Local Governments Rail Against Proposed Pension-Reporting Changes

State and local officials are up in arms over a proposal in Congress that would change the way pension data is reported.
by | December 14, 2010

State and local governments are fuming over a new bill introduced by House Republicans that would require public pension plans to report their liabilities using a new accounting standard.

H.R.6484, introduced earlier this month by Republican Reps. Devin Nunes, Paul Ryan and Darrell Issa, would require public pension funds to report two types of data to the Treasury Department, which would then post it online.

The first set of numbers would detail a pension's liabilities using accounting methods set by the pension itself. The second set would show the pension's liabilities using a set of uniform standards prescribed by the legislation, which the Republicans say would provide a more realistic look at the state of the pension.

Governments that refuse to report would be denied their ability to issue tax-exempt bonds. Municipal bonds pay lower interest rates than other bonds, but those rates are offset by the fact that their returns are tax-exempt. Cutting off that tax-exempt status would make it difficult for a state or local government to raise money, which would give a strong incentive to comply.

The legislation also includes a policy statement indicating Congress won't bail out any public pension programs that tank.

A coalition of groups representing state and local governments -- including the National Association of Counties, the United States Conference of Mayors, National League of Cities and the International City/County Management Association, among others -- released a statement saying that the legislation conflicts with existing accounting standards and undermines investor confidence in the municipal bond market.

"This legislation represents a fundamental lack of understanding regarding the strong accounting rules and strict legal constraints already in place that require open and transparent governmental financial reporting and processes," the groups wrote.

The bill's opponents say it sets a precedent for federal intervention into financial areas historically handled at the state and local government.

That's an ironic twist, given that the bill's sponsors are conservatives who generally tout states' rights. The legislation is also backed by a slew of conservative organizations including the U.S. Chamber of Commerce and Americans for Tax Reform.

The bill is unlikely to pass, given the fact that the current congressional term expires in a matter of weeks. But it could be a dress rehearsal for similar legislation to be introduced in the soon-to-be Republican-controlled House.

It might also be a signal to Governmental Accounting Standards Board, which sets the generally-accepted accounting practices used by state and local governments. GASB is in the process of deciding whether it will require public pensions to adopt accounting practices similar to those proposed in the legislation.

The proposed standards are similar to those used by corporate pension funds, which provides a more conservative and short-term estimate of pension growth.

That's because if a corporation goes under, either the government or the shareholders of another company are left holding the bag of an unfunded pension. The rules mean that corporations try to keep their pensions close to fully funded and minimize the difference between their assets and liabilities. Their valuations are tied to current interest rates. So, if current interest rates are high, then future liabilities are smaller, and vice versa.

Traditionally, public pension plans -- under existing GASB rules -- use an assumption of long-term growth to make their valuations. Frequently, 8 percent growth is used as a target rate.

Groups such as the National Association of State Retirement Administrators say the status quo makes sense since there isn't a compelling reason to have public pension plans be fully funded at a given time, as they would never need to be paid out all at once.

Using the corporate standard could also have negative effects when governments try to budget for their pension plans. For example, a drop in interest rates from 5 percent to 3 percent would cause the value of future pension liabilities to increase by 40 percent -- on the books -- when in reality such a change shouldn't drastically alter the long-term outlook of the plans, NASRA officials say.

"A long-term rate of return makes a lot more sense for a perpetual entity such as a government," said Jeannine Markoe-Raymond, director of federal relations at NASRA. "It's a long accumulation and a long-term payout stream. Historically speaking, state and local government pensions have earned well over 9 percent, and they're using 8 percent as their assumption, and they're being told that's too high."

Markoe-Raymond said the legislation is not about promoting transparency; rather, it's an attempt to make an end-run around GASB's existing standards. She also emphasized that state and local governments aren't seeking bailouts of their retirement systems, and public pensions are secure.

But some observers disagree.

Pensions are funded by contributions from employers and employees. They're also funded by investment earnings. When the financial markets plunged in the second half of 2008, those pensions lost a quarter of their asset value, according to the Government Accountability Office.

As those pensions suffer, some have predicted they face near exhaustion. At that point, a government would likely have to raise taxes or cut spending to fund the pension.

Josh Rauh, a finance professor at Northwestern University whose work is cited by the Republican sponsors of the bill, predicts that state pensions could start running out of money as early as 2017.

Data from the Pew Center on the States reveal that state pensions face a $1 trillion shortfall. At the end of fiscal 2008, states had set aside $2.35 billion to pay retirees, but they had promised to pay $3.35 billion.

(Pew has a useful widget that you can use to explore each state's pensions in depth.)

But Nunes and other Republicans believe that the $1 trillion figure is optimistic, and that the true extent of the program could be even greater, due to accounting standards used by pension plans. They say the plans often overstate the fair market value of their assets -- hence their desire for more transparent reporting requirements.

"Quite frankly, if they have nothing to hide, there's no reason why the states and local governments who control public employee pensions should not embrace this effort to ensure that the taxpayers have a more transparent accounting of the true nature of pension liabilities," Rep. Darrell Issa said in a statement.

Markoe-Raymond criticized the methodology of Rahr's research, saying he used pessimistic assumptions about potential returns to drive his conclusions. "We think they're using pretty bad scare tactics," she said.

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