2010 Retirement Reform Resolutions
Time for less finger-pointing and more action
2009 was a rough year in the public pension world. Although financial markets rebounded smartly after bottoming in March, most public pension plans closed the calendar year with massive unfunded liabilities -- double their best levels of 2007. Yet remarkably little has been done to initiate genuine reforms of financial structures that now appear unsustainable. I've reflected on why the forces of inertia seem to dominate, and have resolved personally to take a different approach to change-management in 2010. After taking some time over the holidays to reflect on the past year's accomplishments and mistakes, here's my list of new year's retirement-reform resolutions.
1. Stop flogging the crew. It's an old joke: There is a sign over the bar in a seaport that says: "The flogging of the crew will continue until morale improves."
All of us in the public pension debate should remember that there are thousands of hard-working public servants out there who can't help but feel demoralized when pension critics paint them all with a single brush. I confess I stepped over that line a few times in 2009 and will make it my point to distinguish the majority of well-intended public employees from the abusers -- like pension spikers and intransigent "gimme-gimme-gimme" unionists. After all, our families want the best police, firefighters and teachers our society can employ, so it makes little sense to demoralize civil servants by calling them all pension crooks.
This won't stop me from blowing whistles when ethics are violated, taxpayers are gouged, common sense is abandoned, financial malpractice is attempted, or plan participants game the system for their personal inurement. But I'll try to remind us all that these black sheep are typically the minority.
2. Separate facts from ideology and vested interests. We all bring our personal perspective to the pension debates. Conservatives and libertarians often instinctively view public pensions as a taxpayer-financed boondoggle that has no parallel in the private sector. Those of a liberal or collectivist persuasion tend to see public employees as victimized, and deserving of a fair retirement benefit that they have earned over decades of faithful service. Each camp selects factoids to buttress its arguments, ignoring the other evidence. Seldom do we see objective, independent research that starts with the data first and draws conclusions after thoughtful consideration of both sides. Abe Lincoln became a great leader by putting himself in the other guy's shoes when thinking about an issue: I'll try to do more of that in 2010, while confessing to my watchdog-reformist instincts that fight regularly with my admittedly schizophrenic fiscal-conservative/social-liberal/pragmatic roots in municipal management.
For those of you who post comments to my columns or post about them on your own blogs, I'll ask that you try to keep it civil and agree to disagree with more respect for those you debate. We don't accomplish anything by calling each other blockheads. After a while it's no longer entertaining. But don't take that as censorship or political correctness: We at Governing want to stimulate a thoughtful interchange of ideas and insights. Just fewer insults, please.
3. Think both inside and outside the box. I hope to make this my trademark and my brand in 2010. The debates over pension and benefits reform will be much more constructive if we can include two types of thinking: conventional and creative -- inside and outside the box. In most cases, the ultimate reform of retirement benefits will be accomplished through conventional, incremental and practical measures that lawmakers, employees and taxpayers can understand and accept. In some instances, however, traditional thinking fails to achieve the conceptual breakthroughs that a creative mind can bring to solving problems. Very few bureaucrats come up with original ideas because they are laden by process over creativity. So I'll endeavor to do both, with my "Inside the Box & Outside the Box" columns in 2010. Hopefully this will assure a balanced presentation of problems and solutions, and still provoke the spirited dialogue that my readers have come to expect and appreciate.
My companion column on the pension investment outlook in 2010 will kick off my "Inside the Box & Outside the Box" column theme. Link to companion column here
4. Stop pointing fingers and crying over spilt milk. Here I confess again that the governance scandals in my home state of California -- and the defensive denial of the financial wake-up call of 2008-09 by several pension-advocacy organizations trying to play the "spin" game -- put me over the edge with such disgust and irritation that it was impossible for me to stand silently on the sidelines. Looking back at the last year, however, I have come to realize that genuine long-term reforms are seldom embraced by those who need them the most, if their critics become vitriolic. So I plan to continue to identify abuses and defects in the system, but to place less emphasis on finding villains and more emphasis on seeking solutions.
For example, the doubling of unfunded pension liabilities in the past two years is now a done deal. It's baked into the cake unless the stock market magically returns to 15,000 on the Dow Industrials by December 2012, which is a long-shot that no Las Vegas bookie would take at even money. But the road to retirement reform will be easier if we just accept that it's a fact of life, spend less time bickering about how and why we got here, and figure out how to fix the mess rather than making it messier by assigning blame.
As for those solutions, measures that devote a portion of future budget surpluses to pay off pension and especially retiree medical (OPEB) deficits will be more effective than just yammering about the unfunded liabilities. Negotiating CPI caps on OPEB benefits, and employee contributions to their OPEB trusts, through a labor-management partnership to achieve long-term sustainability, will be a step in the right direction. Raising retirement ages for new employees and even for younger incumbents (in states where that's legally feasible) will also be steps in the right direction.
5. Clean up the egregious abuses. While burying the hatchet, I will keep a vigilant eye out for the crass abuses of the system that give the public-sector retirement community a bad eye. But rather than generalize from specific excesses, I will try to focus on what will fix them. For example, I continue to believe that the CalPERS governance problems will not be resolved by the recent piecemeal reform policies of the board (although I applaud the earnest efforts of the chairman as a step in the right direction). Broader reform of their composition and policies is necessary -- including structural changes to restore balance through the appointment of enough independent, disinterested trustees to break the stranglehold of vested interests on that board. Beyond the new sanctions, violators of ethics policies should be banned from voting on issues of self-interest and contaminated decision-making.
Likewise, I would urge systems and employers that now offer unjustifiable 3 percent pension multipliers to proactively initiate new, lower benefits tiers that are financially sustainable. Similarly, we need to reverse the practice of employers paying for normal employee contributions when the benefits formulas are already more generous than the prevailing labor market requires.
6. Pull heads out of the sand. While seeking rational and thoughtful changes, I do feel a burning itch to somehow motivate the hundreds of public officials who continue to do nothing to reform what are obviously unsustainable retirement plans. After several years of preaching on this theme, I'm still baffled that the majority of policy-makers decline to face reality or take action that will put their plans on the road to recovery. What is it about pension politics that breeds such ostrich-like behavior? Maybe there should be a joint Nobel prize in psychology, political science and economics for the researcher who solves the inter-generational "kick the can" paradox.
7. Leaders, step up! "Leadership" is the exact opposite of the ostrich-like actions of officials who bury their heads in the sand. We in the media, and all stakeholders in the public sector retirement systems (taxpayers and beneficiaries alike), must create an environment in which elected leaders and policy-makers can safely and boldly step forward and make the tough decisions needed to solve these inter-generational problems sooner rather than later. That means we have to support their efforts even when it means taking a half-a-loaf rather than complete victory. America's state and local governments didn't dig themselves into the retirement plan deficits of 2010 in a single year -- it took a decade or more of policy errors, self-interest and magical thinking. So what's important now is that we encourage and applaud those who take the first baby steps to putting these systems back on the right footing.
8. Start 2010 with governance and codes of conduct. Governance won't fix financial sinkholes, but in some cases, the best place to start is with the policy-making structure, which often can be changed faster than the benefits and funding plans. Next month, I'll report on an important initiative under study by a standing committee on retirement administration of one of the national professional associations. They're working on what could become the most thoughtful and comprehensive outline of best practices in pension governance yet produced by a professional group. In the meantime, I continue to encourage all pension trustees and administrators to take a hard look at the New York attorney general's proposed code of conduct, which provides fertile ideas to consider in every plan -- even if trustees or sponsors don't adopt every feature.
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