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Congress must address public pension plan unfunding

Sheila Weinberg
Sheila Weinberg, a certified public accountant, is the founder and CEO of Chicago-based Truth in Accounting, a 501(c)(3) non-profit organization that researches government financial data and promotes transparency for a better informed citizenry.

According to an April 2014 Gallup poll, 59% of Americans worry they won't have enough money for retirement. As someone who researches and analyzes government financials, I worry about retirement benefits — especially pensions — that governments have promised to their employees, including teachers.

Last year, our research showed that for fiscal year 2014, states had a total of $80 billion of reported unfunded pension liabilities, but states' actual pension debt was $628 billion. The difference was a result of accounting rules that required states to hide the vast majority of their unfunded pension liabilities off their balance sheets. Now, state and local governments are starting to feel the pressure to come up with the money to pay these unfunded liabilities.

My home state of Illinois is known for being in a financial mess and has one of the worst-funded pension systems in the country. In fact, our most recent data show that Illinois has only $78 billion to pay its $195 billion of promised pension benefits. Why have Illinois pension liabilities become such a problem? Part of the answer is failure of leadership from past and current governors and legislators, and perhaps worse, deceptive financial reporting and communication. For too many years, the total amount of unfunded pension liabilities was not reported to citizens, and the state's true compensation costs were not included in the budget.

Employee compensation packages include pension benefits, which they earn a portion of each year. As employees earn these benefits, the state incurs costs and related liabilities, even though benefits are not paid until the employees retire. However, instead of including pension costs in the budget year that employees earned their benefits, governors and legislators do not fund pension plans adequately, and push these costs onto future taxpayers.

Like Illinois, Stockton, a city in Northern California, has also felt the pension-funding pressure. In 2012, Stockton filed for Chapter 9 bankruptcy, with an unfunded California Public Employees' Retirement System liability of more than $200 million and owed more than $100 million in pension obligation bonds. These events have contributed to the national debate about pension reform, but partisan debates about general retirement reform are not sufficient courses of action. For decades state and local governments have not been transparent about their unfunded pension liabilities.

While new Governmental Accounting Standards Board rules are making state and local governments report more accurately the amount of their pension debt, Rep. Devin Nunes, R-Calif., believes more needs to be done. On March 21, he reintroduced a bill he sponsored in 2011 that would bring fiscal accountability and transparency to the public pension system.

H.R. 4822, the Public Employee Pension Transparency Act, would require state and local governments to disclose employee pension plans in a readily accessible, searchable and viewable public database. Currently, no comprehensive database exists. Rather, individuals and legislators alike have to sift through voluminous and confusing documents to find information about their city or state's pension plan.

Imagine if your bank never sent you monthly statements or didn't give you the option to view your accounts online. Instead, every time you want to know your credit card balance you have to call the bank, and then the bank would send you long and complicated documents that only a financial expert could understand. A comprehensive database would not only save time but would also give taxpayers, participants, policymakers and lawmakers an accurate depiction of their unfunded pension liabilities, helping them to make informed financial and pension reform decisions.

This bill would not be an unconstitutional takeover by the federal government. State and local governments will still dictate the benefits offered and how benefits are invested. Rather, PEPTA requires state and municipal pension plan sponsors to file an annual report with the secretary of the treasury, who will develop model reporting statements so financial information is consistent across states. Currently interest earned from most state and local government bonds are exempt from federal income taxes.

If a government does not comply with the proposed legislation, its bondholders will have to pay federal income taxes on the interest earned from the government's bonds. As a result, the government bonds might be less attractive to investors and the government will probably have to pay a higher interest rate.

Currently, state and local governments calculate the taxes they will need to fund promised benefits assuming the pension plan investments will earn generally, depending on the system, from 7% to above 8% a year. But many informed observers believe those assumptions are not appropriate to use in financial calculations for pension liabilities. These critics argue that a lower “risk-free” rate is more appropriate given the certainty of the legal obligation to pay benefits. PEPTA would require significantly lower discount rates based on Treasury yields. This would lead to much higher, and perhaps realistically higher, liability calculations. PEPTA would require pension plans to give citizens an idea of the taxes that will be needed to pay promised benefits using this “risk free” rate.

In a May 2 Pensions & Investments' Other Views commentary, “Faulty claims underlie legislative call for federal mandates,” Gary Findlay, former executive director of the Missouri State Employees' Retirement System, said it would be “inappropriate” for Congress to “mandate costly disclosure requirements that conflict with newly established accounting standards” set by GASB, an “independent agency.” However, GASB members are current and former government officials, and others who might have conflicted interests in the way governments report their debt.

Pension systems are complicated, so taxpayers need to have information about the benefits promised and the amount of taxes that will be needed to fund those promises. State and local governments shouldn't gamble with the future of pension plan participants and taxpayers who fund pension contributions, let alone use bad figures and data. It's time for Congress to act now and consider PEPTA. The stakes are too high.

Sheila Weinberg, a certified public accountant, is the founder and CEO of Chicago-based Truth in Accounting, a 501(c)(3) non-profit organization that researches government financial data and promotes transparency for a better informed citizenry.

This article originally appeared in the July 25, 2016 print issue as, "Congress must address public pension plan unfunding".