WASHINGTON — House Ways and Means Committee panel members, researchers, and muni market participants debated the merits and faults of a public-pension disclosure bill Thursday at a hearing that also focused on tax-exempt financing and pension obligation bonds.
At the hearing, which was held by the oversight subcommittee, Republican lawmakers, a state treasurer and a researcher worried about the soaring unfunded liabilities of state and local government pension plans, saying they might cause severe financial distress for states, leading them to ask for federal bailouts. They asserted that public pension disclosures are not as forthcoming as corporate pensions and that state and local government pensions are relying on overly optimistic returns on the investment of pension assets.
They voiced strong support for the Public Employee Pension Transparency Act, which was introduced by Rep. Devin Nunes, R-Calif., in February. The bill would prohibit state and local governments from issuing tax-exempt, tax credit or direct-pay bonds unless they filed annual pension disclosures with the Treasury Department, including the value of their pension assets and liabilities based on a “riskless” Treasury bond rate of about 4% to 5%.
The Treasury rate is much lower than the 7% to 8% market rate that most state and local governments currently use to value their pension assets and liabilities.
Subcommittee chairman Rep. Charles Boustany, R-La., said that while some argue Congress has no business meddling in the state and local government affairs, he believes lawmakers are justified in doing so because the federal tax code “subsidizes retirement savings and gives preferential tax treatment to state and local debt.”
He said Illinois’ recent budget proposal indicates the governor might seek federal guarantees of future debt to cover pension liabilities. “There can be little question to where state and local governments will turn when trillions in pension payments come due,” Boustany said.
Walker Stapleton, treasurer of Colorado and the only elected official on the board of the state’s Public Employee Retirement Association, said that plan has lowered the cost of living adjustment and raised the eligible retirement age of members. However, he said, these reforms, while “worthwhile” fall “far short of the systematic improvements needed.”
He faulted the state’s pension plan for using an 8% rate of return, which he said is “unrealistic and unachievable.”
Pension funds “act like the Wild West when it comes to assuming [their] returns,” he said, adding, the Nunes bill requirement for state and local governments to comply with pension disclosure in order to issue debt is “absolutely” fair.
“There is a carrot, which is tax-exempt bond financing,” he said, adding that the Nunes legislation “is just another way to get information” on pension funds.
Boustany also zeroed in on Illinois’ issuance of bonds earlier this year to help pay the state’s current contributions to its pension plan. He said the move was akin to buying stocks on margin.
Josh Barro, a fellow at the Manhattan Institute and a witness at the hearing, agreed with Boustany, saying Illinois is “getting free arbitrage” by borrowing at about 5% with the hope of achieving an 8% investment return.
But one source said after the hearing that the bond financing was not an arbitrage play and was more like deficit financing because the bond proceeds were used for the state’s contribution rather than being invested.
Illinois in February sold $3.7 billion of taxable, eight-year general obligation bonds to cover its 2011 pension contribution. Yields ranged from 4.026% to 5.877%.
Democrats argued that Illinois is an isolated case. Rep. Jim McDermott, D-Wash., questioned why his state should adhere to complex disclosure requirements when its pension fund is 99% funded.
He said the House Ways and Means Oversight subcommittee “has no jurisdiction whatsoever on pensions” and that GOP leadership had to find a panel willing to “attack unions.”
“There is no problem with most state pensions,” McDermott said. “Let’s be clear: The Republicans hated defined-benefit pensions, whether it is Social Security at the federal level or it is a public pension at the state level.” The Nunes legislation will “jack up the pressure on states, therefore they will dump the pension plan,” he said.
Nunes, in a brief interview after the hearing, responded to claims by Democrats that his bill was an attack on unions.
“This bill is about transparency, period,” he said. “It’s not at all about erroneous ideas of vast conspiracies that were talked about today.”
“If the [federal] government is going to continue to subsidize these tax-exempt bonds, the public and the taxpayers have a right to know the unfunded liabilities” of pension funds, Nunes said.
During the hearing, panel member Rep. Lynn Jenkins, R-Kan., noted it is ironic that federal lawmakers do not have the courage to deal with the Social Security, which is expected to become insolvent in future years, yet have no problem criticizing states and localities for their unfunded pension liabilities.
The Securities and Financial Markets Association said its members agree with Nunes that federal bailouts of public pensions are not warranted and welcome increased pension disclosure. However, the group said in written testimony that it completely opposes using the tax code to implement pension policies.
“We believe that rescinding the ability of state and local government entities to issue tax-exempt bond is not the appropriate means to engender better pension disclosure,” SIMFA wrote.
State and local groups were more critical of the Nunes bill. The Government Finance Officers Association, National Conference of State Legislatures and National Association of Counties, among others, warned the Nunes bill “creates a dangerous precedent with regard to federal taxation and regulation of state and local governments.”
In written testimony they submitted, they said the legislation “creates confusion” over reporting requirements and risks jeopardizing bond issuance over “simple, unintended reporting errors.”
Iris Lav, a senior adviser at the Center on Budget and Policy Priorities who testified, agreed.
She claimed the Nunes bill “is in many ways a solution in search of a problem” and warned it would create a whole new unnecessary level of federal bureaucracy.
SIFMA pointed out that the Securities and Exchange Commission, rather than the Treasury, that regulates or oversees disclosure by issuers of securities. The group also said that the National Association of Bond Lawyers is spearheading a project to improve public pension disclosures and the Governmental Accounting Standards Board has undertaken a major review of pension accounting and reporting with the aim of releasing updated guidance in this area.
But Stapleton and some of the Republicans on the panel blasted GASB for not doing enough to increase pension disclosures. Its guidance permits public pension plans to use market rates to value their assets and liabilities.
Robert Kurtter, a managing director with Moody’s Investors Service who also testified at the hearing, said pension funds’ investment expectations are generally “too high,” but that Moody’s does not “have an opinion on what the 'right’ rate is.”
Nine states and the District of Columbia have already reduced or announced planned reductions in the rates they use to assume investment returns, he said.
Moody’s in March downgraded Kentucky’s underlying credit to Aa2 with a negative outlook from Aa1 based in part on the state’s “large and growing” unfunded pension liability.