Thoughts on Rolling Stone, Matt Taibbi and "Looting the Pension Funds"

Well, I did not really set out to write “public pensions” week on my blog, although it ended up working out that way, solely because two different articles on the fiscal crisis impacting government pensions caught my eye earlier this week. Having, for better or worse, gone down that rabbit hole, though, I now feel obliged to discuss Matt Taibbi’s new article in Rolling Stone on the municipal pension crisis, which, serendipitously, appeared on-line this week.

Taibbi, for those of you who don’t know his work, is, at a minimum, whether you agree with him or not, a talented polemicist. And that is not to damn with faint praise: this country was founded, in part, by great polemicists. And to be fair, there is certainly no doubt that you can take the facts of the public pension crisis and paint any of a number of pictures, all of them accurate to some degree; Taibbi presents his own impressionistic take on those facts, and his portrayal, like many other views of this problem, has some truth to it. Indeed, in many ways, the public pension crisis reminds me of one of those old trick pictures, that if looked at one way you see one thing (like an old woman’s face) and looked at another way, something else (like a young woman’s face).

The one consistent fact that holds true across all of the competing narratives, however, is this: public pensions are in a whole lot of trouble, and truly are, as a general rule, facing a fiscal crisis. The narratives vary on who is to blame for this, on how to fix it, and who should bear the costs of fixing it, but they don’t vary on that basic fact. Taibbi points to decades of pension underfunding by politicians as the primary cause, and argues that the proper solution to that is not to cut benefits back to a level that can be funded by the amounts left in the plans. His diagnosis and solutions, unfortunately, essentially fall in the category of locking the door after the horse has run off; although he targets the fact that, legally, state and municipal governments were able to avoid funding pension plans properly for years, there is no magic trick nor time machine that will allow anyone to go back and fix that. It falls into the category of what’s done is done, and the question becomes what to do now: absent some sort of massive federal bailout of underfunded public pension plans, the choices become reduce benefits below what was promised or tax the living heck out of current taxpayers to make up the difference. I am not even going to pretend to have a ready answer on how to address that problem.

Going forward, though, is a little easier, when it comes to prescribing a fix, and Taibbi feints toward it in his article, when he references ERISA and the ability of state governments over the years to underfund pension plans. Certainly a federal law, perhaps modeled on ERISA, that obligates appropriate funding by states and municipalities going forward with regard to future pension obligations is a necessary start. However, there are at least two (and probably many more, but these are the ones that jump out at me right off the bat) problems with such a scheme. First off, how will it be enforced? It certainly cannot be done by assigning, under any such new statute, personal liability as a fiduciary to state elected or appointed officials, in much the same way that ERISA assigns fiduciary liability to those who run private pensions. It is hard to picture a law with such a measure in it ever passing, and even harder to picture who would agree to run state pension plans, with all their potential issues, under those circumstances. Perhaps a stick, in the form of withholding some types of federal funds from states or municipalities that violate the law might work, in much the same way that the federal government withholds highway funds or education funds or the like from states that don’t comply with federal wishes in those realms.

Second, though, is a problem I identified in my prior posts on the public pension crisis. The moment you do anything like that, and make state governments account in real time for future pension liabilities, you will see the end of pensions in the public sector, replaced by defined contribution plans instead. It will only be a matter of time. Is that a good or a bad thing? I don’t know, and all have their own ideas on that. I have been in the private sector my whole career, and have never seen hide nor hair of a pension, other than when it is the subject of a case I am litigating, so I have my own biases in that regard.