Funding Public Pensions



Current trends are not promising for addressing the concerns described in this paper. Detroit’s immolation, for example, has produced only a limited backlash. Citizens are certainly angry about what has happened, but with so many possible targets for ire—the auto makers’ abandonment of the city, the corruption of its leaders, the exploitation by Wall Street—technical debates about accounting rules are unlikely to rise to the top of the list.

Certainly GASB itself sees no problem. Indeed, recent developments there, such as the adoption of Statements 67 and 68, have all been in the direction of making the situation somewhat worse. The people who made these changes happen are still at GASB. Their rhetoric forces them to continue to wave this flag and to defend it vigorously. Reform and the concomitant relief will not come from within GASB. Similarly, it is difficult to expect reform to come from Congress, or any other legislature. They are temperamentally unsuited to do anything but delegate technical problems such as this. 

In a theoretical sense, it is quite possible for governments simply to ignore the GASB rules. They are, after all, only guidelines to accepted accounting practice. However, in a practical sense they are woven into a straitjacket that government must wear. Bond ratings and practical politics conspire to force governments to comply with these rules and only the strongest leaders are likely to resist. Unions are somewhat conflicted. Though the threat of bankruptcy is beginning to awaken some to the dangers of the policies they have abetted, if not pursued, their concerns have largely been about the benefit side of the equation. 

The accounting rules have been a convenient club to wield against public employees and their unions for those who would do so. The “obvious” poor state of the pension funds makes it easy to claim that the public has been duped into obligations it cannot afford, and this has been very useful in weakening the political position of these unions. In turn, many union leaders have participated in their own weakening by making unnecessary demands for full funding. In the author’s personal experience, labor leaders frequently perceive concern about the cost of a pension plan to be equivalent to arguing to weaken the guarantee of their benefits. A suggestion of ways to make managing pension funds less expensive is therefore an attack on benefits. 

Full funding is a valuable goal, but so is reducing poverty, keeping roads paved, educating children, fighting crime, and so on. Few government goals can be considered to trump all others, and diversion of taxes into pension savings is a choice not to fund something else. 

In the end, accounting rules should be a guide to action, not a guide to perfection. It is one thing to know how far from the promised land of full funding a system is, but it is a different and more valuable thing to understand how to get there. When those rules guide us to action that makes things worse, leaving us farther from the target than before, what are we to think of the rules?

Ultimately the best argument against the current rules is that following these rules is not necessary to keep the checks from bouncing. “Full” funding of any pension system requires spending more money than necessary to meet the government’s obligations. Is that not the very definition of waste? The remaining question is whether our nation will drive thousands of municipalities into bankruptcy, deprive millions of public employees of pension benefits they have earned, and discredit one of the great financial advances of the last century—all in order to preserve this waste. To date, the answer is not comforting.