New Coordinated Attacks on Public Pension Plans Focus on Fear of Federal Bailout

Yet another well-planned, well-funded, coordinated attack on public pension plans has surfaced.  It includes new academic studies, a new website, a new Congressional report, and supporting media coverage.  This time the focus is on the red herring of a Federal bailout of state and local pension plans.  But maybe there is a silver lining?  In any case, it suggests that a new effort to impose Federal regulation or mandates on States and their pension plans may be underway.  

The latest assault on public pension plans began on September 20, 2012, with the release of a new study by the Illinois Policy Institute entitled “A Federal Bailout of State Pensions Systems Will Reward Failure.”   This study claims that “If states do not make fundamental reforms to their pension plans, they would need to increase their contributions to the pension funds by 75 percent in order to remain solvent.” 

Therefore, the study assumes that a Federal bailout of state pensions is coming – funded either by raising Federal taxes, offering Federal debt guarantees, selling State pension debt to the Federal Reserve, which would in turn print new money to buy the debt (which they refer to as “monetization”), or  providing Federal benefit guarantees.  “In the end, any federal bailout would reward the most profligate states at the expense of more responsible states,” the Illinois study argues.

The Illinois study sets out to measure this financial impact by examining the spending-to-taxes ratios of individual counties and states.  As the study explains, “This ratio is expressed in terms of how much federal spending is received for every dollar sent to Washington, D.C.”  According to the study’s methodology, a ratio of more than $1 means that a state or county receives more money in Federal spending than it pays in Federal taxes and is a “net receiver” of Federal money.   A ratio of less than $1 means that a state or county receives less money in Federal spending than it pays in Federal taxes, and is therefore a “net payer” of Federal money.

The new study purports to show that a Federal bailout of what the study estimates to be $2.5 trillion in state pension debt would benefit 17 states, while the remaining 33 states would suffer.  It provides what it claims is the public pension debt for each state measured as a share of GDP as well as per household.  It also has a listing of the 1,099 counties that it estimates would benefit from a Federal bailout of state pension debt, and the remaining 2,008 counties that would lose money. 

It is also disturbing to see this study cite not just GASB but Moody’s by name as having “issued new rules in 2012 that require state governments to use more realistic assumptions” to measure their pension liabilities.  Clearly, the report’s authors are aware of Moody’s proposed adjustments to pension liabilities, and want to characterize it as comparable to GASB’s official rulemaking process.  It also confirms how the new Moody’s numbers would be used by opponents of public plans.

Next, the Illinois study provides the basis for a new website called “No Pension Bailout.”   This site includes the study’s state and county information in a searchable format, along with model legislation, a petition to sign, and a way to both donate money as well as use virtually every form of social media to forward the website’s information to others. 

The study and the website were also the focus of a press conference on September 20th hosted by the Illinois Policy Institute and featuring U.S. Senator Jim DeMint (R-SC), as well as representatives from the Cato Institute, ALEC, and the Heritage Foundation, all deploring the state of public pensions and warning of a Federal bailout in the works.

This has now been followed by a new “commentary” from the GOP staff of the Joint Economic Committee (JEC), of which Senator DeMint is the ranking Senate Republican, released on September 26th and entitled “The Pending State Pensions Crisis.”   This report finds that “Pension protections and the magnitude of pension liabilities make bailout requests inevitable.”  Despite warnings by the Governmental Accountability Office (GAO) about the reliability of Joshua Rauh’s research in this area, he is, of course, cited frequently.  In an apparent effort to pit public employees against governmental retirees, the report also states that “Pension benefits can take precedence over virtually all other forms of spending, meaning retired teachers receive their pension checks even before current teachers receive their paychecks.”

The JEC Republicans also build on the Illinois report’s data on the impact of a Federal bailout.  The following paragraph captures the flavor of the report’s analysis:

“The size of the coming crisis is so large that reasonable tax increases and spending cuts will not solve the problem. And if public employee unions continue to refuse any sort of reform that would bring public sector pensions more in line with private sector retirement systems, the states will inevitably come knocking on the federal government’s door for a bailout. And whether it is sympathy, cronyism, fears of financial contagion, or a desire to further increase the size and scope of the federal government, Washington policymakers will no doubt find it difficult to say no to saving the pensions of retired teachers and firefighters after a past Congress bailed out the big U.S. banks and automakers.”

The report also compares public pension plans with the instigators of the Great Recession:  “In many ways, the state and local pension funds are acting much like the big banks and automakers before they were bailed out.  Just as the big banks were knowingly engaging in risky behavior and just as Chrysler and General Motors (GM) were conceding unsustainable pay and benefits to their unionized workers, some of the most fiscally troubled states are doing the exact same things.”  Public sector unions are definitely at the heart of the problem, in the report’s view. 

The JEC GOP staff report concludes that “simply passing legislation today stating there will be no federal bailout of state pensions is not enough.”  Instead it argues that “to preemptively deter states from seeking bailouts, the federal government could conditionally reduce federal aid to states in proportion to their unfunded liabilities until their pension fund becomes solvent over a specified future time frame.”  In the alternative, the report suggests a variation on the Public Employee Transparency Act legislation (PEPTA) proposed by Congressman Nunes, proposing that states’ tax free bond status could be revoked if conventional, private-sector accounting standards show that their pension funds are expected to go broke within 10 years or less.

In yet another sign of what appears to be a well-coordinated effort, Time also released an article on September 26th entitled “How Bad Is America’s Pension Funding Problem?”  The article also speaks of the dangers of a Federal bailout and the problems with public sector DB plans.  While acknowledging that, with regard to 401(k) plans’ experience over the past 12 years, “unfortunately” many people approaching retirement have far less money than they expected, the article nonetheless argues that, even though such a shortfall is “distressing,” it doesn’t compare with the “dangers” posed by DB plans. 

The article goes on to argue that eventually it will be necessary to bring down this pension funding deficit, and suggests some options, including a federal bailout.  Also, in addition to cutting retirement benefits by 20% or forcing employees to pay an additional 5% of their salaries toward such benefits, the article suggests that everyone could be switched over to defined-contribution plans, which would “eventually solve the problem.”

Finally, on September 27th, Citizens Against Government Waste (CAGW) held a press conference in Washington, DC, at the National Press Club to release their new report entitled “Public Servants or Privileged Class:  How State Government Employees  are Paid Better Than Their Private Sector Counterparts.”  According to a press release, the report analyzes State government employee wages and benefits in all 50 states, and “for the first time, provides a detailed comparison of compensation for public and private workers in the same job categories, from architecture and engineering to transportation.”  The report claims to show “the impact of high public employee compensation on the massive liabilities for unfunded pensions that are devastating the finances of cities and states across the country.”

Is there, nevertheless, a possible silver lining to be found in this latest assault on public employees and their pensions?  Many of these reports actually speak favorably of allowing states to address their unique problems with regard to pension reform.  For example, the Illinois report says that “There’s no denying the fact that state pension funds are in deep trouble. But what they need are state-based reforms, not a federal bailout.”  Also, the new website petition found on nopensionbailout.com includes this statement:  “Fiscal responsibility and real reforms at the state level are needed to fix the pension crisis – not federal involvement in a state issue.” 

Furthermore, the Time article acknowledges that “since the recession, most states have been trimming pension costs for public-sector employees,” with 31 states having reduced benefits for new hires, 26 requiring  higher contributions from workers and nine reducing cost-of-living adjustments for retirees.   Also, conceding that state and local plans vary enormously from one place to another, the article says that this means that “the worst are much worse than the average.”  But this effectively concedes that there are also many plans that are much better than the average. 

Finally, in arguing that DC plans for everyone will eventually solve the problem, the Time article also notes that this is as far as young workers are concerned, and that such a solution “would still leave a huge unfunded liability for those approaching retirement.”

So there is some good language embedded in these reports and articles that could be turned to our use.  States are methodically taking care of their own unique problems, and the reforms are making a difference,  Also, converting to DC plans for all new hires doesn’t solve the problem of unfunded liabilities and, as we know, is likely to increase them .

However, this weekend the Wall Street Journal published an article entitled “Pension Crisis Looms Despite Cuts.”   The article says that, despite action in virtually every state to reform pensions, the Center for Retirement Research at Boston College finds that only about $100 billion has been cut from their estimated $900 billion funding gap.   This short-term view of efforts to provide pension sustainability could be used to undercut the message that pension reform should, and can, be handled by the states.

On a more positive note, the Boston College research also showed that, as of 2010, state workers were paying 10% more toward their retirement plans compared with three years earlier, which will also gradually help to reduce unfunded liabilities. 

What does this latest attack on public employees and their pensions suggest?  First, despite significant reforms, opponents of the current DB-based structure have not been satisfied, and continue to work to convert public retirement to a DC-based structure. 

Also, there continues to be little attention or concern by opponents of public pensions for the vast majority of Americans who have no real basis for a secure retirement other than Social Security.  Nor is there any attention paid to the adequacy of retirement benefits.  The only focus appears to be on the size of the liability, not whether it reflects a legitimate measurement of real retirement needs.  That is why Senator Harkin’s recent efforts to refocus Congressional attention on retirement security for all Americans are so important.  

The timing of this latest assault is also significant.  It seems very early to be positioning for the 2013 Congressional session.  Perhaps it suggests some real concern regarding the upcoming election results, and signals that opponents of public pensions perceive that the Lame Duck session of Congress following the elections may be their last best chance to achieve a Federal response to state pension reforms.   

Finally, the JEC report offers some hints for what a new Federal solution may look like.  It may be that simply disclosing higher unfunded liabilities based on a much lower, bond-like discount rate is no longer seen as being sufficient.  Forcing draconian state pension reforms in order to retain Federal aid or Federal tax-free bond status seems to be the latest plan of attack.  The JEC report may actually provide a blueprint for what will be coming at the governmental plan community in the near future.  ALEC appears ready to capitalize on it, and once again, Federal activity may simply be providing air cover for what will ultimately be a renewed state-level assault.

• Illinois Policy Institute Study
• “No Pension Bailout” Website
• Press Conference on Danger of Federal Bailout of Public Pensions
• New JEC GOP Staff Report on Public Pensions
• Time Article:  How Bad Is America’s Pension Funding Problem?
• CAGW Report:  Public Servants or Privileged Class  
• WSJ Article:  Pension Crisis Looms Despite Cuts