It Can't Happen Here

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.

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?