The tie that binds public employee unions and Wall Street

Some people think that public employee unions can serve, as private sector unions once did, as a counterweight to wealthy business interests. However, when it comes to a hugely important area of public policy, pensions, the unions are more often allies than adversaries with investment firms and consultants. The unions want larger pensions. The money mangers want higher fees. Everyone benefits from more expensive pensions–except the current consumers of government services and future generations.

The nexus of government unions and Wall Street is evident in New York City’s pension system.  Next year, Gotham will pay $8 billion or 11 percent of its budget, a 12 percent increase since 2000, toward its public employee pensions. Despite pumping more money into the system, the funding ratio has fallen to 63 percent or even as low as 40 percent funded in some estimates.

As New York City’s pensions have become more expensive, the funds have increasingly invested in private equities and other risky asset classes in search of higher returns.  The result is that the investment fees of have skyrocketed. For the largest of the city’s five pension funds, fees jumped from $17.3 million for managing $31.7 billion in 1997 to $175 million for managing $35.4 billion in 2010.

The system is also poorly organized, which benefits consultants and money mangers. The city has a complex system of five different pension funds–for police, firefighters, teachers, and other employees. (Most cities have at most two funds, for those in uniforms and everyone else.) More funds means more work for consultants. Some of the funds boards are also highly politicized, as they include representatives from the unions, the offices of the mayor and the comptroller. The teachers unions, for example, blacklists any investment firm known to support charter schools, regardless of their performance in the market.

The long-term problem is that the only group with an interest in well-funded pensions, city taxpayers, don’t have a seat at the table. The mayor and the city council want to offer more services to urbanites and pay for them later. The unions want larger pensions checks for their members, as that increases there total compensation. Money managers want to charge higher fees for risker investment strategies. In theory, the unions might worry about the funding status of pensions, as their members will rely on them in retirement. Yet, insofar as public pensions are constitutionally guaranteed in New York, there has been little incentive for them to pay much heed to the issue.

Over the next few years, the pension problem is likely to get worse and threaten any major “progressive” program that Mayor de Blasio might want to enact. In fact, the problem will be compounded by the generous contracts the de Blasio administration has signed with the teachers and other city unions. Ironically, by helping one part of the supposedly progressive coalition, Gotham’s public employees, de Blasio has made it harder to do anything for New Yorkers struggling in the private sector.



Comments (4) Add yours ↓
  1. wrong

    A good example of why your analysis is wrong: A push for labor-neighbor alliances.

    August 5, 2014 Reply
  2. Henry Bechard

    The crisis awaiting Gotham’s unsustainable public sector pension system is fast approaching and will certainly dwarf Detroit’s recent public sector pension debacle.

    Having allowed public sector unionism to flourish has had the unintended consequence of unwittingly creating a branch of government unanswerable to the taxpayer and voters who are the principal source of funding for public sector pensions, health care and other myriad benefits that are generally not available to private sector workers. City government, unions and their pension and benefit funds are thus allowed to act unchecked and perpetuate their perverse existence without accountability or control by the electorate that provides their funding. This is a tyranny foretold by President Franklin Roosevelt who refused to allow government workers to unionize because he understood that doing so would allow unions to act unchecked to further their own interests that are oftentimes not in concert with or beneficial to the general public – the voters.

    Gotham’s looming pension crisis will ultimately become a significant political and economic crisis when taxpayers become aware of how the pension funding obligation ultimately trumps the need to fund essential city services. This is occurred in Detroit and there is no reason to believe it won’t happen in Gotham. The result: reduced pension benefits; right-to-work legislation allowing public sector workers not to be compelled to be a union member and provide funding to an organization s/he believes is not acting in their or the voting public’s best interests; and a significant reduction in public sector union activism in the legislative process – the primary source of their corruptive influence.

    Unfortunately, New York City and the State of New York are so beholden to the Democrat Party’s progressive liberal agenda and influence that expecting either government to take needed action now is nothing less than a pipe-dream. It will only happen once the pain – fiscal, emotional, tangible and tragic – becomes too hard to endure or sustain. That’s usually the general course of government – reactionary as opposed to anticipative and corrective. It’s at that time politicians stand and point fingers at one another, play the blame game and engage in faux shock that something this “fiscally irresponsible” could occur. Yes, they never saw it coming! Really? They are the ones that benefited from and perpetuated it, at our collective expense.

    Well, as this runaway train continues down the tracks, expect the big crash to come within a year or two; and when it does, either get ready for drastic change, or have your wallet and check book at the ready to pay more, more, and more.

    August 5, 2014 Reply

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