How should John Arnold approach pension reform?

By Felix Salmon
February 16, 2014
case of the $3.5 million which the Laura and John Arnold Foundation donated to a PBS series on "pensions in peril". The recipient of the money, New York PBS affiliate WNET, has given it back.

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The other shoe has dropped in the case of the $3.5 million which the Laura and John Arnold Foundation donated to a PBS series on “pensions in peril”. The recipient of the money, New York PBS affiliate WNET, has given it back. Understanding what’s really going on here, however, isn’t easy, so bear with me on this one.

If you go to the WNET website to learn more about the Arnold funding, you won’t find any announcement about the station giving the money back. There is a statement, but it’s not easy to find: it seems to have been emailed to news organizations as a PDF. Tellingly, the filename on the PDF is STATEMENTFINALFINAL2: it clearly went through a lot of revisions.

The one web page I can find with the statement is at the PBS ombudsman’s post on the subject, which was mostly written before the decision to return the money had been announced. As far as the WNET website is concerned, the only post is their original, defensive one — their initial high-dudgeon response to David Sirota’s original article.

At this point, it’s important to make a distinction between PBS, on the one hand, and WNET, on the other. I’ll quote the ombudsman:

This is more an issue of what the New York station, the well-known Channel Thirteen, did than what PBS or even the PBS NewsHour did. PBS does not produce television programs. It distributes programs produced by member stations, all of which are independent, or by independent filmmakers. The PBS NewsHour is produced at WETA just outside Washington, D.C. For all of its almost 40-year history, the NewsHour has been a five weekday-night program. In September of last year, it added a Saturday and Sunday night weekend edition. That program comes under the PBS NewsHour rubric but it is produced by WNET in New York and, as far as I can tell, none of the “Pension Peril” segments have been aired by the weeknight NewsHour.

In light of this distinction, the joint statement from PBS and WNET makes a bit more sense: the statement from the mothership is just that “PBS stands by WNET’s reporting in this series”, while the apologies and sword-falling are confined to the New York affiliate.

“We made a mistake, pure and simple,” said Stephen Segaller, Vice President of Programming at WNET. “The PBS NewsHour Weekend is a new production and while we thought we were following the guidelines and the correct vetting processes, we were incorrect.”

There’s a whole world of subtext in that phrase, “we thought we were following the guidelines” — a lot of which my former boss Jim Ledbetter teased out in his 1997 book Made Possible By…: The Death of Public Broadcasting in the United States. The big problem is that public broadcasting has become dependent on corporate financing — and has become very good at coming up with programming which represents corporate interests. The issue with the Arnold Foundation deal, in today’s PBS, was not that the content of the Pensions in Peril series was too aligned with corporate interests. Rather it was — well, let’s go back to what WNET’s Segaller told the NYT:

On Thursday, before the statement came out, he said in a telephone interview that WNET believed the funding did not violate PBS’s “perception” rule, because the foundation’s goals of encouraging public discussion were separate from Mr. and Mrs. Arnold’s desire for reform.

By telephone Friday, he said WNET officials reversed course after discussions with PBS “about both the facts and the optics. We all take very, very seriously any suggestion that there’s a perception problem about the integrity of our work or the sources of our funding, and we came to the conclusion that it’s better to err on the side of caution.”

He added that the grant had been solicited with “absolute conviction” that the foundation was an acceptable funder.

In other words, WNET still doesn’t believe that there was any actual conflict here — it just believes that there’s “a perception problem”. He’s returning the money because of “the optics” — which is to say, because Sirota’s article came out, and it made PBS look bad.

What Segaller told the NYT on Friday is surely closer to his real beliefs than the words put into his mouth in version “final final 2″ of the official PBS/WNET statement. And yet, the conflict here is, in reality, clear as day.

Firstly, The Laura and John Arnold Foundation was the only sponsor of the Pensions in Peril series. (This despite the fact that, as LJAF spokeswoman Leila Walsh told me, “the grant to WNET was made with the explicit understanding that WNET would secure multiple funders for the project”.) Secondly, the Pensions in Peril series covered a California ballot initiative on pensions being run by San Jose mayor Chuck Reed. Thirdly, the ballot initiative was directly funded by John Arnold, and Reed himself thanked “people from the Arnold Foundation” for putting him in touch with other funders. In other words, the TV program covering the initiative got all of its funding from someone with an unapologetic dog in the fight. It’s hard to come up with a clearer conflict than that.

And yet WNET and LJAF are both convinced that there was no real conflict. WNET’s Segaller draws a distinction between the Arnold Foundation, on the one hand, and “Mr. and Mrs. Arnold’s desire for reform”, on the other: it seems that taking money from the Arnolds themselves would have been a clear no-no, but that taking money from their foundation was quite different. Similarly, the foundation’s Walsh was at pains to tell me that “LJAF is not funding the California ballot initiative. We are a 501(c)(3) private foundation. As such, we do not participate in political activities, make political contributions, or advocate for the passage or defeat of legislation.”

This invisible-to-the-naked eye distinction, between John Arnold, on the one hand, and John Arnold’s foundation, on the other, was all that WNET needed to go after the foundation for funding. And it was all that the foundation needed to convince itself that there was no conflict involved and that it could happily write a $3.5 million check to WNET. No one seems to have stopped to ask whether such Clintonian niceties created, in words that pension reformers might understand, a substantial, if contingent, reputational liability. Even though similar concerns have been raised in the past.

That said, the Arnold Foundation has a do-over now: it has its $3.5 million back, and says that “we are going to keep working to educate the public” about pension reform. And after speaking to Josh McGee, the Arnold Foundation’s policy guy on the subject, I’m convinced that there’s more to the foundation’s policy stance than a cackling, plutocratic desire to impoverish the elderly. McGee’s “solution paper” on the subject lays out four goals for pension reform, all of which are laudable:

Sound pension reform meets four general criteria: (1) establish transparency with respect to the true cost of the benefits promised to public employees; (2) mandate that the pension plan sponsor pay the full cost of accrued benefits each year; (3) mandate that the pension plan sponsor pay down the unfunded accrued liability over a reasonable time horizon and (4) improve the generational equity, portability and security of benefits for public employees.

I don’t love the paper as a whole, which happily enumerates all the problems with defined-beneft pensions, without going into any detail about the equally big problems with defined-contribution pensions. The paper concentrates on state and local pensions, for instance, yet ignores the fact that those governments are still responsible for their elderly citizens’ wellbeing, even (especially) if they’re paying those retired citizens very little.

Pension reform is a bit like education reform: the facile solutions are not the correct solutions. In education, reformers tend to point to bad teachers, complain about how difficult they are to fire, and then propose that the necessary course of action is to test those teachers, evaluate them, and fire them at will if they’re not performing up to snuff. With pensions, reformers tend to point to firefighters or policemen who retired at age 50 with a fat pension after 25 years’ service, and who then happily work elsewhere for another couple of decades while simultaneously drawing a pension for much longer than they were actually working. On this view, the necessary reform is to roll back the plans which allow such behavior.

Take a step back, however, and what really needs to be done, in both cases, is a much bigger project — a project where there’s no need to take aim right now at public-sector employees. Start at the top, with the way the schools and the pension funds are structured; once you’ve fixed that, then maybe start moving down the ladder a little, if it’s still necessary — which it might not be.

In the case of pensions, McGee’s criteria are a good place to start. Insofar as there’s a pensions problem, it’s in large part a function of how labor negotiations work in the real world. Local governments, operating on a tight budget, can’t offer the kind of pay rises that the unions demand — and so the unions accept juicier pension benefits in lieu. The present value of the pension benefits is invariably larger than the amount of money the unions would accept as a simple raise — but so long as the current government doesn’t need to pay anything, both the government and the unions are happy. The unions get valuable rights for life, while the government gets to leave for its successors the question of how to pay for them.

So before we start talking about allowing governments to default on their pension obligations (which is the goal of the California ballot initiative being supported by Arnold), let’s start by shoring up the pensions system as a whole. Make sure firstly that pension plans are funded, or on a path to get that way, and secondly that any future pension promises are funded as well — that an actuarially-derived sum of cash is put into pension funds whenever a local-government employer makes a pension promise. (The federal government is a bit different, since it has a lot more latitude in terms of being able to find the money to service future pension obligations.) Finally, start working on making local-government pension plans more portable, so that people don’t feel forced to stay in the same town and the same job for decades, and so that people who work for local government for five or six years can leave their jobs with some improved retirement security.

None of this will be easy: the whole reason why pension obligations started ballooning in the first place was that local governments didn’t have the money to hand out pay raises. So the unions will push back against these ideas: they like any system which makes it easier for them to accrue valuable benefits at negligible up-front cost to the government. But if you want to guarantee vocal opposition which is almost impossible to overcome, then your best way of doing that is to combine or replace these kind of reforms with an attempt to renege on governments’ existing pension obligations.

Again, it’s easy to draw attention to outliers — the handful of municipalities which have literally gone bankrupt, and where pensioners are reduced to the status of unsecured creditors. The argument you hear from the pension reformers is that if we don’t take relatively modest action now, there will be a much more drastic reckoning — involving a spate of bankruptcies — down the road. They might be right, but this is the point at which they start to sound like Meredith Whitney.

Most municipal bonds are still trading at very low yields, and there’s no reason to consider pension obligations to be any less, well, obligatory than bond obligations. Governments have to make good on them, so let’s push hard to increase the degree to which pension plans in general are being funded. If the Arnold Foundation confined itself to that, and didn’t simultaneously support plans making it easier for governments to default on existing promises, it would still face opposition. But there would be much less of it, and the foundation’s chances of achieving real legislative success would surely rise substantially.


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There is another problem in all of this.

It’s a repeat of the old “get paid in grain, or newspapers, or whatever” instead of money that persisted for a long time. And finally the advanced world changed to say “no, you have to pay people in money.” But somehow we have regressed to trying to pay people in other ways.

Pension benefits, healthcare benefits, surely others, all have the properties that they:
(a) inhibit job mobility
(b) hide the costs of something
(c) thwart individual management of resources
(d) lower real wages in the here and now in a not very visible way

And one way or another, the employee (via lower wages) or the public (through higher taxes) have to pay for this OR the employee gets screwed in one way or another.

[Similar issues in private industry as well.]

The real (very hard to reach) solution is to force all compensation to be in money, here and now, and say that everyone is eligible to join very large pools for healthcare, retirement, and so on. Those things need government backstops and insurance? Great. But stop pretending that people can be promised things beyond what society can possibly deliver and they should therefore serve the public now for below market rate wages.

Note that this explicitly frees a fire fighter (say) to invest their “pension” money in some fund, change jobs or even states, and when done being a fire fighter go work at some other job with no controversy at all.

By the way “government obligation to care for the elderly” rings hollow in a reality (ours) where government doesn’t consistently deliver on its educational obligations, transportation obligations, etc.

Posted by BryanWillman | Report as abusive

When I started to look seriously at planning for retirement, I quickly realized that the outcome is particularly sensitive to real investment returns (during the second half of the accumulation phase and first half of retirement). I toyed with a variety of inputs, but have settled on a real return of 3% as being easily achieved even under adverse circumstances.

Pension plans are funded assuming a 6% real return (8%+ nominal return). Actuarial calculations are well understood, and quite reliable, but they are assuming an investment return that roughly matches the historical norm for their portfolio. This will work if investment returns are at least average going forward. This will fail if investment returns are below average.

Forcing pensions to be “fully funded” is pointless if you continue to allow them to assume an unrealistic rate of return. Force them to fund at no more than a 4% real return and allow rebates to the funding entity if the returns exceed that. Actuarial calculations allow this to be done with a high degree of certainty, yet that means nothing if you begin from unrealistic assumptions.

Posted by TFF | Report as abusive

In my lifetime, I have worked 49 years. Prior to ERISA, I was in 5 pension plans but never worked the required ten years to be vested. For pension plans to work, we need a new set of rules as you suggested but these rules would also make a defined contribution plan work.

1. Portability
2. No early withdrawal(no loans)
3. Annuitize benefits(retirement should not be about building an inheritable estate)
4. Immediate vesting
5. Required minimum employee paycheck withholding.

It sounds very much like Social Security doesn’t it?

Posted by ciwood | Report as abusive

The fact is John Arnold and his ilk like those in ALEC don’t care one iota about a pension “crisis.” The whole scheme is to create propaganda about a “crisis” in order for Arnold and his Wall Street to LOOT it by privatizing it like they have done with the gutting of private pensions in favor of 401(k)s. Next on the agenda is the destruction of Social Security so these criminals, which is what they are, have more money to squander from the taxpayers. It’s as clear as a bell, and it is not worth writing a 10,000-word essay about something that is obvious. Arnold once worked for Enron. That should tell people all they need to know.

Posted by tonysam | Report as abusive

Here’s a facile solution: don’t even try to fund pensions. Or more realistically, expand Social Security to the point where is actually supports a decent living in retirement, paying for it with taxes on all income. What we have now is an incredible mishmash of municipalities promising things they can’t deliver, funds being turned over to managers whose main objective is looting, Congress passing ever more tax-break savings schemes that ultimately benefit Wall Street, failing companies and municipalities reneging, etc., etc. Then compensation negotiations might be carried out on a more realistic level. Facile solutions that won’t work are any that involve expanded roles for Wall Street.

Will people ever realize that 2050′s support for 2050′s retired must come out of 2050′s production, not today’s?

Posted by skeptonomist2 | Report as abusive

“So before we start talking about allowing governments to default on their pension obligations (which is the goal of the California ballot initiative being supported by Arnold”

Felix, your characterization of this ballot initiative is inaccurate to the point of being shameful. The plain text of it allows for the modification of benefits “for future work performed”, not a default on benefits that have been earned for past service. Both of your recent posts on pensions contain nuggets of reasonableness amidst a sea of points that read like the talking points of a spokesperson for a public employees’ union. It’s especially disappointing because you, unlike most journalists and columnists who write on this topic, understand the mathematics of financial returns well enough to know that offering someone a traditional defined benefit pension, with a COLA, is a promise with a very expensive NPV, especially when “30 and out” rules let people retire with a full pension in their early 50′s.

Posted by realist50 | Report as abusive

Something has to give, eventually. TFF make’s, IMO, a very salient point. Plan funding growth assumptions are a large part of this problem.

Rosy plan return assumptions wallpaper over outsized promised benefits. Which as you point out Felix, are often granted in lieu of current compensation.

I argue that again in this case the issue is that as a society we place very little emphasis on personal responsibility and even less on a delay of gratification. We want it all and we want it now for the most part. Don’t give it up now and you’ll pay dearly.

I’m fortunate to participate in a private pension plan (with COLA’s) that is fully funded and always has been. My previous employer drummed into the staff that retirement finances were a “three legged stool”. One leg pension, one leg social security and one leg…..are you ready? Personal savings. Wow, how radical.

Those of us who listened are doing quite well in spite of all the financial angst.

Posted by Missinginaction | Report as abusive