Pensions of Mass Destruction

Imagine the implications for the New York Yankees if Major League Baseball at the end of this year announced that it was instituting a hard salary cap under which no team could have a player payroll exceeding $100 million.

By the time the Yankees got done paying the first five batters in their lineup, there wouldn't be enough left to cover Mariano Rivera's salary, never mind the rest of the team's pitchers and hitters. It would be a truly alarming prospect, except that there is no chance that it will actually happen.

A similar type of what-if exercise was recently undertaken by City Actuary Robert North at the request of the Bloomberg administration. He looked at future earnings for the five city pension systems if their assets were placed in risk-free investments, rather than having a large portion of their portfolios in stocks. Under this calculation, he concluded that there would be a long-term gap of $49 billion between the systems' assets and its obligations to current and future retirees. From an academic standpoint, it's an interesting finding. But it's also meaningless, because there is no way that this administration or any other is going to change the investment strategy for the five pension systems to take them out of the stock market. City officials nearly 40 years ago gave police and firefighters special benefits known as Variable Supplements Funds to persuade their representatives at the Police and Fire Pension Funds to vote for investing in the market, because this was the best long-run method for building up those funds.

So how, then, does one explain the New York Times's decision to place a story on Mr. North's findings on the front page of its Sunday edition Aug. 20, treating them as if they foretell a looming crisis? One theory is that the ghost of Judith Miller, the self-proclaimed Miss Run Amok who was suckered by the minions of Vice President Dick Cheney into writing a series of stories making an overwhelming case that Saddam Hussein possessed weapons of mass destruction, is still roaming the halls of the Times long after its editors cast her out.

Two Times pieces on the imaginary $49 billion gap were sandwiched around another one that focused on what could have been a David Letterman list of Top 10 Pension Giveaways that public-employee unions have secured from Albany over the years. The shock value of this story was somewhat diluted by the fact that most of these supposed boondoggles occurred at least six years ago, and were written about extensively then.

It is clear what the Bloomberg administration's agenda is in generating stories about getting pension costs under control. The initial Times story noted that the city in 2001 paid $1.1 billion into the five pension systems but is paying $4.7 billion this year.

But the rapid growth in city contributions is somewhat misleading, because the amount paid five years ago was far lower than it had been a few years earlier. The stock market surge of the late 1990s produced deals between the Giuliani administration and its unions that were also reflected in statewide policy; among them was the agreement to allow the city to significantly reduce its annual pension contributions while agreeing to several pension-related benefits for municipal workers, including the permanent cost-of-living adjustment that also was granted to state pensioners.

Once the stock market bubble burst, diminished investment returns forced a sharp increase in city contributions. Earnings have since improved enough to stabilize the funds with much smaller future additional payments by the city. Some of the pension benefits granted in the late 1990s were questionable. The clearest case, highlighted in one Times piece, was the granting of a Variable Supplements Fund to correction officers, who unlike cops and firefighters did not have the leverage of control over whether their pension fund could invest in stocks. It is one thing, however, to bring attention to an example of government largesse that is unwise public policy, and quite another to suggest that the pension system is in rocky waters based on a hypothetical that bears no relation to actual investments by the funds.

Just as Vice President Cheney sought to use the WMD issue to build a case for war in the most prominent American newspaper, Mr. Bloomberg seems to be seeking to influence public opinion toward the creation of an inferior pension plan for future city workers. We just can't figure out why the Times was not more wary about being used in this way after having been burned before by a phantom scenario.