Archive for May 9th, 2011

Pension Legislation in Congress

Kudos to State Treasurer Walker Stapleton for testifying before Congress in favor of H.R. 567, Rep. Devin Nunes‘s Public Employee Transparency Act, which would require states to use reasonable rates of return when calculating the financials for their pension plans, and would also require that they use proper discount rates based on US Treasuries, rather than their rates of return, when reporting their level of fundedness.

States would be able to continue reporting under the old standards, if they chose (and would likely continue doing so anyway), but would be required to issue a second set of numbers using proper accounting standards.  States that failed to do so would no longer be able to issue tax-exempt municipal debt, forcing them to use pay higher interest rates and making borrowing more difficult.  While the Wall Street Journal is reporting that Congress may yank that exemption altogether, blunting the effect of Nunes’s bill, I rather doubt that would pass the House this year.

For those interested in a fine synopsis of the state pension mess we’re in nationally, I can’t do better than to recommend Josh Barro’s piece in National Affairs, “Dodging the Pension Disaster,” which lays out the problems and potential solutions as clearly as I’ve seen anywhere:

First, pension reforms should include all benefits that will be accrued in the future, not just benefits that will be accrued by new hires. As mentioned earlier, most states are limiting their pension reforms to new employees only — which means they are likely dooming their reforms to failure….

Second, serious pension-reform plans should abandon the defined-benefit model. Three states — Michigan, Alaska, and Utah — have enacted reforms that will move many employees to defined-contribution retirement plans, or at least to sharply modified defined-benefit plans that shift most investment risk away from taxpayers. In most states, however, pension reform has been a matter of tinkering: increasing employee contributions, adjusting benefit formulas, raising retirement ages, and so on….

Third, states should consider voluntary buyouts of existing pension benefits. The two reform principles outlined above address only the costs of pension benefits going forward; they do not help resolve the very real problems associated with states’ existing pension liabilities — those that were incurred by governments as payment for labor that employees provided in the past. Here, there are no easy policy maneuvers: Short of defaulting on these debts, the only way states can eliminate unfunded pension liabilities is to fund them.

That last would be hard for Colorado to consider, as the State Constitution prohibits issuing general obligation debt, but it remains an option for other states.

We should be under no illusions that Harry Reid of Chuck Schumer would even allow Nunes’s bill to come up for a vote in the Senate.   But as we know, putting these things out there in the form of legislation is critical to getting actual reform in the long run.  And in this case, the long run is shorter than we think.

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