More Columns
BENEFITS BEAT
A Dirty Little Secret Retro-Pension
Secrecy and retroactive benefit giveaways are a toxic mix.
Questions, success stories or anecdotes about benefit issues in government? Girard Miller wants to hear from you.
E-mail him
It's got to be stopped. When politicians and unions conspire to give away pension increases on a retroactive basis, and cut their deals in private, taxpayers have a right to be outraged. And it's happening again, this time in Fullerton, California.
As I have explained before in a previous column, the practice of awarding pension benefits on a retroactive basis is the devil's doing. Retroactive pension increases neither attract nor retain employees. They serve no purpose except to buy favor with incumbent union members in order to get a contract signed — at the expense of future taxpayers who don't even know what hit them.
There is something wrong with governmental decision-making when public leaders make secret decisions to give windfall benefits to selected employees, and leave behind them a huge bill for somebody else to pay long after they have left office. It completely violates the concept of intergenerational equity, and there is clearly little or no value to any taxpayers at any time. So it's no wonder that these practices have stirred up a hornet's nest among the taxpayer associations. They have a right to be mad.
There are two solutions: (1) fix the government-in-the-sunshine laws and (2) fix the accounting rules. Here's how:
Across the country, states adopted "open-meetings" laws in the 1970s in a wave of popular support for better government. These laws require that most decisions by public bodies be made in public meetings with sufficient advance notice for the public to participate in the process and voice their opinions. But they left exceptions — some would say huge loopholes — for public officials to conduct business in private on such matters as real-estate negotiations, litigation discussions with legal counsel, individual personnel issues and collective-bargaining strategy. The theory — and it's valid — is that certain matters would be damaging to individuals or contrary to the public interest if disclosed before deals are made. For example, in the purchase of property for parkland, it makes no sense for the counterparty to know what the city council would pay for land by reading the newspaper. Likewise, it is generally unwise to conduct collective bargaining through a newspaper — it just pushes the two sides apart further and invites gamesmanship.
But in the case of retroactive pension benefits, there is something fishy about how these exceptions to the open-meetings laws are being conducted. By putting the actuarial analysis of costs behind closed doors and keeping taxpayers and the media in the dark, a disservice is done to today's and tomorrow's taxpayers. The "executive-session" exceptions need to be revised to require that any retroactive pension or other benefits increase that will be deferred to future taxpayers be discussed in public, and voted on by roll call, before inclusion in a labor agreement. If the city council then wants to cut a deal that gives employees sweeter pension benefits for services provided in prior years, to be paid for by tomorrow's taxpayers, then we have to allow the elected officials to make that mistake and be held accountable for it.
Apparently, some Fullerton council members are now advocating a reform of the California open-meetings act, right along these lines. This movement will follow efforts by other cities to obtain legislation that requires advance disclosure of the costs of pension increases before they are awarded, such as a bill proposed recently in Illinois.
The other solution involves accounting rules. Current pension accounting standards permit state and local governments to amortize newly authorized pension obligations over 30 years into the future. This means that future taxpayers will pay for services rendered to their parents' generation by employees who have since retired or even died. Nobody would think about selling a city hall bond issue with principal payments delayed for 30 years after the building was built, but that's what this amounts to. It's bad accounting policy. As the Governmental Accounting Standards Board conducts its upcoming review of public-pension accounting standards, this practice should be addressed.
My professional opinion, based on considerable review of this issue, is that accounting standards should be tightened to require that when retroactive pension benefit increases are awarded, the entire resulting unfunded liability must be expensed as an operating cost that same year. Nothing would more effectively wake up public officials than requiring them to book the entire expense when they make these "retro" deals. That would enable today's taxpayers and the media to see the true cost of these giveaways, and hold the politicians accountable. It would also forever remove the incentive for labor unions to make tradeoffs between a dollar or two of lower pay today in exchange for a hundred dollars of higher pay in the future — which is essentially what is going on here.
Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. His general market observations and institutional investment strategies are his own and should not be construed as investment advice or recommendations concerning specific securities.
More biographical information.