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.