The Senate Finance Committee's top Republican said Wednesday that Detroit's bankruptcy filing and Chicago's pension problems illustrate the need for legislation he has proposed that would allow state and local governments to turn to move from defined benefit plans to life insurance company annual annuities.
Sen. Orrin Hatch, R-Utah, said in a CNN opinion piece, that Detroit's bankruptcy filing was caused in part because it has "$9.2 billion in retiree health care and pension commitments that it simply cannot afford."
Noting the city's other problems, such as the dramatic loss of population and "rampant corruption and mismanagement," Hatch said, "To be clear, Detroit is an extreme example, but there are states and municipalities across America that simply cannot afford their pension obligations."
"The Pew Center for the States found that states' public pension plans faced a stunning $757 billion shortfall in 2010. And some economists place the figure as high as $4.4 trillion in 2012," he said.
Hatch noted that Chicago's credit rating was just downgraded because of its $19 billion in unfunded pension liabilities and that Los Angeles could face up to $30 billion in pension obligations.
"The fear is that some of these cities will declare bankruptcy and a Washington bailout will make innocent taxpayers in Utah and across the country foot the bill, which isn't fair or right," he said.
Hatch said his bill provides state and local governments with another option.
Instead of a government's putting money into a pension fund that could be raided or underfunded, it would pay premiums each year to a life insurance company, which would invest the money and pay fixed pensions when workers reach retirement age, the Senator said.
The annuity contracts would be competitively bid and state insurance departments would supervise the life insurance companies, he said.
But some pension experts have questioned whether Hatch's plan would work. Hank Kim, executive director of the National Conference on Public Employees Retirement Systems has said public pension plans are already self-annuitized and that turning them over to life insurance companies does not make sense.
Earl Pomeroy, senior counsel at Alston & Bird here, a former congressman from North Dakota who was that state's insurance commissioner, said the bill would not work, partly because, unlike state and local governments, insurance companies can fail. He has said he suspects private life insurance companies are pushing the bill to get their hands on the billions of dollars of assets held by public pension funds.