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.
In General
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.
Details
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.”
Outlook
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.
