Detroit's pension abuses similar to Harrisburg 2001 pension grab
Public pensions are again in the spotlight with Detroit’s bankruptcy. The attention is not helpful if public employee pensions are looking for public support.
It’s recently been made public that Detroit’s public pension board made “extra” payments from the funds’ investments for decades. The extra payments were known as “the 13th check” and were issued when the pension funds rate of return was better than the 7.9 percent target return. The pension trustees approved the extra payments, which the New York Times described as “skimming off excess returns.” By taking the so-called excess returns, Detroit’s pensions made billions of dollars of inappropriate payments, which drained money that should have stayed in the funds to grow with stock market gains.
According to the Times, Detroit was not alone in making extra, unwarranted pension payments. Pensions in New York City, San Jose, Calif., and Phoenix did something similar.
San Diego suffered a financial crisis in the early 2000s, in part because of years of skimming “excess” profits from the pension fund.
It’s been estimated that the extra payments from the Detroit pension funds cost several billion dollars, contributing to the city’s current financial crisis. An obvious solution is to reduce benefits to anyone who received the extra, unwarranted pension payments until the bogus payments are covered.
But common sense was ignored earlier this month when a state labor judge ruled that the city acted illegally when it stopped the extra payments two years ago. Despite this twisted state-level logic, there is hope that the federal judge handling the bankruptcy will see things differently.
The Times article notes that public pension funds are not like highly regulated private, company pension funds. Public pension funds are mostly governed by their boards of trustees. And in the case of the Detroit pensions, the board was dominated by organized labor, and those board members supported the extra payments, reportedly voting down anyone objecting to the inappropriate draining of the pension funds’ investment gains.
A similar unwarranted taking of above-average returns is what happened in Pennsylvania in 2001 when state lawmakers decided to give themselves a 50-percent increase in their pension payments. At the time, the stock market had been posting strong returns, riding the dot.com bull market. At the time, lawmakers said the pension boost would not cost taxpayers a dime. When word got out about lawmakers’ pension grab, other state pension beneficiaries complained, so lawmakers approved a 25-percent pension increase for most other state employees and public school teachers. Soon after skimming off the pension funds’ gains by voting for larger future payments to beneficiaries, the stock market crashed as the dot.com bubble burst.
That pension-grab action has doubtless contributed to the current crisis in the two big state pensions, which are about $40 billion underfunded.
Just as Detroit should reduce future pension payments to gradually take back the inappropriate payments, beneficiaries of Pennsylvania’s public pensions who benefited from the unwarranted pension grab of 2001 should be required to boost their contributions to the pension funds so that they pay for their increased benefits, not the taxpayers.
The abuse of the pension fund in Detroit, as well as in other major cities and states, only adds to the arguments for converting traditional pensions, called defined benefit plans, to 401(k)-style plans, which are known as defined contribution plans.
The trustees of these public pension funds should be held accountable — and prosecuted, if possible. No matter what solutions to the crises are pursued, taxpayers should not be expected to make up for money that was wrongly skimmed during good investment years.
