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The Constitution Can't Protect Underfunded Public Pensions

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The Constitution Can't Protect Underfunded Public Pensions

New York Post November 13, 2017
Public SectorPension Reform
Urban PolicyNYC

Government-employee unions won in a landslide last week, defeating New York’s ballot question to update the state constitution by 78 percent to 16 percent. Public-sector groups were worried that any changes would imperil their pensions, which the constitution guarantees.

But public-sector workers should worry less about words and more about numbers.

Whenever anyone writes that public-sector pensions are unsustainable, New York union leaders have a rejoinder: The constitution guarantees them. Such benefits, according to the document, “shall be a contractual relationship, the benefits of which shall not be diminished or impaired.”

New York’s government workers might not like to think so, but they, too, depend on public will — and that depends on money.

Unions are wary of any threat to this. “The best way to protect our pensions is to defeat the initial [Con-Con]question when it appears on the November ballot,” the United Federation of Teachers counseled in January. “Be ready to fight for your own interests.”

The clause, though, isn’t as ironclad as it sounds. A contractual relationship is important — but it can be changed. Companies and cities can change contracts through bankruptcy.

States can’t go bankrupt. But Puerto Rico was prohibited by federal law from going bankrupt, too — until its fiscal crisis spurred Congress to create a special law last year. Now, Puerto Rico has defaulted on general-obligation bonds protected under its own constitution. It has done so to protect payments to pensioners — even though Puerto Rico’s constitution doesn’t mention pensions.

In a crisis, expediency governs. Puerto Rico’s pensioners are politically more popular than bondholders. New York’s government workers might not like to think so, but they, too, depend on public will — and that depends on money.

So, what’s the state of the money set aside for public-sector pensions? At the state level, good. New York’s two major pension funds are about 95 percent funded.

At the city level, not so good. Gotham owes $56.2 billion in unfunded debt to pensioners — money it has promised future retirees but not set aside. Most of this is for teachers: the city owes $71.6 billion to current and future retired teachers, but has put aside only $48.9 billion for this purpose, leaving a $22.7 billion shortfall.

Overall, Gotham’s pension funds are about 71 percent funded. As cities go, this isn’t bad: Chicago’s pensions are only 21 percent funded.

Consider, though: New York may be at the tail end of a historic boom. The stock market is two-thirds above its 2007 peak. The bond and real-estate markets are at record highs. (The city invests taxpayer money in these markets through its pension funds to earn a return big enough to pay benefits.)

And city taxpayers will make a $9.6 billion contribution to these pension funds this year — up from an annual payment of $7.5 billion (in today’s equivalent dollars, after inflation) in 2009.

If the city can’t fund its pension promises now, with an economy that allows for huge annual payments plus good returns on those payments, when can it?

The city emerged lucky from the 2008 market meltdown. But a longer-term change in the global economy — an end to low interest rates and ever-rising debt — could mean deep trouble.

An inflexible constitutional provision stands in the way of small changes that could prevent bigger disaster years or decades later. A new teacher may not retire for more than a quarter century: In 2015, the average new retiree had worked 24 years. And she’ll depend on her pension for as much as another 40 years after that.

Government workers may feel more secure after last week’s vote. But the constitution isn’t made of money.

Nobody can know the future. But a public-sector retiree with a growing portion of her retirement money in a private account — with a big contribution from the city and invested in low-fee, diverse investments just like the investments the pension fund makes — would be hedged against the risk that the New York of the future faces fiscal calamity.

Public-sector workers invest nearly all their retirement security in the city’s ability and willingness, decades from now, to make payments to retirees who may live in another state. But no investment adviser would counsel putting all a customer’s money in one city’s municipal bonds. Even the safest investment can be dangerous.

Government workers may feel more secure after last week’s vote. But the constitution isn’t made of money.

This piece originally appeared at the New York Post

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Nicole Gelinas is a senior fellow at the Manhattan Institute and contributing editor at City Journal. Follow her on Twitter here.

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