Rep. Devin Nunes has introduced legislation that would prohibit state and local governments from issuing tax-exempt, direct-pay and tax credit bonds unless they file annual reports with the Treasury that contain information about their pension plans, including their net unfunded liabilities and amount of pension obligation bonds outstanding.
An aide to the Republican from California said the Public Employee Pension Transparency Act is similar to, but contains some revisions from, the previous bill of the same name (H.R. 567) that he introduced in 2011.
The current bill has not received a number, but is co-sponsored by Reps. Paul Ryan, R-Wis., chair of the House Budget Committee, and Darrell Issa, R-Calif., chair of the House Oversight and Government Reform Committee. Sen. Richard Burr, R-N.C. is expected to introduce a companion bill in the Senate, the aide said.
Like the previous bill, the new one would require the annual pension reports filed with the Treasury to include funding status, assets, net unfunded liability, and funded percentage. The reports also would have to include a schedule of contributions for the year, the actuarial and rate-of-return assumptions used, and investment returns for the year as well as each of the five past years. But unlike the earlier bill, it would require projections for the next 60 years, instead of 20 years.
If a government did not use fair market value or the Treasury yield curve to determine its liabilities, it would have to file a supplemental report with the Treasury with those calculations. The bill would also prohibit the federal government from bailing out any government that ended up with serious financial problems as a result of pension plan problems.
The first five pages of the 19-page bill detail the concerns about state and local pension plans and the rationale for the reports.
The bill claims pension plans “are becoming a large financial burden” for some governments and cites a recent study by the Journal of Economic Perspectives that found the present value of already promised pension liabilities of the 50 states amounts to $5.17 trillion. These pension plans are unfunded by $3.23 trillion, the study said.
State and local governments’ pension plans have promised benefits to about 20 million Americans who are active employees and another seven million retirees and their dependents, the bill said, adding, “There currently a lack of meaningful disclosure regarding the value of state or local government employee pension benefit plan assets and liabilities.”
The bill warns the lack of disclosure “poses a direct and serious threat to the financial stability of such plans and their sponsoring governments, impairs the ability of state and local government taxpayers and officials to understand the financial obligations of their governments, and reduces the likelihood that state and local government processes will be effective in assuring the prudent management of their plans.” It warns, “The status quo also constitutes a serious threat to the future economic health of the nation.” But some pension experts denounced the bill.
“It threatens to tax state and local bonds and impose onerous federal regulations on governments’ retirement systems,” said Jeanine Markoe-Raymond, director of federal relations for the National Association of State Retirement Administrators. “It does not protect the employees or result in more transparency.”
Markoe-Raymond pointed out that state and local governments already include detailed information about their pension plans in their comprehensive annual financial reports and bond documents, as well as in pension plan reports. Forty-five states have made changes to address concerns about their pension plans within the last three years, she added.
John McNally, a partner at Hawkins Delafield & Wood and former president of the National Association of Bond Lawyers who helped draft pension disclosure guidelines for bond documents, agreed.
“At some point, the issuers will cry ‘enough is enough,’” he said. “That would be a fair reaction to the draft [bill], which will result in opacity not transparency.”
McNally said he doubts the drafters of the bill are aware of recent efforts of the Governmental Accounting Standards Board, the Governmental Finance Officers Association, and NABL to issue pension reporting, accounting and disclosure guidance. They also are probably unaware that states and localities, in response to SEC enforcement actions against San Diego, New Jersey and Illinois, have taken steps to address their pension problems.
“I think the premise of the bill [that there is a lack of meaningful pension disclosure] is simply incorrect and does not reflect the significant enhancements to pension disclosure that have been achieved by issuers,” he said.