An Open Secret: MTA Capital Costs Have Soared to Pay for Underfunded Metro New York Construction Union Pensions

I worked in capital budgeting for New York City Transit in the early 2000s, and was shocked to see the price of capital projects soar — despite a recession.   The MTA’s construction costs have continue to soar ever since, contributing to the agency’s $41 billion in debt and deteriorating infrastructure, and this has become a political issue since the New York Times series on the decline of the subway late last year.  Recently, MTA head Joe Lhota promised to implement reforms to reduce those costs.

“On some projects the MTA has shelled out seven times more money than European transit agencies have paid for similar initiatives. Lhota said the agency is working to reduce red tape and the high risk that causes contractors to inflate their bids on MTA projects or not bid at all. In theory, increased competition would drive down costs.”

Or at least admitted costs, since “reducing contractor risk” means reducing the MTA’s ability to get restitution when the contractors fail to perform.

What I didn’t know back in 2004, but have since learned, is that the MTA’s contractors have been jacking up their bids in large part not to pay for current workers doing current construction, but rather to pay for the underfunded construction union pension plans. This is something the MTA isn’t talking about, because both the construction unions and the real estate industry, two of the most politically powerful interests in New York, each benefit from the shift at that private debt to the public sector in general, and the MTA in particular.

The crisis in the pension plans of New York area construction unions is part of the broader crisis in “multi-employer” pension plans across the country, a crisis that has seen benefits for existing retirees cut to save plans from insolvency.

Among the plans recently applying to cut benefits for existing retirees is New York’s Teamster pension fund. The Central States Teamster pension fund is the largest to have cut its retiree benefits.

Multi-employer pension plans are, or were, common in industries with large numbers of smaller firms, such as construction and trucking. Typically managed by unions, these provide benefits to employees of all the firms.  But when the plans become underfunded, if some of the former member firms go bust or go non-union the remaining unionized firms are stuck with a soaring share of that debt.

This is an under-the radar-issue, with many unions seeking a debt-financed federal bailout. It is kept under the radar because those who benefit from multi-employer pension plans also benefit from Social Security, and the bailout would end up being paid for younger workers who don’t get any pensions at all, and are facing cutbacks in Social Security as that program goes bust.  Thus a single public hearing was held in a single location on a bailout proposal not long ago.

About 5,000 people rallied outside the Ohio Statehouse on Thursday to urge Congress to aid more than 200 multi-employer pension plans at risk of failing. They came from as far as Utah. They carried signs and sang union songs. And they shouted their message over and over again: Fix it.

The pension funds cover more than 1.3 million retirees nationwide and more than 60,000 in Ohio, including truck drivers, bakers, musicians, miners and flight attendants. If the funds’ obligations exceed their assets, pensioners’ benefits will be slashed. Taxpayers could be on the hook if they fail because the plans are backed by the federal Pension Benefit Guarantee Corp.

The United Mine Workers of America pension plan is on the brink of collapse.   MWA International President Cecil Roberts said the government needs to step in after creating the conditions for the funds’ struggles and bailing out the banks behind the financial crisis that led to the funds’ investment losses on Wall Street.

Actually, by re-inflating asset values with zero percent interest rates, the federal government helped make the pension plans better off than they would have been otherwise, along with Wall Street and the rich, at the expense of younger people who could have benefitted from lower-priced investments for their savings. So it if wasn’t Wall Street bailouts that sunk these pension plans, what did?

“By the late 1990s, many plans were fully funded. In this environment, unions were concerned that employers would stop contributing to the plans due to limits on the tax deductibility of employer contributions to fully funded pension plans. They were wary of interrupting the flow of contributions, because restarting contributions when markets cooled would require reducing other components of compensation. To ensure that contributions remained tax deductible for employers, plans offset the increased funded levels by repeatedly increasing benefits. The good times ended with the bursting of the dot-com bubble in 2000.”

Actually, the plans were not fully funded. They only appeared to be because of the bubble.  Asset prices were so high that lower returns going forward were guaranteed, and the pension plans could have simply reduced their future expected rate of return to avoid the tax consequences of appearing to be fully funded and ensure ongoing, responsible contributions, as I noted here.

But instead, Generation Greed union leaders and members decided to enrich the retirement benefits of those cashing in and moving out to far more than those older workers had been promised– just as in the public sector. And with lower employer contributions due to that false “full funding,” private developers got a break on construction costs.  This was covered up until it couldn’t be covered up anymore.   And now the question is, who will be stuck with the massive bill for those benefit enrichments, and the nearly two-decade cover-up?

New York City’s construction unions followed the pattern of enriching pension benefits for those cashing in and moving out in the late 1990s. I recall talking with a fellow father of a girl on my daughter’s soccer team in the early 2000s.  He worked installing HVAC ducts, and was probably a member of the Sheetmetal Worker’s Union.

He told me that there had been a big pension increase for the retired and near retired, and soon afterward the union started agreeing to cutbacks in take home pay for younger workers to pay for it. As in the “screw the newbie, flee to Florida” cycle for New York’s public pensions.  I haven’t spoken to him for years, but for all I know he has been further squeezed, union contract after union contract, for a decade.  As is happening all over the country in the public and private sectors alike.

After having been lulled into a false sense of security by numbers that overstated the health of the fund while understating the cost of increasing benefits, the County Board of Supervisors in 2002 passed a 50 percent benefit enhancement for all county employees. But when the inevitable market downturn hit — a certainty for any long-term investor like SDCERA — paying the full cost of the 2002 enhancement fell to today’s taxpayers and public employees, who never received any of the benefits they are now being required to pay for. 

In addition to forcing both groups to pay more, while getting less, the county also repeatedly cut the benefits offered to new hires to get its soaring retirement costs under control.   After reducing the retirement benefits offered to new hires in 2009 and again in 2013, the county earlier this year approved a plan to cut new employees’ benefits to the lowest level allowable under law, which are worth roughly half as much as those received by pre-2009 employees.

To avoid paying for past construction union pension benefit increases and past underfunding in metro New York, private developers are opting to use non-union contractors, or “open shop” arrangements where many of the workers are non-union. This shifts even more of the cost of pension underfunding to public jobs, which continue to use union workers, an open secret in the real estate industry.

While cracks are appearing in the commercial market generally, getting open shop into public works will be the greatest challenge, and it might explain why the unions have been sanguine about open shop’s sudden visibility.

Public-works jobs require workers be paid prevailing wages by state law. The unions set wages in its collective bargaining agreements with construction companies.

“New York has been, is and will continue to be a robust place for members of the building trades to build our city, region and state,” said Carlo Scissura, the president of the New York Building Congress. “The building trades continue to build New York in a great way.”

According to an Empire Center for Public Policy report in April, the average prevailing wage with benefits for a union construction worker on a nonresidential site is about $75 an hour, an increase of nearly double from the $40 an hour for a site with both union and nonunion labor.

Operating engineers in Gotham bring in an average of $114.5 an hour ($74.20 base salary and $40.30 in benefits), and laborers average $66 per hour ($36.47 in base salary and $30.13 in benefits), according to that report. Meanwhile, carpenters average $96.76 an hour, and electricians bring home $103.44 per hour.

Besides the prevailing wages, most super-large government projects have project labor agreements (PLA), which tend to require a certain percentage of union workers on job sites.

“I think when you look at public works, you look at the large, multibillion dollar projects that the government is building, government will always find a way to give that to the unions,” said Brian Sampson, the president of the Empire State Chapter of the Associated Builders and Contractors, a group that represents approximately 130,000 workers not affiliated with unions in New York City.

“You’ve got the MTA, LaGuardia, Penn Station, bridges, Javits Center, Second Avenue subway, basically any large public project [Gov. Andrew] Cuomo has stipulated they are going to build will be built by PLA. But the governor is a big beneficiary of labor contributions and labor support.”

One point construction experts are making, however, is that taxpayers are paying premiums for these public projects since they aren’t being done open shop. The Empire Center report calculated that the government ends up paying 25 percent more for public projects in New York City because of the high prevailing wages.

This is the cost no one wants to talk about.   The NY Times article on high construction costs for MTA capital projects pointed to high costs for current workers, implying their wages and benefits should be cut further.  But did not disclose that much of the inflated cost is actually for past workers on public and private projects done ten, 20 and 30 years ago.   That basically the New York City subway is being pillaged to pay for yet another self-dealing score by Generation Greed.

The real estate industry is demanding that either current construction workers accept even less to pay for the richer deal scored by past construction workers (and managers), or going non-union – leaving the MTA with more of the hole to fill.

To hire union or to go open shop, that is the question — at least for many developers. While that has long been a loaded question, it’s never been more fraught with political ramifications and controversy than it is now.   With razor-thin margins in a market marked by softness and uncertainty, nonunion and open shops (those that employ both union and nonunion workers) seem to be eating up market share from union hardhats.

And the escalating dispute between one of the city’s biggest developers, Related Companies, and biggest union trades — Building and Construction Trades Council of Greater New York — has put the tension in the spotlight yet again.   The BCTC — which represents 100,000 New York City workers from various unions — has been picketing Related’s 50 Hudson Yards for more than a year because the developer hired some nonunion construction workers.

This spring, the developer responded by slamming the group and its head, Gary LaBarbera, with two lawsuits, accusing BCTC of inflating construction costs and using “thug-like” tactics during demonstrations, which disrupted work at the site. LaBarbera called the allegations “bullshit” and recently said that the Related dispute was an anomaly and that relations between unions and developers are strong. But some developers and general contractors say unions need to become more flexible on pricey mandatory benefits and pension contributions.

This source reports developers get a 20% to 25% discount by hiring a nonunion shop. Thanks to the cost of funding pension plans, NYC construction costs $362 per square foot – “the highest dollar amount worldwide and a key driver in pushing developers to hire nonunion workers. San Francisco clocked in as the second priciest at $347 per square foot.”

And with much of that going to retired workers in Florida and new workers facing lower wages and benefits, it isn’t even enough to attract quality young people to the trades.

The New York Building Congress says that about 56 percent of all New York construction workers earn less than $50,000 annually. On average, according to LaBarbera, BCTC members earn between $75,000 and $80,000 per year on average.

Back in the 1980s and early 1990s, “prevailing wages” on public projects meant just that – wages. Much of the affordable housing built and re-built under the city’s mass building program at the time saved money by paying union rates in cash, but avoiding some of the higher cost of rich union benefits.  But at some point the unions got that changed, and now “prevailing wage” refers to pension benefits too, even though the wages are no longer really “prevailing.”

In total , according to The Real Deal, the unfunded liabilities of the top 25 New York-based construction union pension funds was $12 billion as of last year.

Most of the pension funds — which were hit by the recession and are struggling with shrinking market share — had less than half the money needed to make good on their benefit promises to current and future retirees.

Who should have to sacrifice in what way to make up for that $12 billion-plus hole? What would be fair?  To get to fairness, the question would have to be addressed openly, rather than as an open secret.  But in an open discussion the question would be asked “who benefitted?”

Older generations of construction workers, who got far richer retirement benefit than they had been promised.

Older and former construction companies, which made higher past profits leading to greater executive pay due to lower employer pension contributions – with some of those executives also getting retroactively enriched pensions themselves.

And developers of past New York projects, who might have gotten a break on construction prices as a result of lower past employer pension contributions. Including, ahem, President Trump.

But Generation Greed doesn’t want to make sacrifices in the present to help pay for its past pillaging of the future. And it doesn’t even want to face the fact that they are forcing the generations to follow, who are less well off, will sacrifice even more to make up for what they had done.  So everything is swept under the rug as long as possible.  And then shifted to what matters least to the most powerful people in New York.

The New York City subway and the people who ride it. With that $12 billion hole in the construction union multi-employer pensions, one might as well say the MTA’s debt is $53 billion and not $41 billion.   Plus the funding deficits in the pension plans for its own employees.

Andrew Cuomo and Joe Lhota surely know where the excess money from the MTA’s inflated construction costs is really going. So does the New York Times, though it chose to emphasize the high cost of current workers in its article on MTA construction costs.

Who doesn’t know?   Probably New York City Transit President Andrew Byford, newly arrived from Great Britain via Canada.  Just so he knows what he is dealing with, someone should send him a link to this post.

3 thoughts on “An Open Secret: MTA Capital Costs Have Soared to Pay for Underfunded Metro New York Construction Union Pensions

  1. Richard Layman

    The Village Voice broke the story that a big reason for service problems on the subway was a systematic reduction in speeds, the installation of signal switches that would be tripped by trains going pretty slow. And how reduction in speeds has contributed to lateness, inability to catch up after major service interruptions, etc. You should reach out to the transit beat writer at the Village Voice.

    1. larrylittlefield Post author

      They were installing all the Grade Timers back when I was at NYCT. “Safety is our number one goal.” Perhaps, under pressure from the FTA, they went overboard. If so, that’s easy to fix.

      But there are always tradeoffs. How many wrecks have their been on the LIRR, MetroNorth, Amtrak, New Jersey Transit, the DC Metro, etc over he past 20 years, compared with the subway?

      The tradeoff that matters now is the past, and those who controlled it, compared with the present and future, and those who will live in it. They have fallen behind on replacing signal systems to the point where they are starting to fail frequently, and with $41 billion in debt and operating deficits, basically ongoing normal replacement under the MTA capital has halted. Consider the implications of that, a decade or two into the future.

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