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Pension Fund Boards and Conflicts of Interest
Thursday, June 12th, 2008
Robert Wechsler
Who should be on a local government pension board? Should conflicts of
interest be taken into account? These two questions are closely
interrelated, because the common answer seems to be that those with the
greatest conflict are also the most appropriate members.
There are two values at odds here: letting employees and retirees manage their own pensions, and the public interest in having tax dollars handled by disinterested and competent individuals.
Click here to read the rest of this blog entry.
The first question is, are pension funds the property of employees and retirees, or of citizens? The answer is, both, but in completely different senses. If everything goes well, then once tax dollars become part of a pension fund, they're no longer of interest to taxpayers. But when things go wrong, as they have been recently, taxpayers are the ones who pay.
The decision to appoint pension boards that consist primarily of employees and retirees assumes that everything will go well, an irresponsible assumption. After all, why should local government employees and retirees -- knowing, in most cases, that their pensions will be paid no matter what, and lacking financial knowledge and experience -- why should they do the best job possible?
The essential question is, Is it appropriate to dispense with conflict of interest protections for pension boards and other pension-related decisionmakers that are provided for all other boards and decisionmakers?
There is another issue: pension policies and rules. For example, should employees be involved in deciding when an employee vests? And what about overtime decisions, especially when they affect, as they so often do, the amount of the final pension? How often are overtime and staffing decisions handled by employees themselves?
An opinion piece in the New Brunswick Telegraph Journal shows serious concern for conflicts on the Saint John pension board (for news background, click here). Legislation guarantees that nine of the 12 members be city employees, leaving the council with only three representatives. "This biases the decision-making process toward offering higher benefits to employees and creating more serious financial liabilities for the city," the article states. The article goes on to say that the council neither takes control of the process (handing this off to senior staff, who are themselves city employees), nor does it seek an independent review of pension operations or hire an independent mediator to discuss options with city employees. In fact, until he resigned from the pension board this week, the city manager was both pension board member and the staff member who made recommendations about pensions to the council. Of course, he recommended for his successor the deputy city manager, whose conflict of interest is just one degree of separation away from his own.
Shockingly, when a council member proposed independent review of the pension situation, the pension board filed a defamation lawsuit against him. He is no longer a member of the council.
Pensions are serious business. It is arguable that conflict of interest rules should be stricter rather than looser when it comes to pensions. In other areas, the principal argument against strict conflict of interest rules is that local government needs expertise. With pension boards, the situation is the opposite: those with conflicts are the ones without expertise, and the unprofessional are chosen over those with knowledge and experience.
A result can be serious losses, as, for example, has been seen in Massachusetts according to a recent article in the Boston Globe. There, the issue is whether pension funds should be handled by local officials at all, or at the state level, where there is both more expertise and fewer conflicts of interest.
An article in the Pittsburgh Tribune shows another side of unprofessional self-management of pension funds. Two Detroit pension funds are investing in a casino operation in Pittsburgh. The vice president of the police officers association, who is also a police pension board trustee, said, "In the gaming industry, they're always booming. It's a very sound investment." Other members of the boards felt it was risky. One said, "Anything with gambling is like gambling." But the majority of both boards overrode these concerns.
This is a complex issue, and I am doing no more here than raising it. Others' experiences and thoughts would be welcome.
Robert Wechsler
Director of Research-Retired, City Ethics
There are two values at odds here: letting employees and retirees manage their own pensions, and the public interest in having tax dollars handled by disinterested and competent individuals.
Click here to read the rest of this blog entry.
The first question is, are pension funds the property of employees and retirees, or of citizens? The answer is, both, but in completely different senses. If everything goes well, then once tax dollars become part of a pension fund, they're no longer of interest to taxpayers. But when things go wrong, as they have been recently, taxpayers are the ones who pay.
The decision to appoint pension boards that consist primarily of employees and retirees assumes that everything will go well, an irresponsible assumption. After all, why should local government employees and retirees -- knowing, in most cases, that their pensions will be paid no matter what, and lacking financial knowledge and experience -- why should they do the best job possible?
The essential question is, Is it appropriate to dispense with conflict of interest protections for pension boards and other pension-related decisionmakers that are provided for all other boards and decisionmakers?
There is another issue: pension policies and rules. For example, should employees be involved in deciding when an employee vests? And what about overtime decisions, especially when they affect, as they so often do, the amount of the final pension? How often are overtime and staffing decisions handled by employees themselves?
An opinion piece in the New Brunswick Telegraph Journal shows serious concern for conflicts on the Saint John pension board (for news background, click here). Legislation guarantees that nine of the 12 members be city employees, leaving the council with only three representatives. "This biases the decision-making process toward offering higher benefits to employees and creating more serious financial liabilities for the city," the article states. The article goes on to say that the council neither takes control of the process (handing this off to senior staff, who are themselves city employees), nor does it seek an independent review of pension operations or hire an independent mediator to discuss options with city employees. In fact, until he resigned from the pension board this week, the city manager was both pension board member and the staff member who made recommendations about pensions to the council. Of course, he recommended for his successor the deputy city manager, whose conflict of interest is just one degree of separation away from his own.
Shockingly, when a council member proposed independent review of the pension situation, the pension board filed a defamation lawsuit against him. He is no longer a member of the council.
Pensions are serious business. It is arguable that conflict of interest rules should be stricter rather than looser when it comes to pensions. In other areas, the principal argument against strict conflict of interest rules is that local government needs expertise. With pension boards, the situation is the opposite: those with conflicts are the ones without expertise, and the unprofessional are chosen over those with knowledge and experience.
A result can be serious losses, as, for example, has been seen in Massachusetts according to a recent article in the Boston Globe. There, the issue is whether pension funds should be handled by local officials at all, or at the state level, where there is both more expertise and fewer conflicts of interest.
An article in the Pittsburgh Tribune shows another side of unprofessional self-management of pension funds. Two Detroit pension funds are investing in a casino operation in Pittsburgh. The vice president of the police officers association, who is also a police pension board trustee, said, "In the gaming industry, they're always booming. It's a very sound investment." Other members of the boards felt it was risky. One said, "Anything with gambling is like gambling." But the majority of both boards overrode these concerns.
This is a complex issue, and I am doing no more here than raising it. Others' experiences and thoughts would be welcome.
Robert Wechsler
Director of Research-Retired, City Ethics
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