A bill introduced Dec. 2 in the U.S. House — the Public Employee Pension Transparency Act — will draw more attention to the financial crisis of state and local government defined benefit plans.
What public plans need is the equivalent at of ERISA, the Employee Retirement Income Security Act, which covers corporate plans.
Public plans in general need compelling discipline in financial management, especially with regard to funding. The House bill, sponsored by Republican Reps. Devin Nunes of California, Paul Ryan of Wisconsin and Darrell Issa of California, doesn't go so far as to dictate funding. It really cannot.
State and local governments need to enact their own type of ERISA to compel public plan funding, because the federal government doesn't have such jurisdiction. Besides, the federal government hasn't been a success in managing its retirement programs, including Social Security.
But the House bill has its good points, including requiring better disclosure of pension funding — especially a requirement to value pension liabilities based on interest rates of Treasury securities.
That valuation method. using a riskless, lower rate, is contrary to the general practice of public pension plans and their actuarial consulting firms, which use the long-term expected return on assets to value pension liabilities, which results in lower pension contributions.
Congress shouldn't dictate what rate public plans should use. States have that authority and use it at their own peril. But the bill is correct in saying existing accounting practices have resulted in “an understatement of plan assets.”
The Governmental Accounting Standards Board sets voluntary standards that public plan actuaries use.
Connecticut Gov. M. Jodi Rell vetoed a bill in 2007 that would have allowed the state comptroller to issue financial statements using whatever valuation method he or she prescribes. “Transparency and confidence in government financial reporting are based on adherence to uniform standards that are independently established and free from commercial and political influence,” Ms. Rell said in a statement at that time. “Bond investors and those making economic decisions have a clear understanding of statements prepared in conformity with generally accepted accounting principles. To deviate from this standard would jeopardize the financial standing of our state.”
The GASB has contributed to putting public plans at risk. The board has proposed toughening valuation methods, but still tilts strongly in favor of the current approach. Some actuaries are seeking to bring the GASB in line with corporate valuation methods, which use lower discount rates. What the House bill suggests is encourage pension accounting that reflects economic reality and promotes better understanding of the cost of retirement benefits, their affordability and the contributions necessary to keep funding levels adequate to secure pension promises.
Congress should adopt another provision of the bill: a clear federal prohibition on public pension bailouts by the federal government, which might encourage better public plan funding.
State and local governments need discipline in funding their pension plans. The solution belongs at the state level. The lack of funding requirements imposed on public plans underscores a principal reason these plans, in general, face a grim financial outlook unless drastic action is taken to shore up funding.
Unlike corporate plans, public plans have been said to operate in a fishbowl, where their operations are exposed to public pur-view. Yet accountability has been lacking.
Corporate plans face the legal discipline of ERISA funding, investment and conflict-of interest-requirements, including scrutiny by the PBGC. In addition, public companies must comply with reporting and accounting requirements of the Securities and Exchange Commission and the Financial Accounting Standards Board, as well as shareholders and debt investors and securities analysts. Corporations have to operate their pension plans in keeping with the best way to allocate capital to meet corporate financial objectives, including determining what's affordable, what's competitive.
But lately public plans have received scrutiny from some unfamiliar sources. For example, the SEC in April charged the state of New Jersey with securities fraud for failing to disclose to investors in its multibillion-dollar municipal bond offerings that it was underfunding the state's two largest pension plans. The state settled the charges without admitting or denying the SEC's findings.
Drawing attention to the crisis is only a first step. Resolving it is the challenge.
To ensure the sustainability of public plans, pension trustees must take a more active role in promoting good funding, even considering suing sponsors that shortchange funding or seek to influence a political aim or other action not in the best interest of beneficiaries. And they need the encouragement the House bill offers.