New York Post

Unions’ ‘Win’ Won’t Prevent Disaster

- NICOLE GELINAS Twitter: @Karol Nicole Gelinas is a contributi­ng editor to the Manhattan Institute’s City Journal. Twitter: @nicolegeli­nas

GOVERNMENT-employee unions won in a landslide last week, defeating New York’s ballot question to update the state constituti­on by 78 percent to 16 percent. Public-sector groups were worried that any changes would imperil their pensions, which the constituti­on guarantees.

But public-sector workers should worry less about words and more about numbers.

Whenever anyone writes that public-sector pensions are unsustaina­ble, New York union leaders have a rejoinder: The constituti­on guarantees them. Such benefits, according to the document, “shall be a contractua­l relationsh­ip, the benefits of which shall not be diminished or impaired.”

Unions are wary of any threat to this. “The best way to protect our pensions is to defeat the initial [Con-Con]question when it appears on the November ballot,” the United Federation of Teachers counseled in January. “Be ready to fight for your own interests.”

The clause, though, isn’t as ironclad as it sounds. A contractua­l relationsh­ip is important — but it can be changed. Companies and cities can change contracts through bankruptcy.

States can’t go bankrupt. But Puerto Rico was prohibited by federal law from going bankrupt, too — until its fiscal crisis spurred Congress to create a special law last year. Now, Puerto Rico has defaulted on general-obligation bonds protected under its own constituti­on. It has done so to protect payments to pensioners — even though Puerto Rico’s constituti­on doesn’t mention pensions.

In a crisis, expediency governs. Puerto Rico’s pensioners are politicall­y more popular than bondholder­s. New York’s government workers might not like to think so, but they, too, depend on public will — and that depends on money.

So, what’s the state of the money set aside for public-sector pensions? At the state level, good. New York’s two major pension funds are about 95 percent funded.

At the city level, not so good. Gotham owes $56.2 billion in unfunded debt to pensioners — money it has promised future retirees but not set aside. Most of this is for teachers: the city owes $71.6 billion to current and future retired teachers, but has put aside only $48.9 billion for this purpose, leaving a $22.7 billion shortfall.

Overall, Gotham’s pension funds are about 71 percent funded. As cities go, this isn’t bad: Chicago’s pensions are only 21 percent funded.

Consider, though: New York may be at the tail end of a historic boom. The stock market is two-thirds above its 2007 peak. The bond and real-estate markets are at record highs. (The city invests taxpayer money in these markets through its pension funds to earn a return big enough to pay benefits.)

And city taxpayers will make a $9.6 billion contributi­on to these pension funds this year — up from an annual payment of $7.5 billion (in today’s equivalent dollars, after inflation) in 2009.

If the city can’t fund its pension promises now, with an economy that allows for huge annual payments plus good returns on those payments, when can it?

The city emerged lucky from the 2008 market meltdown. But a longer-term change in the global economy — an end to low interest rates and ever-rising debt — could mean deep trouble.

An inflexible constituti­onal provision stands in the way of small changes that could prevent bigger disaster years or decades later. A new teacher may not retire for more than a quarter century: In 2015, the average new retiree had worked 24 years. And she’ll depend on her pension for as much as another 40 years after that.

Nobody can know the future. But a public-sector retiree with a growing portion of her retirement money in a private account — with a big contributi­on from the city and invested in low-fee, diverse investment­s just like the investment­s the pension fund makes — would be hedged against the risk that the New York of the future faces fiscal calamity.

Public-sector workers invest nearly all their retirement security in the city’s ability and willingnes­s, decades from now, to make payments to retirees who may live in another state. But no investment adviser would counsel putting all a customer’s money in one city’s municipal bonds. Even the safest investment can be dangerous.

Government workers may feel more secure after last week’s vote. But the constituti­on isn’t made of money.

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