Yesterday in Detroit a federal judge drove a stake through the heart of public pension funds in the United States. If this decision is upheld on appeal, every public pension fund will have to reevaluate its funding and investment assumptions. From now on any shortage could easily fall on the backs of the public employees and retirees.
It is ironic that in the mid 1970's when New York City came close to bankruptcy, it was the city's pension funds that bailed out the city.
Previously public employees and retirees reasonably felt that state constitutional provisions protected their pensions. That is no longer true.
Public employees and retirees must become totally aggressive so far as protecting their pensions. There is no legal protection for their pensions. Bankruptcy will trump any legal protection you thought was there.
With this decision it is not clear what type of protection the individual pension trust may have. However, even if the trust is outside the reach of the bankruptcy court, the public employer will be able to walk away from any contractual obligation it has to the employees and retirees. The particular state constitution is null and void in federal bankruptcy court. Unlike bond holders who knew that there was a bankruptcy risk, employees and retirees were totally blindsided.
Ok, what needs to be done going forward. Employees and retirees need to force the public employers to properly fund the pension trust every year and the plan trustees to do a better job investing the assets of the fund. This is most acute for municipal pension funds. You don't see Michigan running into bankruptcy court.
What about here in New York City? Since 2000, New York City with the help of the NYCERS and TRS actuary has been underfunding the five city pension funds, not as bad as New Jersey or Illinois, but still not contributing enough. On top of the underfunding, which has a very natural motivation, the NYCERS trustees, and most likely the trustees at the other four pension funds, have made a mess of the investment performance over the last 14 years.
In the past employees and retirees were far too casual about these issues thinking that it was the city's problem if things went bad. No more. It is their problem, if things go bad. The city can now walk away.
The assets of the NYCERS pension fund belongs to the employees and the retirees, not the city. When it comes to money, you trust no one. I just posted a "to do" list for the new NYCERS chair. I need to add another item. Ask the actuary how does he propose to make up the shortfall that his interest rate assumptions have caused at NYCERS since 2000. Of course, the union representatives on the Board of Trustees should have been on top of this fiasco all along.
But just to get everyone focused on how these problems happen consider the following. From 1996 to 2009 Mike Musuraca sat for DC-37 at all the investment meetings of the NYCERS Board. From my experience as the NYCERS executive director, Musuraca was the most forceful trustee on investment issues. In mid 2008 the NYCERS Board voted to hire Blue Wolf as a private equity manager. On January 23, 2009, Musurarca left NYCERS to work for Blue Wolf. The members and retirees of NYCERS can not allow this type of shit to continue.