Public pension politics must change

PETER KIERNA, Times Union

By PETER KIERNAN, Commentary

Tuesday, November 20, 2012

Fiscal stress runs downhill and the collecting points are local governments. New York has many cities and counties that are facing enormous fiscal strain and exemplify that structural budget deficits and years of unwise fiscal practices in response to declining populations and shifting economic realities can reach a breaking point.

The Great Recession and the unprecedented revenue crisis it occasioned badly hurt local governments. However, the crisis did not cause the perilous financial condition as much as it exposed it, and improved economic circumstances will not resolve it. In that sense, the Great Recession could be termed the Great Awakening.

In the private sector, when a business reaches a point where revenue increases or expenditure reductions cannot bring it to sustainability, the legal system is accommodating. Mergers, consolidations, buyouts or dissolutions can be accomplished rapidly, and if those are not viable measures, there is easy access to the bankruptcy courts. Regardless of whether an entity is privately or publicly owned, shareholders have the means to effect decisive change.

But in the public sector, the legal system resists change and taxpayers, who are the analog to shareholders, do not have ready ways to cause dramatic adjustments to policy. Elections seldom are clear and often are schizophrenic; public officials can experience retribution and substitution, but there is not necessarily substantive change.

Public pensions, rightly or wrongly, are blamed by many as a cause of local government distress because their costs are unrelenting. They illustrate the legal obstacles to effecting public will. Notwithstanding that nearly all opinion surveys indicate overwhelming support for reductions in public employee retiree benefits, pensions in New York are guaranteed in the state constitution. A pension is a contract between government and an employee that becomes effective on the first day of employment. Thereafter that contract cannot be diminished or impaired.

That is why so-called pension reform in New York always is geared to new hires. New pension tiers such as those enacted in 2009 and 2011 may save billions of dollars as their proponents claim, but those savings will not be realized for decades.

In the interim many local governments face near insurmountable employee costs that "crowd out" other valid calls on the public fisc. These costs are not avoidable; if a local government fails to make its annual required contribution to the state pension fund, its obligation is paid by the withholding of state aid. Thus, pensions are creating contests: between payments to lenders to governments and payments to government employees; between taxpayers and public employee unions; and, unhappily, between the vulnerable who are beneficiaries of safety net programs and retirees who are beneficiaries of public pensions.

The pension contract, like any contract, could be changed by agreement. But public employees will not give up benefits they have earned and fought for and there is no means legally to force concessions. Other creditors of governments such as debt holders also will not make concessions and also cannot be forced to — unless a government collapses and a bridge too far has been built.

The larger point, then, is that reform necessarily will have to be achieved politically. Laws that now are barriers to change may have to be recast.

Peter Kiernan is counsel to the state budget crisis task force. He is also of counsel at the Schiff Hardin law firm.