WASHINGTON — As a House Judiciary Committee panel meets Monday to hold a hearing on public pensions and the need for state bankruptcy protection, pension and muni bond experts are opposing a recently introduced bill that would prohibit them from issuing tax-exempt bonds unless they subject their pension plans to federal oversight and regulation.
All of the witnesses slated to testify at the hearing — James Spiotto, a partner at Chapman and Cutler; Matt Fabian, managing director of Municipal Market Advisors; Keith Brainard, research director of the National Association of State Retirement Administrators; and Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University — are expected to question whether pension plans are in crisis or state bankruptcy protection makes sense.
Spiotto recently noted that Congress did not provide localities with the ability to declare bankruptcy until roughly 4,000 defaults occurred during the Great Depression. Arkansas is the only state to have defaulted on its debt and that was during the Depression when it was trying to provide assistance to local governments, according to other bankruptcy experts.
“Talk about swimming in the pool before you jump,” Spiotto said. He added that even though localities can declare bankruptcy, at least two Supreme Court decisions — U.S. v. Bekins and Ashton v. Cameron County Water Improvement District No. 1 — prohibit federal judges from interfering with governmental revenues or affairs.
Brainard said the pension bill is “an unnecessary and inappropriate intrusion.”
The bill, introduced by Rep. Devin Nunes, R-Calif., Wednesday, would require state and local governments to submit annual reports to the Treasury Department disclosing detailed information about their pension plans, including unfunded liabilities determined on the basis of a Treasury rate, rather than the more commonly used rate of return on investments, which is higher.
The legislation, which also prohibits federally financed bailouts of public-sector pensions, has emerged as Republicans have raised fears that growing unfunded pension liabilities will lead to the collapse of some state and local governments, triggering requests for federal assistance.
But pension experts claim states and localities are taking steps to put their pension plans on sounder footing and governments insist they have no plans to seek federal assistance of any kind.
The Nunes bill is called the Public Employee Pension Transparency Act. It proposes to amend the federal tax code by requiring public-sector pensions, for the first time, to file annual reports with the Treasury disclosing details about their contributions, assumptions, valuations, the rate of return on their investments, and the amount of pension obligation bonds outstanding.
It also requires them to calculate the present value of their future liabilities using two rates: the discount rate they typically apply — the historic rate of return, which is roughly 8% — and a lower discount rate that is pegged to Treasury rates and is roughly 4% to 5%.
The bill imposes a sanction for noncompliance: any state or local government whose public-sector pension fails to provide the required information will be barred from issuing new tax-exempt or tax-credit bonds as well as taxable bonds that receive federal subsidy payments, such as Build America Bonds, until it files the necessary report.
As background, the bill cites a 2009 study in the Journal of Economic Perspectives that finds public-sector pensions in all 50 states are collectively underfunded by $3.23 trillion. The bill also claims current governmental accounting rules and practices suffer from a “lack of meaningful disclosure” that obscures the value of plan assets and understates plan liabilities, posing a “serious threat” to the financial stability of state and local governments.
Supporters, including Sens. John Thune, R-S.D., and Richard Burr, R‑N.C., who plan to introduce a companion bill in the Senate, say the proposal fosters transparency and imposes a uniform system of reporting about the assumptions and methods underlying how public-sector pension managers calculate future liabilities.
But opposition to the bill has surfaced from a host of sources, ranging from professional pension managers and labor unions to academics, including some of the witnesses at Monday’s hearing. Detractors balk at federal oversight in an area historically left to state and municipal governments and at the bill’s prescribed method of accounting for future pension liabilities.
“It’s one of the dumbest ideas I’ve heard of in a long time and it shows a total lack of understanding of how pension plans are funded,” said Jeffrey Esser, executive director of the Government Finance Officers Association.
Opponents to the bill question the wisdom of forcing federal requirements on already strapped state and local governments.
“That’s just another unfunded mandate this bill would impose on state and local governments to do a bunch of silly calculations that have no bearing on the success of public pension plans,” Esser said, noting many public-sector finance departments are already understaffed. “They don’t have the extra capacity and taxpayers don’t have the willingness to have more staff fill out more paperwork that won’t help pension plans one iota.”
Others question the bill’s underlying assumptions, including the notion that existing pension disclosure falls short.
“It’s part of the effort to kill defined benefit pension plans and entrust our family’s retirement security to the good graces of Wall Street,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, who is on the board of the California Public Employees Retirement System. The bill’s supporters “don’t like public employees. They don’t like defined benefit plans,” he said.
On a technical level, concerns have arisen about the bill’s focus on discount rates. Though the legislation does not require a plan to employ a specific rate, the failure to analyze and report future liabilities based on both rates would bar federal tax benefits for new debt.
Pension experts note that the Governmental Accounting Standards Board, which expects to finalize pension accounting and reporting standards next year, has endorsed the long-term, higher expected rate of return.
Even as a data point in a report, though, critics say the lower discount rate magnifies the size of the unfunded liability, increases the size of the employer contribution, and could potentially increase the burden on taxpayers, who would have to make up the shortfall.
“This bill selects a ridiculously low rate,” Esser said. “It probably comes close to doubling the unfunded liability.”
Pension professionals also say the bill neglects inherent differences between public- and private-sector plans. Corporations can declare bankruptcy and foist their unfunded pension liabilities onto federal taxpayers. State and local governments, by contrast, do not typically go out of business, though several Republicans are exploring whether fiscally strapped states should be allowed to avail themselves of bankruptcy protection.
One possible approach, suggested by Rep. Mike Quigley, D-Ill., the ranking minority member on the House Oversight and Government Reform panel on TARP and financial services that held a hearing last week on the role public pensions could play in state insolvency, would be to limit reporting requirements to the most fiscally troubled states.
“Transparency is hard to be against,” said Quigley, who is still studying the Nunes bill. “But this has to be done in an appropriate way.”
Spiotto has suggested creating a federal quasi-judiciary Public Pension Funding Authority, or individual state authorities, consisting of independent pension experts who could determine if state pension plans were sustainable. If a state did not have a sustainable pension plan, the authority could recommend adjustments to the plan to make it sustainable.
“It could be created by a state, or by the federal government as something the states could opt into,” he said recently.
Moreover, labor unions representing public-sector workers, typically supporters of Democrats, resist what they see as an effort to target their defined benefit pension plans, long a staple of the public workforce, and a rarity in the private sector.
“We’re unanimous in opposition to this,” said Charles Loveless, director of legislation for AFSCME, which represents an estimated 1.6 million state and municipal government workers. “It’s designed to unfairly and unnecessarily affect public opinion that these plans are financially out of control.”
A muni bond analyst, who likes the bill’s disclosure provisions, also expressed reservations about the bill’s overall impact. “These are just reporting changes,” said Howard Cure, director of municipal research for Evercore Wealth Management LLC, “They’re not changing the actual liability.”