Lawmaker May Resurrect Bill to Block Bond Sales Without Pension Disclosure

A California Republican appears to be moving toward reintroducing legislation that would prohibit states and local governments from issuing tax-exempt, tax-credit and direct-pay bonds unless they subject their pension plans to federal government oversight and regulation.

Rep. Devin Nunes, R-Calif., a member of the House Ways and Means Committee, sent identical letters to colleagues last week asking them to co-sponsor the "Public Employee Pension Transparency Act" which "would condition the continuation of specified federal tax benefits upon state and local governments' decision to file certain information regarding their pension plans with the Secretary of the Treasury."

"The bill is designed to enhance the soundness of state and local employee pension benefit plans and to declare unequivocally that the federal government will not provide a bailout," Nunes said in the "Dear Colleague" letter.

As described by Nunes, the legislation appears to be very similar to a bill he introduced first in December 2010, and then again in February 2011, that would have required states and localities to submit annual reports to the Treasury Department disclosing detailed information about their pension plans, including the assumptions they used to determine their unfunded liabilities. Governments would have been required to estimate their unfunded liabilities based on a so-called "riskless rate of return" such as a Treasury rate of 4% or 5%, rather than the more commonly used 7% to 8% rate of return typically used for pension investments.

State and local government groups criticized the bill, claiming it was unnecessary and would be burdensome.

"We would be sorry to see it introduced," said Keith Brainard, director of research at the National Association of State Retirement Administrators said Tuesday. "It's an unwarranted and needless intrusion into state and local government operations by the federal government to require reporting a figure that is irrelevant and is based on theory that reflects generally more of the bond market than of public pensions."

Estimates of state and local governmental unfunded pension liabilities have ranged from $730 billion to $4.4 trillion, Harvard Kennedy School's Mossavar-Rahmani Center for Business and Government said last year.

The legislation initially emerged in 2010 amid Republican fears that growing unfunded pension liabilities would lead to state and local governments seeking federal bailouts.

"The Public Employee Pension Transparency Act would address this serious situation by requiring state and local government pension plans to disclose the true magnitude of their liabilities to the American people," Nunes told colleagues in this letter.

"If you want to paint the worst possible picture for pensions, it would be by calculating the lowest interest rates which would be from PEPTA," Brainard said, adding that state and local government pension plans are different than corporate pension plans.

"They are not going to go out of business. They can ride out volatility in markets and there is no reason to tie their required costs or asset allocations to the vicissitudes of the bond market," Brainard said.

Neil Bomberg, program director center on federal relations with the National League of Cities, said Tuesday that he would adamantly oppose such legislation because it would set standards for public pensions that "in no way make sense."

"It would require a level of reporting that we believe state and local pensions should not be subject to," Bomberg said.

Bomberg also said that the federal government has "no business getting involved with" barring state and local governments from issuing municipal bonds.

Pension experts claim that states and localities are in better financial positions than they were several years ago following the market crash in 2008.

Many state and local governments have adopted pension reforms, particularly after the credit rating agencies began paying more attention to bond issuers' unfunded pension liabilities.

Moody's Investors Service last year proposed changes last year for analyzing public sector pension data. The rating agency proposed adjustments would allow the pension obligations of state and local governments to be compared and treat pension liabilities like debt so that it can better analyze the long-term liabilities of governments.

Moody's said its proposed adjustments would nearly triple - to $2.2 trillion from $766 billion - the unfunded pension liabilities reported by state and local governments in 2010. It's final adjustment report is expected to be released in the next few weeks.

Nunes' bill also would come at a time when some of the new public pension and accounting reporting changes approved by the Governmental Accounting Standards Board last year are set to go into effect in June. In addition, muni market groups have worked together on guidance for disclosing pension information in bond-related financial documents.



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