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Independent Agencies Without Ethics Oversight Can Mean Disaster
Thursday, September 26th, 2013
Robert Wechsler
"It was like dandelions. You just accept them. They were there,
something you've seen all your life."
Dandelions are a perfect metaphor for institutional corruption. In this case, the dandelions were extra payments (beyond those due to retirees) made by Detroit's two pension funds, to active employees (54%), retirees (14%), and the city itself (32%), the latter to lower annual contributions to the funds, according to a front-page article in today's New York Times. The extra payments totaled almost $2 billion over 23 years. The quote is from Detroit's former independent auditor general, Joseph Harris.
Why would pension boards hand out payments to active employees? May it have had something to do with the fact that the boards were controlled by government employee unions? Back in 2008, I wrote a blog post which dealt with this issue. The post talks about whose property a pension fund is: that of the employees who will be paid from it or of the citizens whose money is being spent? In good times and when pension board trustees are acting responsibly, the citizens have little to lose. But in bad times and when pension board trustees are acting irresponsibly, not only is the citizens' money wasted, but they may find themselves paying extra money of their own.
As the former auditor general is quoted as saying, "Ultimately, the fund has to be funded by the taxpayers." It is this ultimate responsibility that should prevent anyone with a conflict of interest (such as a government employee, retiree, or government union staff member) from serving on a pension board. However, it is common for these people to sit on a pension board because, as in Detroit, ethics commissions often have no jurisdiction over pension boards, or the ethics code makes a special exception for them. Back in 2009, when the Detroit Free Press started exposing problems with the pension funds, there was a council proposal to provide the Detroit ethics board with jurisdiction over the pension boards, but I don't believe it ever passed.
The Power of Pension Board Staff
Pension board trustees need more than just ethics guidance. Especially when they are ordinary government employees, rather than citizens with some expertise, they are highly dependent on their staff. This gives an executive director and/or counsel a great deal of power. Four years ago, I wrote a blog post about what I referred to as the fiefdom of the pension boards' attorney. The lack of transparency was such that the uniformed board tried to argue in court that it was not a public body and, therefore, was exempt from public records laws. At the time, he was being investigated by the Michigan Attorney Grievance Commission, but it appears that nothing was done.
But a little more than three years later, according to a March article in the Detroit Free Press, the attorney was indicted for taking gifts from those having business before the pension boards, forcing them to spend thousands of dollars entertaining trustees, and raising more than $70,000 for the Kilpatrick Civic Fund in order to curry favor with Kilpatrick, the then Detroit mayor who was later convicted of many crimes.
Zajac's attorney is quoted as saying that the indictment caught Zajac by surprise. How could it have, considering that a lot of the facts were public information four years ago? The surprise was that it took so long.
The Consequences of a Lack of Ethics Oversight
This is only a small part of the indictments and problems. But all of it stems from three things:
Robert Wechsler
Director of Research-Retired, City Ethics
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Dandelions are a perfect metaphor for institutional corruption. In this case, the dandelions were extra payments (beyond those due to retirees) made by Detroit's two pension funds, to active employees (54%), retirees (14%), and the city itself (32%), the latter to lower annual contributions to the funds, according to a front-page article in today's New York Times. The extra payments totaled almost $2 billion over 23 years. The quote is from Detroit's former independent auditor general, Joseph Harris.
Why would pension boards hand out payments to active employees? May it have had something to do with the fact that the boards were controlled by government employee unions? Back in 2008, I wrote a blog post which dealt with this issue. The post talks about whose property a pension fund is: that of the employees who will be paid from it or of the citizens whose money is being spent? In good times and when pension board trustees are acting responsibly, the citizens have little to lose. But in bad times and when pension board trustees are acting irresponsibly, not only is the citizens' money wasted, but they may find themselves paying extra money of their own.
As the former auditor general is quoted as saying, "Ultimately, the fund has to be funded by the taxpayers." It is this ultimate responsibility that should prevent anyone with a conflict of interest (such as a government employee, retiree, or government union staff member) from serving on a pension board. However, it is common for these people to sit on a pension board because, as in Detroit, ethics commissions often have no jurisdiction over pension boards, or the ethics code makes a special exception for them. Back in 2009, when the Detroit Free Press started exposing problems with the pension funds, there was a council proposal to provide the Detroit ethics board with jurisdiction over the pension boards, but I don't believe it ever passed.
The Power of Pension Board Staff
Pension board trustees need more than just ethics guidance. Especially when they are ordinary government employees, rather than citizens with some expertise, they are highly dependent on their staff. This gives an executive director and/or counsel a great deal of power. Four years ago, I wrote a blog post about what I referred to as the fiefdom of the pension boards' attorney. The lack of transparency was such that the uniformed board tried to argue in court that it was not a public body and, therefore, was exempt from public records laws. At the time, he was being investigated by the Michigan Attorney Grievance Commission, but it appears that nothing was done.
But a little more than three years later, according to a March article in the Detroit Free Press, the attorney was indicted for taking gifts from those having business before the pension boards, forcing them to spend thousands of dollars entertaining trustees, and raising more than $70,000 for the Kilpatrick Civic Fund in order to curry favor with Kilpatrick, the then Detroit mayor who was later convicted of many crimes.
Zajac's attorney is quoted as saying that the indictment caught Zajac by surprise. How could it have, considering that a lot of the facts were public information four years ago? The surprise was that it took so long.
The Consequences of a Lack of Ethics Oversight
This is only a small part of the indictments and problems. But all of it stems from three things:
1. Allowing those with a conflict of interest to sit on pension boards.What we learn from all this is that government ethics is not just about being good and making government more trustworthy. Serious ethical shortcomings can also lead to a loss to taxpayers of thousands, millions, or even billions of dollars. These shortcomings were an important contributing factor to Detroit's insolvency. An effective local government ethics program, with jurisdiction over independent agencies, could have made a huge amount of difference to Detroit.
2. Allowing pension funds to operate without sufficient transparency or ethical and political oversight, so that a fiefdom could be created.
3. Allowing pension fund board trustees and staff to have relationships with officials (such as raising money for them) and to do business with those seeking business from the pension funds.
Robert Wechsler
Director of Research-Retired, City Ethics
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Story Topics:
- Robert Wechsler's blog
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