Glass and Vanatta on New York State Pensions and "Fiscal Mutualism"

Michael Glass, Princeton University Department of History, and Sean Vanatta, New York University Gallatin School, have posted The Frail Bonds of Liberalism: Pensions, Schools, and the Unraveling of Fiscal Mutualism in Midcentury New York:

Between 1940 and 1965, state-level officials changed the relationship between two pillars of the postwar social contract: secure retirement and modern public schools. In the early twentieth century, state pension managers, following a prevailing investment regime we call “fiscal mutualism,” funneled the savings of government workers into government securities. Through direct participation in financial markets, pension officials lowered borrowing costs for local governments and helped lay the infrastructural foundation of modern America. Yet by the 1960s, pension managers had completely abandoned this investment regime. We document this transformation through a close examination of New York State’s pension fund. Throughout the 1950s, the comptrollers who managed the New York State Employee Retirement System (NYSERS), the nation’s largest state pension, underwrote the boom in suburban school construction by purchasing the municipal bonds of local school districts. However, in response to changes in national political economy, along with evolving norms of “fiduciary duty,” New York Comptroller Arthur Levitt, Sr., sought to deregulate the pension’s investment powers. Following significant regulatory changes, Levitt steadily disinvested from municipal bond holdings in favor of higher-yielding corporate securities. Pension deregulation thereby secured higher returns for state retirees, but it also forced local school districts to confront municipal bond markets without the backstop of fiscal mutualism. As school budgets, and the property taxes supporting them, became freighted with expensive interest payments, tax revolts became a permanent response to liberalism’s fiscal volatility. These transformations, we argue, stemmed from postwar liberalism’s dependence on financial markets to deliver retirement security, public education, and other social benefits. This underlying dependence on finance foreclosed more ambitious policy alternatives and ceded inordinate power to private actors, who prioritized profits over social welfare provision.

--Dan Ernst