On April 18, 2013, Congressman Devin Nunes (R-CA) introduced the newest version of his Public Employee Pension Transparency Act,” HR 1628, and its companion, S 779, was introduced in the Senate on April 23, 2013, by Senator Richard Burr (R-NC). The bills are essentially the same as the previous versions from the last Congress, with a few significant exceptions. Despite a “Dear Colleague” request made to other House members on February 25, 2013, Congressman Nunes only has two original cosponsors, as does Senator Burr. NCTR, along with nine other national organizations, wrote to all House members on April 3, 2013, urging them not to cosponsor the Nunes legislation, and has recently joined with 20 other national groups representing public employers, public employees and public pension fund administrators in writing to former cosponsors of the legislation telling them PEPTA is unwise and unwarranted and asking for a meeting to discuss public pension plan reforms. There are some signs that PEPTA may have lost some steam since the last Congress, but NCTR and other public sector organizations still view it as a major legislative threat.
The new PEPTA legislation (HR 1628 and S 779) continues to require that, in order to retain Federal tax-exempt status for their bonds, sponsors of State and local pension plans (other than defined contribution plans) must file an annual report as well as potential supplementary reports with the Secretary of the Treasury related to their pension finances. These reports will be entered into a database that will be accessible to the public.
In effect, PEPTA would require every public pension plan to essentially keep two sets of books. One would be the set that plans currently produce, which would reflect the reality of balanced investment portfolios -- including stocks and other sensible investment alternatives as well as bonds – that have, over the past 25 years, averaged 8.8 percent returns (based on median returns for periods ended 09/30/2012). The other set would pretend that all public plan assets were invested in U.S. Treasury bonds (even though this is not the case for any public plan), which currently yield around 3 percent.
The result would be two substantially different measurements of a plan’s unfunded liabilities maintained by the Treasury Department. One set of numbers would be a substantially increased, artificial liability measurement that the use of the Treasury yield curve would produce, which, along with the unsmoothed valuation of assets, would significantly understate plan funding levels. This artificial set of numbers will differ substantially from those used to fund a plan or required for accounting and financial reporting purposes under GASB. The reporting of these two sets of numbers will only serve to confuse the public, failing to provide clarity with regard to public pension accounting.
Specifically, PEPTA would require an annual report that would have to include the following:
- A schedule of the funding status of the plan, including the net unfunded liability and the funding percentage of the plan;
- A schedule of contributions by the plan sponsor for the plan year;
- Alternative projections for each of the next 60 plan years of cash flows associated with the current liability, together with a statement of the assumptions used in connection with such projections;
- A statement of the actuarial assumptions used for the plan year;
- A statement of the number of plan participants who are retired or separated from service and are either receiving benefits or are entitled to future benefits and those who are active under the plan;
- A statement of the plan's investment returns including the rate of return, for the plan year and the 5 preceding plan years;
- A statement of the degree to which unfunded liabilities are expected to be eliminated;
- A statement of the current cost of the plan for the plan year; and
- A statement of the amount of pension obligation bonds outstanding.
The two significant changes from last year’s bill are the requirement for 60 years of plan projections of cash flow instead of 20 years, and the addition of the “current cost” of the plan.
In addition to the annual reports, supplementary reports will be required of plan sponsors in any case in which either the value of plan assets in the annual report is not determined using fair market value, or the interest rate or rates used to determine the value of liabilities or as the discount value for liabilities are not interest rates based on US Treasury obligation yield curve rates.
The supplementary report would be required to include certain information specified in the Annual Report -- specifically, a schedule of the funding status of the plan; a statement of plan investment returns; the degree and manner the plan sponsor expects to eliminate its current unfunded liability; and the plan’s current cost -- but determined by valuing plan assets at fair market value and by using the applicable daily Treasury obligation yield curve rate as the discount rate. (This is also different from the previous legislation, in that it no longer would require the Treasury yield curve to be based on three different periods.)
Finally, the legislation would continue to prohibit a Federal bail-out of public pensions.
Public Sector Reaction
On February 25th, Congressman Nunes circulated a “Dear Colleague” request to his fellow House members, asking them to join in cosponsoring his legislation. NCTR immediately alerted its members, urging them to contact their Congressional delegations, particularly those Members who had cosponsored PEPTA in the last Congress, to ask them to call their public retirement systems before they considered cosponsoring the Nunes PEPTA legislation.
Next, on April 3, NCTR, along with nine other national organizations, wrote to all House members, asking them not to cosponsor the Nunes legislation, and pointing out that PEPTA “paints an inaccurate and misleading picture of the state of public finance and pensions, and ignores the extensive efforts made at the state and local levels to close short-term budget deficits, as well as address longer-term obligations such as pensions.” The letter went on to note that “Federal intrusion into areas that are the fiscal responsibility of state and local governments is unwarranted” and that it “makes no sense to impose disruptive and costly federal requirements that only serve to interfere with state and local government economic recovery and pension reform efforts.”
When Congressman Nunes introduced PEPTA on April 18th, NCTR issued a Press Statement that condemned the legislation as a Federal takeover of public pension accounting. The statement quoted Meredith Williams, NCTR’s Executive Director, as saying that “I continue to be surprised that Congressman Nunes and his supporters believe that imposing unwarranted, unnecessary, and duplicative Federal regulation on state and local governments is the best way to solve any problem.”
The statement went on to note that when, as now, interest rates are very low, PEPTA will make pension plans appear very underfunded. This could place pressure on State and local governments to put more monies into these funds than they really need based on their actual funding status. “But when interest rates are high, it could make plans look even more funded than they actually are, which could exacerbate the underfunding of pensions,” the statement pointed out.
Finally, NCTR has joined with 20 other national groups representing public employers, public employees and public pension fund administrators in writing to former cosponsors of the legislation in both the House and Senate on April 24, 2013, telling them PEPTA is unwise and unwarranted and asking for a meeting to discuss public pension plan reforms. The letter points out that the Government Accountability Office (GAO) (in a March 2012 report entitled “State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability”) documented that the exhaustion dates cited in the PEPTA summary materials are “not realistic estimates” of the true financial condition of state and local retirement plans. “Nevertheless,” the letter continues, “the legislation has been reintroduced in the 113th Congress, along with the same misleading information.”
As before, Congressman Nunes was joined in introducing the legislation by Congressman Paul Ryan (R-WI), the Chairman of the House Budget Committee, and Congressman Darrell Issa (R-CA), Chairman of the House Oversight and Government Reform Committee. These two gentlemen continue to be very powerful members of the overall House Leadership. However, unlike in the previous Congress, when Mr. Nunes had 36 additional original cosponsors when his bill was dropped and he added another 13 subsequently, he introduced PEPTA in this Congress with only these two additional original cosponsors. And, despite almost two months of seeking other cosponsors, he has only been able to add five more: Cramer (R-ND); Duncan (R-SC); Jones (R-NC); McClintock (R-CA); and Westmoreland (R-GA).
Similarly, in the Senate, Senator Burr had only two additional cosponsors when introducing his legislation on April 23rd – Senators Coburn (R-OK) and Thune (R-SD). In the last Congress, when Burr introduced the Senate PEPTA bill, he had six original cosponsors, Missing, at least for now, are Senators Grassley (R-IA) and Isakson (R-GA); Senators Ensign (R-NV) and Kyl (R-AZ) are no longer in the Senate. Also, Senators Kirk (R-IL) and Chambliss (R-GA), who subsequently cosponsored the Burr legislation in the last Congress, are also missing from it so far.
While it is certainly likely that additional cosponsors will be added to both items of legislation, it does suggest that both Senator Burr and Congressman Nunes may have had some difficulty in obtaining comparable numbers for the introduction of this new version of their legislation. This in turn suggests that the public sector message of unnecessary and unwarranted Federal intrusion is getting across. Also, unlike the introduction of the PEPTA legislation in 2011, there are no signs of any coordinated media campaign this time around. Congressman Nunes has not been seen on television talking about “smoking the rats out of their holes,” for example.
However, it is well to note that Congressman Nunes has a new trifold brochure supporting his legislation that includes a litany of supportive quotes and endorsements from newspapers across the country for his earlier bill. Also, notwithstanding his new role as Chairman of the House Ways and Means Trade Subcommittee, and the demands it places on his time, he has once again championed this legislation. In short, it cannot be safely assumed that this time he is any less serious about advancing PEPTA. And as a more senior member and part of the leadership of the Ways and Means Committee, he is now in a much better position to help move it than he was in the last Congress.
In summary, NCTR and the public pension community in Washington are taking the new PEPTA legislation as a very serious threat. The risk is not that the legislation will be moved as a free-standing bill, but that it will be added to some other major piece of legislation, such as an extension of the debt ceiling, or tax reform, from which it will be difficult to strip out.
Hopefully, the efforts of NCTR and its members to keep cosponsors off the bill this time around are working, and Members of Congress are not as quick to jump to blame public pensions for all of State and local governments’ fiscal problems as they have been in the past. If you have not yet reached out to your Congressional delegation on this matter, please do so as soon as is possible.
- New PEPTA Legislation
- NewNunes Tri-fold on PEPTA
- Nunes Press Statement on PEPTA
- NCTR Press Statement on PEPTA
- Ten National Organizations’ Letter to House
- Twenty-one National Organizations’ Letter toFormer Cosponsors of PEPTA
- NCTR Talking Points