Unions: Pension Fund Shortfall An Urban Myth;
Skewer City Figures That Triggered Times Stories

By REUVEN BLAU

City union leaders last week ripped published reports stating that the city's pension funds face a potential shortfall of up to $49 billion based on long-term conservative, risk-free investment calculations.

MAYOR BLOOMBERG: Cooking up a crisis?

The unions contend that the Aug. 20 and 22 articles in the New York Times were driven by Mayor Bloomberg's claim that there is a pension crisis that must be addressed. They also pointed out that the projected gap according to City Actuary Robert C. North was based on investment figures that the city doesn't rely on.

'City Hall's Prints On It'

"It certainly has the fingerprints of City Hall on the story," charged Anthony Garvey, the president of the Lieutenant's Benevolent Association. "I'm sure the story was to crank up the public pressure not to enact other legislation that would positively affect the unions."

Mr. Bloomberg has maintained that the city needs "to modernize" its pension system for municipal workers by creating a less-generous tier for new hires or by establishing other retirement restrictions to reduce future costs.

TONY GARVEY: A ruse with a purpose.

The city's pension costs are projected to increase from $1.3 billion in 2002 to $5.5 billion in 2010. Currently at $4.7 billion, they are projected to rise 11 percent during the next fiscal year, to $5.2 billion.

At that point, however, the Office of Management and Budget believes pension costs will level off. Over the following three years, pension spending will crest at $5.6 billion in fiscal 2009 and then decline by $134 million the following year.

'Costs Keep Rising'

"It is true that the value of the pension funds, and the amount of money we have to put in, changes from year to year," Mr. Bloomberg said during his budget address in January. "But the underlying fact of the matter is that the cost of providing a pension when people are living longer is going up."

Union officials, however, scoffed at the Mayor's assertion that there is a pension crisis.

"We think recent newspaper articles on public sector pensions in New York City are inaccurate and extremely slanted and are likely to encourage dangerous attacks on pension plans for working people without shedding light on the real issues," Randi Weingarten, the chairwoman of the Municipal Labor Committee, said in a letter published in the Times.

RANDI WEINGARTEN: 'An attack on pensions.'

The city has long detailed its pension obligations by measuring the value of benefits that have been accrued compared to actuarial asset value rates, as required by the Government Accounting Standards Board.

'Follow the Standards'

But based on those calculations, each of the city's five retirement plan's shortfalls are practically always listed at or near zero. "We follow the appropriate standards," a person familiar with the process said. "Unfortunately, the standard as it applies to us isn't very informative." Mr. North is currently looking at different ways to measure projected costs.

Ms. Weingarten, who is also the president of the United Federation of Teachers, noted that Standard and Poors recently said that the city's pension plan was just shy of 100 percent funded.

The article and two subsequent editorials in the newspaper pointed out that many unions have convinced the State Legislature and Governor Pataki to sign into law various pension benefits, despite opposition from the city.

Labor historian Joshua B. Freeman explained that the circumstances of those deals were by design. "Unions have no choice but to use the political process if they want to address the issue," said the Professor at the City University of New York Graduate Center. "The process is you go through the Legislature. Some unions have been successful, some have not."

'State Running Amok'

But Dick Dadey, the executive director of Citizens Union, charged that the current system places pressure on the city's finances. "I think it's just another example of the state government run amok in creating unfunded mandates," he said during a phone interview. "Compensation issues should be negotiated at the bargaining table, not unilaterally mandated by the state."

Ms. Weingarten's letter noted, however, that most pension benefit enhancements were jointly negotiated with the city during contract talks. "There was no 'endrun' to the Legislature," she asserted, noting that in 2000 the city chose to negotiate pension supplements rather than wages. "Probably because the then-high level of assets in the pension systems would help defray the costs," she added.

The Times articles noted that in 1999 Governor Pataki signed legislation that allowed cops and firefighters who contract tuberculosis, hepatitis, or HIV to receive a disability pension worth 75 percent of their salaries. The measure presumes that the officers became ill due to their work.

Inflated Estimates?

The Bloomberg administration claims the bill costs the city $2 million a year. But Mr. Garvey said he did not know of more than three officers who have benefited from the measure since it was passed. "Much of the costs of these things are just so over-inflated," he contended.

The article labeled the Variable Supplements Fund for Correction Officers that was obtained in 1991 a "Christmas bonus," and stressed that it is scheduled to reach a $12,000 ceiling in 2007.

That fund, which despite its name actually provides a defined benefit, was created in 2000 after Governor Pataki signed legislation, much to the chagrin of then- Mayor Rudy Giuliani and many city and state unions. Because it is not strictly a pension benefit, it is not protected by state public-employee retirement law and can be reduced or eliminated.

The Correction VSF, which appears to be running dry, was based on similar benefits negotiated by the police and fire unions in the late 1960s. The city agreed to that enhancement after the unions allowed pension fund investments to be diversified, going from conservative bonds and other securities into stocks for the first time. In return, the city remitted a percentage of the stocks to the union VSFs when earnings exceeded a certain level.

A Mutual Benefit

"They had returns in which they benefited tremendously," Mr. Garvey pointed out, referring to the reduction in required city pension contributions that resulted from the funds' increased earnings. "It's clear to me that the intent of the [Times] story was to create sticker-shock journalism, to convince the general public that many of these things just fell out of the air. Many of these things were in lieu of wages."

For the Correction fund, the skim from the first year of the benefits generated approximately $100 million as a result of the late 1990s bull market. Those earnings have been used to finance the defined benefit over the past six years. But with the exception of the minimal gains of fiscal year 2004, stock earnings over the past few years have not reached the set level above the returns on government bond investments that triggers a skim.

Correction union leaders banked on the market continuing its upswing for at least a short while longer, which would have produced enough earnings to keep the fund afloat until 2019, when the benefit becomes guaranteed by law.

Ms. Weingarten called her members' pension benefits "reasonable." She noted that for most Teachers the city's cost will be 8 to 9 percent of payroll over their careers. "Research shows that Teachers reach their peak performance after 10 years, so a pension system that encourages them to stay in the city's public schools benefits all public school children," her letter said.

A Pre-Emptive Strike?

Mr. Garvey argued that the articles may have an adverse effect on pending legislation supported by labor organizations. The uniformed unions have successfully lobbied the State Senate and Assembly to pass legislation amending their terminal leave benefit to include a monetary payment option.

The Bloomberg administration, however, has opposed the measure, arguing that it will unnecessarily add to the city's already burgeoning pension and labor costs.

The bill, which initially received a City Council home-rule message, has been an issue the unions have tried to address via collective bargaining and through legislation for years.

Under the current terminal leave benefit, officers who work for 20 years are entitled to an average of two months of the earned time benefit, which essentially enables them to leave work for that period before retiring while still being paid. "Terminal" refers to the end of their careers.

But few cops and firefighters have actually been taking that time off before they retire because they want to work as much overtime as possible to increase their pensions, which are equal to 50 percent of their earnings over their final year on the job.

Mr. Freeman also questioned the impetus behind the Times articles. "It's not clear to me how serious the problem is," he remarked, referring to the overall pension issue. "It's always appropriate to look at this. But there seems to be an implicit push to cut back pensions; that informs some of these articles."