What Even Our Debates Can’t Acknowledge
Municipal finances are a mess, as exemplified by Detroit’s filing for bankruptcy, while other cities teeter on the edge.
It’s not a new problem. We have known for years about the fiscal manipulations city governments and states have engaged in to “balance” their budgets, which is to say to appear to live within their means. They can’t print money, like the US government, and the politicians can’t raise taxes and expect to be reelected – especially as taxes have become such a hot political issue. So they have gotten into the habit of borrowing from their pension funds year after year, engaging in slights of hand to make it work. And we have looked the other way.
Now, time has run out. Retired workers need their pensions, but the funds are depleted — and we still find it hard to face the underlying truths. As usual, we don’t really want to know about the massive collusions that masked the problem for years. Too many people are implicated, but, more importantly, to do that would expose the underlying rifts in our fraying social compact. Who is to pay? The 1% or, as usual, the 99%? The unions who negotiated unrealistic benefits? The tax-payers? Wall Street firms that charged exorbitant fees for managing the funds while endorsing inaccurate projections?
All the answers reflect different competing interests. That was revealed in a “debate” The New York Times just organized on the subject. Not surprisingly, it wasn’t a debate at all, as the various sides talked past each other, trying to impose their version of the truth on the reader. But it provided an opportunity to see the extent and complexity of the collusions that have led to this impasse. (See, “The Public Pension Problem.”)
The co-Director of the Center for Economic and Policy Research, a liberal think tank, makes the point that the pension funds were paid for by the workers themselves out of their salaries. The pensions are debts, not entitlements or gifts, and he goes on to note that, restructured, they could actually be paid out by local governments over time. Those are good points, but that casts into the shadows the fact that for years municipal unions exploited local politics to negotiate sweet-heart deals.
A scholar at the American Enterprise Institute, a conservative think tank funded by the Koch brothers, concedes that the majority of public pensions benefits should be paid, but leads off his comments by noting that, “in bankruptcy, nothing should be off the table. More important, cities and states need the right, which is taken for granted in the private sector, to alter the rate at which public employees earn future benefits.” Pensions must be “brought under control.”
That suppresses the fact that cities and states knowingly dipped into the funds to avoid covering their commitments, and many of them relied on the credit bubble to avoid making any contributions at all.
A director of research at the Center for Popular Democracy, which supports liberal causes, suggests New York should set up its own in-house management for pension funds. That would reduce the excessive cost of managing pension funds — a good point, but one that ignores the likelihood of continuing political influence and the “revolving door” between government and the financial industry.
A staff member at the Manhattan Institute, a think tank devoted to “market based solutions,” argues against blaming Wall Street, noting that even renegotiated management fees would be a drop in the bucket. State and local governments “should certainly rein in payments to Wall Street. But eventually, [they are] still going to have to rein in retirement benefits, too.” That sounds balanced and fair, but covers over the fact that the sums involved are wildly disproportionate.
None of these comments is exactly wrong, but they don’t really help us to understand what is going on. The Canadian publisher of Pension Pulse, perhaps the commentator most outside our compromised system, notes the value of what other countries do. Canada has independent investment boards, and Holland has the principle of shared risk.
We, on the other hand, we have a long tradition of deluding ourselves with economic fantasies, in this case the belief that “public pension funds will be able to attain their 8 percent investment bogey over a sustained period,” when interest rates are at historic lows.
He concludes: “These ridiculous investment targets have led to an even bigger problem, excessive risk taking among U.S. public pension funds that have allocated a large portion of their assets into alternative investments like private equity, real estate and hedge funds. . . . U.S. public pension funds are wasting billions in fees praying for an alternatives miracle that will never happen.”
The justification for such fees is to avoid facing the contradictions built into our system. But even The Times contributes to the mystification by sponsoring a “debate” that avoids looking squarely at the fault lines and conflicts that explain how we got here and, moreover, gives special interests the chance to plead their case.