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Steven Bavaria writes about finance, economics and politics, drawing on his forty years experience in international banking, credit, investment, human resources/training, journalism and public service. Now retired from his "day job" on Wall Street, Bavaria lives mostly off his... More
  • New York State’s most important election: comptroller’s race! (And why Cuomo should be rooting for his own guy to lose) 0 comments
    Oct 25, 2010 6:20 PM
     It seems like a foregone conclusion – according to the lopsided polling numbers – that New Yorkers will have Andrew Cuomo as their new governor. But the really important question is: Will enough Democratic and independent voters split their tickets and vote for the Republican comptroller candidate – Harry Wilson? Giving the state a professional, honest, motivated comptroller – one who actually understands what has to be done to bring the state’s wildly out-of-control public pension system under control – is the key to saving New York State from bankruptcy, and saving our children and grandchildren from a tax burden that will make our own current sky-high taxes seem modest by comparison.

     

    Ironically, electing the highly qualified Republican comptroller candidate, who actually has a chance to get the job done and save New York’s “fiscal posterior,” probably also represents Andrew Cuomo’s best chance to actually succeed as governor and, ultimately, be perceived as a credible candidate for president. In other words, it will be hard for Cuomo to mount a credible run for the White House if the state goes bust on his gubernatorial watch.

     

    Does Cuomo realize that it is in his own personal best interest – as well as that of New York State and its citizens – that his own party’s candidate for comptroller (Tom DiNapoli) should lose and that Republican comptroller candidate Wilson should win? Will we have to wait and read his memoirs some day to find out, or will it become obvious over the next week?

     

    Voters finally get it: pensions matter

    It has finally begun to dawn on many Americans – including those who wouldn’t have a clue what a word like “actuary” means – that we, our children and our grandchildren will be paying taxes through the nose for generations to come if we don’t get our pension commitments to state and local employees under control. You don’t have to be a pension expert to know, when you read in your local paper that public employees with salaries of, say, $75,000 per year are able to retire at age 55 and collect taxpayer-paid pensions for the rest of their lives of upwards of $100,000 per year (i.e. more than they made while working!) that something is wrong. And when you multiply that by the tens of thousands of public employees currently working and/or retired who will be collecting inflated benefits like that – far more generous than anything a typical taxpayer receives – until the middle of this century and beyond, the mind boggles at the size of the tax burden we are passing on to future generations.

     

    This is what the New York State comptroller’s race is all about this election year. The comptroller – not the governor – is responsible for managing the state’s public pension system. The comptroller’s office has traditionally been a job for a career political hack – one just smart enough to know how to use the system for political and personal gain, but not creative or courageous enough to want to fix it. Sometimes they go too far in their quest for personal gain and get caught, like former Comptroller Alan Hevesi, who just pleaded guilty earlier this month to corruption charges. But even for typical comptrollers, like the incumbent career politician Tom DiNapoli, there is little incentive to rock the boat and fix the system, since to do so would upset powerful public employee unions, whose funding and support is considered crucial to winning elections.

     

    Private sector figured this out long ago

    Most workers in the private sector have a clear understanding, from their personal experience, about the difference between so-called “defined benefit” pension plans, and the alternative, “defined contribution” plans. Defined benefit plans were just that; the “benefit” you were going to receive after you retired was fixed, based on a formula that included how much you made, how long you worked, and how old you were when you retired. Most plans were designed to pay retirees about 60-70% of their pre-retirement income, on the assumption that for most people their cost of living later in life was lower than it was when they were younger (i.e. by then the kids were grown up, house and college were paid for, etc.)

     

    But “defined benefit” plans were very expensive and difficult to manage, so most private sector companies have phased them out or scaled them back. They have replaced them with “defined contribution” plans (like 401Ks and similar programs), where the amount the employer pays in upfront is fixed, but the value of the accumulated funds in the future, at retirement, is solely a function of investment performance. Defined contribution plans, therefore, can result in retirement payouts that are larger, smaller or the same as, payouts from a traditional defined benefit plan, depending on the amount of the initial contribution and the investment results. One big advantage of defined contribution plans is that they are “portable” and can be moved from company to company as an employee changes jobs. With traditional plans an employee loses some or all of the pension benefit if they don’t stay at the company for their entire career, a rare occurrence in an era of frequent layoffs, cutbacks and job changes.

     

    Sharp pencils in private sector; none in government

    This move from the essentially uncontrolled costs of traditional pensions to the more disciplined 401K-type pension plans was spurred by sharp-penciled corporate staff types who realized that companies and their employees would both benefit from a more creative approach to pension design and funding. Unfortunately, no such motivated group exists in government to push for cost-savings or reform. Just the opposite, with the politicians charged with making pension plan decisions generally in the pockets of the public employee unions. This explains why public pension plans have been getting richer and more extravagant at the same time private plans have been getting leaner and more efficient.

     

    New York voters at a crossroads

    New York has one of the largest pension plans in the country, and hence, one of the biggest fiscal challenges. It is also the financial capital of the country, so if it manages to come up with a solution – political and financial – to its pension problem, it could serve as a model to the rest of the country. Unfortunately, with pension plans and the contracts that define the funding and costs associated with them, the devil is in the proverbial details. Most voters and politicians don’t have a clue how they work or how to fix them. Those who do generally are lobbyists or lawyers who work for the unions and don’t want to fix them.

     

    This year, the Republicans have nominated someone – Harry Wilson – who has the smarts, the background, and most of all, the motivation to actually begin to fix the problem. Wilson’s campaign has published a 53-page analysis of New York’s public pension crisis and the steps needed to address the issues before it’s too late.

     

    The irony of the situation is that Democratic candidate Andrew Cuomo is running way ahead of his Republican opponent Carl Paladino, in pre-election polls. Assuming he wins, Cuomo, later on, will probably run for president. To do that successfully, he will have to show that he actually was an effective governor in New York, which means that he cleaned up the fiscal mess. And for that he needs Harry Wilson – the Republican – as comptroller, not Democratic candidate Tom DiNapoli.

     

    Andrew Cuomo is smart. He’s also ambitious. So he clearly wants to be a successful governor and have a shot at moving on to the White House. It will be interesting to see whether he is savvy enough to encourage his base to split their tickets and vote him into office, along with the Comptroller he (and New York) needs to solve its looming public pension problems.



    Disclosure: No positions
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