Three key members of the new GOP majority in the House of Representatives have introduced legislation to require States and local government sponsors of public pension plans to provide specific funding information to Treasury based on the market value of assets and liabilities (calculated with U.S. Treasury obligation yield curve rates), as well as other assumptions and methods proscribed by Treasury to achieve comparability across plans. Failure to do so would cause the offending State or political subdivision to lose all Federal tax benefits with respect to any State or local bond issues. The sponsors say the legislation is needed because the debt reported by public pensions fails to convey the true size of the debt confronting taxpayers because public pensions are able to calculate their liabilities using “unreasonably high discount rates” and to “distort fair market value of assets in order to hide debt.” Grover Norquist and his Americans for Tax Reform are among the initial and vocal supporters of the bill. While nothing will happen to the legislation before the current “lame duck” session of Congress adjourns later this month, the sponsors have said it will be quickly re-introduced in the new 112th Congress. The legislation can be expected to be one of the focal points for Congressional hearings and possible legislative action in the House in 2011 – and a major priority for NCTR.
On December 2, 2010, Congressmen Devin Nunes (R-CA), Paul Ryan (R-WI) and Darrell Issa (R-CA) introduced HR 6484, the Public Employee Pension Transparency Act, which would amend the Internal Revenue Code. It would condition the continuation of certain specified Federal tax benefits --namely the ability to issue federally tax-exempt bonds, as well as receive direct subsidies under the Build America Bonds program and other direct subsidy bond programs -- upon State or local government pension plan sponsors’ filing certain reports with the Secretary of the Treasury. These reports would set forth each plan’s financial data using Federally-proscribed methodologies and valuations, including, among other things, a “market value of liabilities.” The legislation would also mandate the creation of a public website, with searchable capabilities, for purposes of posting the information received by the Federal government in these reports.
Mr. Nunes is a member of the House Ways and Means Committee, to which the legislation will be referred for further action. Mr. Ryan is the incoming Chairman of the House Budget Committee, which will play an increasingly important role in the 112th Congress given the GOP's focus on deficit reduction. He is very well-respected by his colleagues and will be a key member of the House leadership.
Finally, Mr. Issa will be the new Chairman of the House Oversight and Government Reform Committee, where he intends to hold what could prove to be a record number of oversight hearings on any number of subjects. (See story below.) These three gentlemen are therefore very well-positioned to advance such legislation.
The bill is seen as necessary because “lucrative pension promises are being made to public employees that taxpayers simply cannot afford” and the “true level of unfunded liabilities associated with these plans – perhaps more than $3 trillion – is being hidden thanks to unrealistic accounting standards,” according to Congressman Nunes.
Congressman Ryan claims that “We need to ensure that state and local governments are accurate and honest in detailing their financial liabilities, including the cost of pension plans for public employees,” apparently suggesting that currently, accuracy and honesty may be absent. Finally, Congressman Issa asserts that the American people have a right to “know the truth about the unfunded liabilities being run-up by state and local pensions.” “Quite frankly,” Mr. Issa notes, “if they [public pensions] 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.”
The legislation is very tightly and carefully crafted. It begins with a number of findings setting forth both the constitutional basis for Federal involvement as well as the policy rationale. For example, it notes that:
• State and local government employee pension plans are substantially facilitated by the favorable Federal tax treatment of participants and beneficiaries, investment earnings, and employee contributions;
• The investment of public pension plan assets, the distribution of benefits, and other financial activities are facilitated through the use of instrumentalities of, and substantially affect, interstate commerce, and these interstate activities have “a substantial impact on the national economy, affect capital formation, regional growth and decline, the national markets for insurance, and the markets for securities and the trading of securities of State and local governments;”
• State and local government employee pension plans have a substantial impact on interstate commerce as a consequence of the interstate movement of participants;
• Public pension plans are “affected with a national public interest” and meaningful disclosure of the value of their assets and liabilities is necessary and desirable in order to adequately protect plan participants and their beneficiaries and the general public;
• “Meaningful disclosure” would also further efforts to provide for the general welfare and the free flow of commerce.
The legislation states that its policy is:
(1) to protect the interests of participants and beneficiaries in State or local government employee pension benefit plans and the interests of the Federal government and the general public in the fiscal soundness of such plans;
(2) to minimize the threat of a possible adverse impact of the operations of such plans on Federal revenues and expenditures and the national securities markets; and
(3) to encourage sponsors of such plans to examine the problems which may be experienced by their plans and to “expeditiously implement those remedial measures which may be necessary to guarantee meaningful disclosure of the assets and liabilities of such plans as well as their fiscal soundness, by providing for meaningful disclosure of the value of State or local government employee pension benefit plan assets and liabilities.”
There would be an Annual Report as well as Supplementary Reports required by a plan sponsor for each plan. The Annual Report would have to include the following:
• A schedule of funding status, to include a statement as to the current liability of the plan, the amount of plan assets available to meet that liability, the amount of the net unfunded liability (if any), 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 20 plan years relating to the amount of annual contributions, the fair market value of plan assets, current liability, the funding percentage, together with a statement of the assumptions and methods used in connection with such projections, including assumptions related to funding policy, plan changes, future workforce projections, and future investment returns (To “achieve comparability across plans,” the Treasury Secretary is to specify the projection assumptions and methods to be used.);
• A statement of the actuarial assumptions used for the plan year, including the rate of return on investment of plan assets;
• A statement of the number of participants who are retired or separated from service and are receiving benefits, those who are retired or separated and 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, and manner in which, the plan sponsor expects to eliminate any unfunded current liability that may exist for the plan year and the extent to which the plan sponsor has followed the plan’s funding policy for each of the preceding 5 plan years; and
• A statement of the amount of pension obligation bonds outstanding.
In any case in which either the value of plan assets in the Annual Report is determined using a standard other than 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, then the plan sponsor would have to file Supplementary Reports.
The Supplementary Report would be required to include the information specified in the Annual Report, but determined by valuing plan assets at fair market value and by using certain Treasury yield curves based on the following three periods: benefits reasonably determined to be payable during the 5-year period beginning on the first day of the plan year; benefits reasonably determined to be payable during the following 15-year period; and benefits reasonably determined to be payable thereafter.
As is obvious, this would appear to be essentially a Federally-mandated “market value of liabilities” (MVL) restatement of a pension plan’s liabilities and an unsmoothed assessment of the value of its assets. It would also impose a standardized Federal set of methods and assumptions for valuation purposes. Due to the use of MVL and an unsmoothed asset valuation, the reports would present highly inflated and volatile numbers compared to those used by plans and employers currently for valuation and funding purposes. It would likely create tremendous confusion among decision-makers as well as the public.
Furthermore, to the extent that it places in question to any degree the status of any Federal exemption from gross income relating to interest on State and local bonds, or any credit allowed to holders of qualified tax credit bonds, or any credit allowed under build America bonds, it could threaten investor confidence in the municipal bond markets at a time when State and local government can ill afford any restrictions on their financing capabilities.
Unfortunately, the legislation will likely have a certain appeal to some lawmakers, who will be told that it is all about transparency – and after all, if public pension plans thought that increased transparency was good for corporate America and the financial sector in the Dodd-Frank financial reform legislation, how could they reasonably oppose it being applied to them?
Also, the fact that the legislation will represent a case of “reform” that will not cost the Federal government a cent will also have its fans. This is bolstered by the proponents’ claim that the bill also “establishes a clear federal prohibition on any future public pension bailouts by the federal government.” Indeed, the legislation does have a provision that provides that “the United States shall not be liable for any obligation related to any current or future shortfall in any State or local government employee pension plan.”
However, public pension plans have not been requesting any such Federal bailout. Nevertheless, this did not stop Thomas Schatz, President of Citizens Against Government Waste, from declaring that “State and local governments’ empty coffers should not be ignored, nor should they become dependent on federal bailouts to ensure the fiscal soundness of their pension plans” in a statement supporting the bill.
The Chamber of Commerce, another showcased supporter of the legislation, also indirectly raised the bailout issue. “The unfunded liabilities of state and local government pension plans has [sic]reached crisis proportions with no solution in sight,” said Randel K. Johnson, senior vice president of Labor, Immigration, and Employee Benefits for the U.S. Chamber. “Unfortunately, the one solution governments may turn to as a source of funding is further taxation on private sector employers and workers.”
Mr. Johnson also argued that private sector pension standards should be applied to the public sector, saying that “it is hardly fair that the private sector is held to stringent funding requirements under the Employee Retirement Income Security Act, which can adversely affect wages and benefits for workers as funding shortages are addressed,” Johnson stressed, “while the public sector often remains free to promise increasing levels of benefits without properly funding those benefits for the future.”
Ironically, Mr. Johnson failed to note that the Chamber worked aggressively on Capitol Hill to obtain relief from the very Pension Protection Act funding rules that it believes should now be applied to the public sector. Specifically, the Chamber helped make sure that the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 included provisions which ensured that pension contributions “are not out of proportion to those required before the market downturn.” The Chamber website calls “Defined Benefit Plan Funding Relief” one of its policy accomplishments for 2010.
While it is extremely unlikely that the legislation will see any action before Congress adjourns later in the month, its supporters have promised to reintroduce it next year. Such reintroduction will likely serve as the focal point of a hearing before Mr. Issa’s Committee on Oversight and Government Reform. It is probably a safe bet to assume that critics of current pension accounting, such as Joshua Rauh, will be among the witnesses.
Finally, it is important to note that in addition to Grover Norquist and the Americans for Tax Reform, other supporters include Americans for Prosperity, the American Conservative Union, National Taxpayers Union, Americans for Limited Government, and, as also previously noted, the U.S. Chamber of Commerce. Not only is the list impressive, but the fact that these supporters were already lined up for the introduction of the legislation is another indication of the careful planning behind this overall effort.
(For those who may not be familiar with Mr. Norquist , he has famously said that “My goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub.” He is also well known among public employee pension plans because of his campaign to dismantle and privatize state pension plans and the trillions of dollars of public funds held as investments for retirees. He has said, “Just 115 people control $1 trillion in these funds. We want to take that power and destroy it.”)
In summary, this legislation must be taken very seriously. It has been carefully crafted and its introduction well-orchestrated. Its supporters are in positions to advance it while also using it as a means to continue to inflame public opinion against public pensions, and their resources with which to do so are formidable. It obviously implicates the entire GASB debate involving pension accounting and MVL. Finally, by connecting the legislation to municipal bonds, it links up with the SEC and its actions in this area (see story below).
This legislation will therefore be a major priority of NCTR in 2011. We are already reaching out to public employer organizations to make sure that they understand all of its implications, and we will also be working closely with other public sector groups to ensure that the Congress is made aware of the negative implications of this legislation. A key message will be that doomsday predictions and draconian legislative proposals distract attention from the real pension crisis that Congress should address, namely the vast majority of Americans who have no pension and little to nothing set aside for future retirement needs.
One last point to note: even though its provisions are clearly crafted to apply to defined benefit plans, the legislation’s drafters were careful to explicitly note that it does not apply to DC plans. Hmmmm.
• Nunes Press Release on Public Employee Pension Transparency Act
• Copy of HR 6484
• Chamber of Commerce Press Release
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