Since I’m not from the political world, for me the questions are about what, not who. I generally discuss policy issues and trends in government and society at large, and seldom mention individual politicians. This keeps me out of the various flame wars, and away from the personal enmity, that characterizes both the political tribe and the internet. And I haven’t called for retribution against any individuals, with the possible exception of not voting for them.
While the decisions, non-decisions and deals that led to the current public employee pension crisis were made over the course of nearly 20 years, that crisis has only attracted public attention for less than four years. The crisis has two causes. Using inflated asset prices due to the 1990s stock market bubble and later the mid-2000s housing bubble as an excuse, politicians both underfunded the pension promises that had been made to public employees, and retroactively enhanced those promises in exchange for union political support. The extent of blame for the disaster varies from place to place, with unjust retroactive pension deals more responsible in some cases and taxpayer underfunding more responsible in others. But New York City taxpayers have contributed far more than taxpayers elsewhere to their public employee pension plans, according to long-term Census Bureau data that can be downloaded from this post.
During the entire 20-year period of pension irresponsibility, Robert North has been the New York City actuary. According to a New York Times article from February 1990 “Mr. North, a 39-year-old investment banker with the Ocwen Financial Corporation, was selected by a four-member search committee appointed by former Mayor Edward I. Koch and the municipal unions….As chief actuary, Mr. North would head a department of 42 employees, managing pension systems whose combined funds amount to $35 billion. The salary of $175,000 a year makes the chief actuary the second highest-paid city official, surpassing the Mayor.” Apparently Mr. North is 61 years old today.
When North took office, New York City had finally recovered from the massive cost of the Tier I pensions retroactively granted by former Mayor Lindsay, to curry favor with the public employee unions while running for President. The soaring costs of retirees had led to huge cuts in the number of workers still on the job and big cuts in the pay and benefits of new hires. City workers were less qualified and less motivated as a result, and public services still haven’t recovered. Having reached 28.6% of active employee payroll in 1982, New York City’s taxpayer pension contributions had reached a more manageable 12.4% by 1990. Nationally, taxpayer public employee pension contributions have generally been around 9.9%. When Mr. North arrived, New York City’s residents had paid a huge price to get its pension plans out of the hole. Its infrastructure had deteriorated, its schools were bad, its police did not stop crime, and its taxes were far, far higher than the U.S. average, as they still are today.
As City Actuary, it was North’s job to ensure the terrible consequences of severely unfunded pension plans did not happen again, by telling politicians and unions looking to cash in that the money would be needed for later. He, and the City and State Comptrollers, were supposed to guard future taxpayers and service recipients from being robbed by older generations, or at least force those older generations to admit to the consequences of what they were doing before and as they were doing it. So how did Mr. North meet his responsibilities?
People disagree with the severity of the public employee pension crisis, depending on their interests and their assumptions. But every comparative analysis of public employee pension funds that includes large local government pension funds as well as state government pension funds, based on any such assumptions, shows that New York City’s pension funds are among the most underfunded in the U.S. Despite all the additional money New York City taxpayers have paid in, and the higher tax burden in the city compared with other places. As bad as in New Jersey and Illinois, where taxpayers didn’t put a dime into those funds for years, so politicians could win votes by keeping taxes far lower than in NYC.
The latest such analysis, by the Center for Retirement Research at Boston College, may be found here. That report was covered by independent actuary Girard Miller, who writes for Governing magazine. The CRR is generally a public pension fund apologist, and downplays the nationwide crisis by asserting that only some plans are in really bad trouble, such as those in New York City. An earlier analysis, by independent actuary John Bury can be found here.
The consequences of that underfunding have already been felt, with ongoing cuts in services, tax increases and New York City taxpayer pension contributions that already exceed those of the post-Lindsay debacle, as a share of the wages of those still on the job. There are fewer police officers, fewer teachers, and fewer sanitation workers. How did the city get into the same mess?
By repeating the same kind of retroactive pension deals. From 1991 to 2008, the New York State legislature passed one retroactive pension enhancement after another, always asserting that the deals cost nothing. The basis for those assumptions was discovered by the New York Times and reported in this article on the analysis of a pension actuary paid by the unions to provide biased estimates of the cost of the deals they wanted. “Lawmakers have cited Mr. Schwartz’s analysis on hundreds of bills in recent years, with billions of dollars worth of potential costs. His projections were used to fulfill a legal requirement that every piece of legislation be accompanied by a ‘fiscal note’ that examines its impact on spending” according to the Times. “Mr. Schwartz, a former city actuary, said that he routinely skewed his projections to favor the unions — he called his job ‘a step above voodoo.’” The state legislature didn’t pay for the analyses. The union did. “The Legislature knows full well I’m being paid by the unions. If they choose not to disclose that, that’s on them, not me.”
So what did the replacement city actuary have to say about all those deals foisted on the city by the New York State legislature? Not much publicly, as I recall, and I’ve been following state and local finance fairly closely for all the years Robert North has been in charge. He certainly didn’t call a press conference to defend the future of the pension funds he was responsible for, and the general public whose future public services relied on those funds, from the unions who had recommended his appointment. He didn’t condemn those unions, and the politicians who could rescind his appointment.
Moreover, not every retroactive pension enhancement of the past 20 years was foisted on the city by the state legislature. I can think of three, all described as costing nothing, that the city itself proposed during North’s watch. In 1995, the Giuliani Administration asked the New York State Legislature to enact a “retirement incentive” that allowed thousands of city workers to retire years earlier, inflating the payout from the city’s pension funds but temporarily cutting the city payroll. No money was set aside for this. State legislators would go on to proposed many more early retirement “incentives” over the city’s objections, even when it wasn’t trying to cut is workforce. Some of these, I believe, passed as well.
In addition to those who walked out the door at the time, as part of the 1995 deal, city workers were allowed to retire at age 57 after 25 years of work rather than age 62 after 30 years of work, as long as they paid an additional 1.85% into the pension plans (for a total of 4.85%, at least at first), including buying back all the years of extra contributions before the deal. This was also held to cost nothing. My own calculations show that was not the case, the earlier retirement cost far more than the additional pension contributions by the workers. Especially the catch up contributions for past years, for which there was no return on investment for past years.
In 2000, then-Mayor Giulani wanted some extra cash to spread around during his campaign for Senator, and he once again turned to the pension funds to get it. He offered the unions a chance to eliminate the required 3.0% employee pension contribution after ten years of seniority. This reduced the employee contribution to zero for those not in on the 25/57 deal, and 1.85% for those in on the deal. In the former case, this cut the amount employees contributed to their own pensions by 75.0%, because they earn more later in their careers. In exchange, the unions agreed to allow the city to underfund the pension plans as well, temporarily. The cost of this little deal according to Giuliani? Zero.
At the same time as it passed the Giuliani deal, the state imposed a bunch of retroactive pension enhancements, including a big increase in benefits for workers who were already retired, over the city’s objections. The state legislature had been passing that deal for years, but Governor Pataki had been vetoing it. But when it came to selling out the future for short-term political advantage, George (MTA debt) Pataki was not about to be outdone by Giuliani. Needless to say, the state said the cost of its portion of the retroactive pension deal would cost zero.
In 2007 Mayor Bloomberg, seeking support from the teacher’s union for his efforts to sell himself as a pension reformer, cut deal to allow teachers not in on the 1995 deal to retire at age 55 after 25 years of work rather than at 62 after 30 years of work. While future teachers would have to contribute an extra 1.85% of their pay for the privilege, those close to 55 were allowed to retire without buying back the past years (unlike under the 1995 deal). The deal passed the state legislature and was signed in 2008. The city claimed its cost would be zero, as I recall, but the state made the city put $100 million extra into the pension fund. A pittance compared with the actual cost.
In Milwaukee County, Wisconsin similar deals to these that passed in 2000, with similarly bad consequences, led to a scandal that forced the County Executive to resign and elevated the career of Scott Walker, now the Governor of that state. After years of slashing county services to pay for the cost of the “backdrop” pension deal he inherited, Walker sued the county’s pension actuary, a private firm, for $100 million. “Key bits of evidence include the failure of Mercer consultants to speak up at an Oct. 27, 2000, meeting of the county's Pension Study Commission. The county's lawsuit argues the Mercer employees should have contradicted a presentation stating that the backdrop would not cost the county anything and admitted that they hadn't yet studied the backdrop's cost.” The case was later settled for $45 million, “among the largest recoveries of its kind by a government entity based on claims of actuarial malpractice.” But the dollar value of the damage to the people of Milwaukee County was a fraction of the damage to the people of New York.
I don’t recall City Actuary Robert North condemning these deals and their purported cost publicly, or threatening to resign and then doing so. Moreover, if the deals could not be stopped there was another option. As City Actuary, North could have required that they be paid for. The amount that New York City is contributing to its pension funds right now, even according to my more conservative assumptions, is more than would have been required to pay for even the retroactively enhanced pensions, if that amount of money had been paid in all along. The reason is that because those enhancements were not paid for at the time, the pension funds are deep in the hole, and thus money that should be there earning a rate of return to pay future benefits isn’t there. The expected rate of return on the half of the city’s pension assets that aren’t there is zero.
The funds are close to a death spiral, one that could have been avoided. New York City had two economic booms during the time Robert North was actuary, from 1995 to 2000 and from 2003 to 2007. Tax money was rolling in during those booms. North could have demanded that the city use the additional tax money to pay for all the retroactive pension deals, and fill the holes in the pension fund. He clearly did not choose to demand enough.
And now, Governor Cuomo has decided that to help pay for the pension enrichments for his generation, which is Bloomberg’s generation, and North’s generation, and the generation of most members of the New York State legislature, future public employees should receive retirement benefits that are drastically less valuable than Generation Greed had been promised to begin with. The unions have started to pretend to object to their own cycle of undeserved benefits for those cashing in, and moving out and lower pay and benefits for their future members. But just to be sure those future members aren’t in a position to object, the United Federation of Teachers is pushing through a plan to increase the voting power of the growing number of advantaged retirees relative to shrinking number of ripped off future workers. The very day after Cuomo made his proposal, which did not include any suggestion that existing workers and retirees give back anything to offset the huge increase in their privileges at the expense of everyone else.
Mayor Bloomberg agrees that only future employees should be sacrificed. So do all the major media outlets. No one will dare to question why it is that future workers should be so much worse off than those coming earlier. Were the earlier deals fair? Then the future workers are being cheated. Are the proposed rules fair? Then the general public has been cheated by the current workers and, to a greater extent, today’s retirees. Are younger generations worth less in general than Generation Greed? Are they worse of in other ways? Should they be? Is that the legacy of that generation and its leaders? No one talks about it.
Just as future government workers are the ones who will be sacrificed to make up for 20 years of self dealing according to the Governor’s proposal, so future taxpayers will be made to pay for yesterday’s pensions according to a proposal from the Mayor recently endorsed by City Actuary Robert North.
A year ago, Mayor Bloomberg proposed a budget to add another $1 billion, and no more, to what the city will contribute to public employee pensions, bringing the total to around $8 billion (plus contributions by New York City Transit). Meanwhile, actuary Robert North dragged out a study of how much more money was actually required. His assumptions, including a 7.0% future return, were extremely optimistic given present circumstances, not in compliance with the proposed rules by the General Accounting Standards Board, and seemingly designed to allow the city to underfund its pensions. But even so, the actual requirement according to the City Actuary, after all the pension funding increases of the past decade but also after all those retroactive pension deals, is more than an additional $1 billion. Perhaps much more. We don’t know how much more, because the City Actuary declined to make the report available to the public that pays his bills. We know about this at all because the report was leaked to the New York Post.
And then there is this. “The cash-starved city will be allowed to pass on to future generations the bills it gets for some of its massive new pension debts, The Post has learned. In confidential memos distributed to City Hall and the boards of New York’s five pension systems, Chief Actuary Robert North said he wants to lower the assumed ‘rate of return’ on pension investments from 8 percent to 7 percent, as The Post first reported in October” but “in addition to revising the rate of return, North is also recommending a change in key accounting practices for the $120 billion pension funds, which would allow the city to pass some of the costs to Bloomberg’s successors.” He is going to recommend that the city intentionally underfund the pensions, leading to even more devastating costs later.
“Sources involved in the pension analysis said North’s staff was concerned that too big a hit all at once could cause a budget catastrophe at City Hall” according to the Post. “The impact would be too great,” said one analyst involved in the discussions between the actuary and the administration. “You have to look at the [city’s] ability to pay.”
“No you don’t,” asserts independent pension actuary John Bury. “The actuary should be able to to determine the cost of a promised defined benefit based on his professional judgment. If a government is unable or unwilling to make that payment they have options since there is no authority forcing them to put in that money.” The City actuary’s job, according to Bury, is to tell the truth.
The actuary should not be covering for the politicians. Just recently, in response to questions about the health of the pension funds, Comptroller John Liu said that the city had always put in the pension contributions recommended by the actuary. But not it proposes not to do so, on the recommendation of the City Actuary to underfund his own recommendations, and only pay an amount that the Mayor had decided to pay one year earlier – until years more have passed and the hole is even bigger, the sacrifices even greater, and the younger generations who will be paying more even poorer. And the politicians, seeking to rationalize what they have done, are already hiding behind the City Actuary. “’The $1 billion is enough. It looks like we’re in good shape,’ said City Council Finance Chairman Domenic Recchia (D-Brooklyn).” Wrong and wrong. It isn’t enough, but the City Actuary agrees that you should stick it to younger generations who will be even worse off. If the wealthiest geneations in U.S. history cannot afford to fund their pension promised to themselves, how can those coming after, who are worse off?
Quick aside: in my view the city pension funds are so deep in the hole that the minimum that should be put in each year should be the amount that is paid out to beneficiaries, allowing any earnings by pension fund investments to be used to allow the funds to recover – for perhaps 20 years. I don’t know exactly how much that is, but it could be as much as $3 billion more, not $1 billion more, with additional increase in each and every year. The pensions are guaranteed and have to be paid? That is what they cost. Or, rather, what they cost now because they weren’t paid for before.
New York City Chief Actuary Robert North has one of worst record imaginable for someone in his profession. He has worked for a city that suffered dearly to restore its pension funds to health after the retroactive pension deals and underfunding of the 1960s and 1970s, a city whose residents have among the highest state and local tax burdens in the U.S. and have paid more of their tax dollars in to the pension funds, rather than using that money for better services for themselves. While there have been two stock market downturns on his watch, there have also been two bubbles, and the investment rate of return for the entire period from 1990 to today was probably better than the return that can be expected in the next decade. New York City’s pension funds had solid investment returns and got massive taxpayer contributions.
And yet the pension funds North is responsible for are once again among the most underfunded in the country, with severe consequences for anyone who will be living and working in New York City in the future. After a 20 year period in which North failed to publicly force politicians deal beneficiaries to acknowledge or obtain funding for what they were doing. That is why he should be fired.
And this is why he should be fired now. There is no way that someone in North’s position should be receiving a city pension. That is a conflict of interest with regard to retroactive pension deals that could benefit the actuary himself. But I don’t doubt that he is earning a pension. And I don’t doubt that he did benefit from the retroactive pension deal to allow retirement with full benefits after 25 years of work. Which would mean he could walk out the door with that retroactively enriched pension in February or March 2015, about three years from now.
If that is the case, no wonder he is willing to go along with whatever the Mayor wants, to keep his seat. Mayor Bloomberg wants to postpone some of the devastation from all the retroactive pension deals on North’s watch until after he leaves office. Perhaps North has decided it is best to postpone the rest of the devastation until after he retires, just in case some of the devastation will be in the form of higher taxes. Because the pension he may be in line to receive, which may very well exceed $100,000, would be completely free of state and local income taxes.
Is it fair to single North out? Well, as far as I’m concerned everyone involved with those deals over the years deserves to be fired. But most of them were not specifically tasked with telling the possibly unpopular truth. Our society has created a variety of those “truth telling” professions in order to prevent victimization in secret from happening, from the accountants to the actuaries to the bond raters, etc. That whole structure has failed, while doing very well for itself from a strictly money point of view. It didn’t create the institutional collapse, but it certainly enabled it. I don’t consider any warnings North might have issued in secret to be a sufficient rationalization. The trappings and honor of a profession were in exchange for more than that.