The Ethics of Today's Municipal Pension Plan Problems

The New York Times has been running a series of articles about municipal pension funds (by Mary Williams Walsh, Michael Cooper, and Danny Hakim, August 20, 22, 27, September 1, 4, 2006). The articles focus on two principal problems: (1) pensions have been increased, largely in order to get short-term cuts in negotiations with unions, and (2) calculations to determine the health of pension plans usually have little relationship to reality. Each problem is essentially an ethical problem.

First of all, both problems involve transparency. Long-term tax increases that taxpayers don't see are traded for lesser, more visible and lesser short-term expenditure decreases (in real terms) tied to lower wage increases and the like. If taxpayers knew about and understood the tradeoff, they might not be very happy. Similarly, using calculations and assumptions that make a pension plan look healthy is nothing short of a lie.

The long-term vs. short-term tradeoff also raises one of the most important ethical issues facing the Baby Boom generation: how much of its spending is it going to make the next two generations pay (which it can do because the generation is large, it is supported by the older generation, and both generations vote)? Since discussing this problem openly would most likely lead to a generational battle (and more voting by the younger generations), it is usually kept under wraps, as it is with pension plans.

Increases in pensions can have a different origin than this tradeoff, however. In states where pension plans are handled by the state, but union negotiations are handled by municipalities, as in New York, unions that fail to get the increases they want from a city can go to the state, offering their campaign contributions, endorsements, and manpower.

How much are pension plans increasing? According to the Times articles, in the last five years pension costs in New York City have quadrupled; in Buffalo they have sextupled; and in the town of Lockport (pop. 20,000) they have increased more than tenfold. This is not a minor problem.

Deciding which sort of calculation to use to determine the health of pension plans involves another ethical problem. If a municipality uses the sort of calculation that actuaries use, where it is assumed that all bumps, no matter how big, will be smoothed out over time (and that the plan will never go bankrupt), then everyone will feel good, including voters and municipal bond rating agencies. However, if the municipality uses the sort of calculation employed by financial analysts, everyone would be worried and the town's bond rating would go down, all in the name of honesty. So as New York City's chief actuary recently wrote, cities will continue to say that the earth is flat, and people will nod their heads.

Pensions are a tough problem, just the sort of problem municipal ethicists should think about so that they can put in their two cents.

Robert Wechsler
Director of Research-Retired
City Ethics, Inc.