. If the employee himself receives personal benefit from that decision, whether cash, sex or unearned privileges of any nature, the situation is much more serious, and punishment should be more severe. If the case should justify dismissal, the issue of pension forfeiture should be considered as a potential part of the penalty, depending on the circumstances.

There should not be an ironclad rule in these cases, where the extent of the penalty should depend on the motive of the wrongdoers, the seriousness of the offense, the number of people victimized, denied their rights, or unjustly enriched or deprived, the length of time the conspiracy continued, the defendant's willingness to co-operate with the authorities, the value of that co-operation, to whom pension benefits may be allocated if the defendant's interest in receiving those benefits is revoked, as well as other facts which may be unique to the situation. No one rule can cover all the cases, but pension forfeiture should be within the range of available outcomes, depending on its gravity.

Often cases of this sort deal with people who have already messed up their lives, one way or another. Rule 16-J: "Nobody does it once" applies here, and people who are apprehended for one specific offense have usually committed others which did not come to the attention of the authorities. When I was at Parks, and a disciplinary proceeding was being held for an employee, the union lawyer would often argue that his client had had a spotless record for twenty years, and it was unjust to punish him severely for a single misstep. People familiar with the circumstances knew for a fact that the employee had been engaging in similar misconduct for years, and this was simply the first time the agency put its resources into catching him.

Should the hearing officer and the Commissioner keep those facts in mind, or should they consider this as a brand new case against a first-time offender. Is there a presumption of innocence when there has been no previous proceeding? Can a hearing officer consider what everyone knows, or is he bound by the record of this particular case? If he is bound by the record in determining guilt or innocence, when it comes to the penalty phase, is he required to assume that every act of misconduct is a first offense?

How many hearing officers, particularly those in middle management at the agency, can be deterred from findings of guilty or serious penalties by the fact that they must co-exist with the employees on trial and their union representatives? It helps no one's career to be identified as unsympathetic to working people, even if the misconduct of which they are accused consists of not working. The union leaders are likely to be around longer than the commissioners who come and go with the political winds. They remember who their friends are, people who are lenient with their members without regards to the facts of the cases they are assigned to judge.

Mayor Tackles Pensions

Bloomberg Plans Assault

On Rising Pension Costs,

Asks Koch to Lead Drive

Mayor Bloomberg's tenth State of the City speech was delivered this afternoon in a restored 1929 movie palace, the St. George Theater, named for the old neighborhood, an historic district close to the Staten Island ferry. A spinoff of the President’s State of the Union message, the State of the City is an annual ritual which, in prior years, has told listeners about the city’s condition, often as the administration at the time wished it to be.

You can click on the text of the Mayor's remarks here. If you prefer to watch the speech, click here. The video is an hour long.

The speech was well prepared and forcefully delivered, indicating that the Mayor is regaining his groove after a recent series of unfortunate events which are chronicled by aspirants to his office in an article in today's City Hall newspaper by Edward-Isaac Dovere.

One initiative proposed by the Mayor dealt with the pension system:

"In the weeks ahead, we will make pension reform our number one priority in Albany. And today, I'm glad to announce that a great New Yorker has agreed to take up our cause: Mayor Ed Koch. Last year, he formed a group - New York Uprising - that convinced a majority in both houses, and Governor Cuomo, to pledge their support for redistricting reform, something I strongly support, too. This year, he’ll expand his crusade and if you know Ed, he won't do it quietly. Thanks, Ed.

"Working with Ed and our partners in State government, we will work to pass several basic reforms to bring our pension system into the 21st century.

"First, we can save $8 million a year right off the bat by consolidating pension systems, an administrative reform that will not affect benefits at all.

"Second, we'll seek a new tier for employees hired in the future that would raise the retirement age to 65 for non-uniformed workers. That would produce billions in long-term savings, and bring our retirement age in line with the private sector, even as we offer far more generous benefits. We can also save another $200 million every year by eliminating, for future uniformed retirees, what is effectively a $12,000 annual bonus, paid on top of full pension benefits every year around the holidays. City taxpayers just cannot be expected to give substantial holiday bonuses when so many of them are out of work or having their own wages frozen or cut.

"The third piece of our pension reforms would overturn the State law that prohibits the City from negotiating pension as part of the collective bargaining process. Pension and health care benefits are a substantial part of a City employee's compensation, and so it only makes sense they should be part of the collective bargaining process.

"Right now, State elected officials are setting pension benefits for City workers, and sticking another group - city taxpayers - with the bill. Again, our message to Albany is: we'll pay the bills, but let us get better prices. And the only way we will be able to afford raises for City workers in the future is if we can find some savings in our pension and health care bills. That is not a negotiating stance. It is reality.

"And so today, I will make this commitment: I will not sign a contract with salary increases unless they are accompanied by reforms in benefit packages that produce the savings we need to continue making investments in our future and protecting vital services."

Pension costs are an enormous problem all over the country as, under pressure from public employee unions, governments have given public employees ever more generous pensions, earlier retirement ages, tax-free disability pensions without the necessity of incurring actual disabilities, substantial overtime in the year before retirement which is reflected in swollen pensions, and other abuses negotiated by the finest lawyers, and assisted by pliant actuaries who brazenly conclude that these enhancements come at no cost to the city, without disclosing that they were on union payrolls.

Public employees, like private sector employees, are entitled to decent pensions, and should have the opportunity to contribute to a retirement fund if they wish to receive enhanced benefits. The problem here is that in the classic tug of war between labor and management over wages and pensions, the unions' political strength has driven management into the mud of deficit and despair.

In one way, the City of New York has been attempting, with limited success, to reduce employee pensions for 37 years. The first benefit reduction came on July 1, 1973, when Tier One was superseded by Tier Two, slightly less favorable to employees. A sharper reduction came in 1977, after Fiscal Crisis One in 1974-75. We are now under Tier Five, which covers employees hired after January 1, 2010. Governor Paterson promised the unions that in exchange for their not blocking the creation of the new tier, there would be no layoffs until 2011 at the earliest.

He almost kept that promise, delaying several hundred layoffs to December, which was practically 2011. Meanwhile, the state fiscal situation worsened due to reduced tax collections because of the Great Recession, Medicaid costs increasing by billions of dollars, and other billions going to supplement the pension fund, which is dependent to a considerable extent on the vagaries of the stock market. Although tax receipts and stock prices are now rising, they have a long way to go before the state's pension contribution can be reduced to an affordable level.

As an example of the way our top elected officials operate, Governor Paterson promised publicly that the state would not borrow any money in 2010 to balance its budget. However, the state deferred the payment of three billion dollars which was due to the pension fund. The result was the same as borrowing: the state has to pay interest on the three billion dollars it now owes the pension fund, and that will add to the state's debt service obligations for the foreseeable future.

The argument that what happened is not borrowing is specious. Instead of borrowing the money from banks, which might be increasingly reluctant to risk their capital in a state approaching insolvency, he borrowed the money from the pension fund, which is under the sole control of State Comptroller Thomas DiNapoli, a loyalist who served twenty years in the Assembly where he was a trusted minion of the Speaker. That is why he was chosen for promotion to Comptroller.

Discussion of Albany leads to one outrage piled on another. It is hard to fault the unions for trying to enrich their members, when the people from whom they seek the handouts are themselves so hopelessly compromised. Yet reform must begin somewhere, for the simple reason that the current financial situation in which the State of New York is operating is not sustainable, barring an extraordinary turnaround in the economy, and even in that eventuality, relief would be short-lived.

Let me state that the people in Albany are usually (with some exceptions) not wicked or corrupt. They are part of a system in which they remain in power by pleasing others who support their campaigns and could, if they wished, support their rivals.

The power of union retribution was shown in 2010 in the defeat of Frank Padavan, a state senator from Queens for 38 years, who had served with me in the Lindsay administration. Padavan had headed the Senate Committee on Cities and was an ally of successive New York mayors. His downfall came after he supported a charter school bill, and the UFT, disregarding his prior fidelity to their interests, switched their endorsement to his opponent, former City Councilmember Tony Avella, who had run for mayor in the Democratic primary in 2009 but was defeated by City Comptroller Bill Thompson. Padavan's severed head could have been spiked and placed on one of the pillars that line the Appian Way, as a warning to other elected officials as to the power of the United Federation of Teachers.

We cannot predict what effect the recruitment of Mayor Koch to the cause of pension reform will have on the legislature. We believe he will try to shine the light of day on practices that have received little attention in the past, except from the beneficiaries of the special privilege. To achieve changes, it will be necessary to arouse public interest in the subject. With the Governors Cuomo, Mayors Koch and Bloomberg (and others if they care to join), a strong assault will be mounted against practices which have led New York and many other states - this is by no means a local problem - to the brink of insolvency.

Perhaps the State needs a Lehman Brothers experience to show the people the seriousness of the fiscal situations. Perhaps it can learn from the experience of others. Initially, the decisions will be made by the powerful three men in a room. But while they can borrow money, they can't print it.

Is the bubble bound to burst?