The Fiduciary Duty of Government Consultants

A recent City Ethics blog post discusses the value of a functional definition of a government employee with respect to government ethics. That is, a private individual who does government work for the government has the same obligations to the community as a government employee.

Since a government employee's obligations derive from a fiduciary duty to the community (see the discussion in my book Local Government Ethics Programs; scroll down a half page after clicking), it is fair to say that a private individual doing government work has the same fiduciary duty with respect to that work.

A front-page article in yesterday's New York Times presented an interesting scenario with which to consider this issue in a different context. The question here is, Does a government consultant have a fiduciary duty to the city that goes beyond conflict of interest matters?

A firm that provided ongoing actuarial advice to Detroit's pension trustees said in a statement that it "is not a fiduciary or member of the board of trustees for either of the Retirement Systems, and therefore, it does not vote on matters of governance for the Funds and does not make decisions of any kind on behalf of the Retirement Systems."

In other words, it uses the term "fiduciary" with respect to the obligations of a trustee, which it was not, rather than with respect to the obligations of a government consultant, which it was.

This firm played the same role in San Diego, a much wealthier city that had a pension crisis a few years ago. Former SEC chair Arthur Levitt was brought in to deal with the crisis. According to the article, Mr. Levitt said that, “Of all of the [pension] board’s advisers, [this firm] was most qualified to understand, and explain to the board, the basic conceptual mistake” it was making. By failing to do so, and giving the pension fund “sound” annual valuations, “[the firm] facilitated the perpetuation of the underfunding scheme and breached [its] professional obligations.”

The firm's lead member working in both San Diego and Detroit told the Times that the cause for the pension crisis in San Diego was faulty thinking about pension math. “A 7-year-old child could understand this. It’s laughable that this could happen, but it did.”

In other words, the pension crises of San Diego and Detroit (and the same mistake appears to have been made in such places as New York City, Phoenix, San Jose, Tampa, Illinois, Indiana, Texas, and Mississippi) are based on the ignorance of and/or pressures placed on pension trustees. San Diego came close to filing for bankruptcy, and Detroit is currently in bankruptcy proceedings.

I think that a pension consultant has a fiduciary obligation to do everything possible to prevent such severe harm to a community, especially when it's so clear a case. If pension trustees will not listen to reason, a consultant should tell high-level officials how irresponsibly the trustees are acting. If high-level officials don't want to deal with the matter, the consultant should resign and make a public statement that it can no longer advise a board that will not listen to its advice and instead is acting in ways that will cost the city billions of dollars. This is not confidential information; it is information that is essential to the community.

The firm's lead member says that the actuarial community has not been “as explicit as we could have been” about unsustainable pension costs. The actuarial community needs to provide written guidance to actuarial consultants on how to fulfill their obligations as government consultants in such situations. Associations whose members act as consultants in other areas should do the same thing.

Robert Wechsler
Director of Research-Retired, City Ethics

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