5 Min Read
WASHINGTON (Reuters) - Congress is again joining the fight over public pensions, as a Republican Representative on Thursday pushed a bill to require state and local funds to give more accurate information on their assets and to bar the federal government from bailing them out during a financial crisis.
The legislation introduced by Representative Devin Nunes of California is essentially the same as the bill he offered in 2010 that languished as unions and advocacy groups for the retirement systems objected to having the federal government intervene in state and local affairs.
Although state and local governments are dealing with high pension costs, which strain their already tight budgets, no one has yet asked the federal government for a bailout.
A corresponding bill will likely be introduced soon in the Senate by Richard Burr of North Carolina. The House bill has many of the same backers as the 2010 measure, including House Budget Committee Chairman Paul Ryan of Wisconsin.
"Often hidden by opaque accounting practices, the costs of public pension funds are driving an increasing number of states and municipalities toward insolvency," Nunes said in a statement. "This bill will increase the funds' transparency and eliminate deceptive accounting practices that are already shunned in the private sector."
States and cities have frequently shortchanged their pensions over the years and when their revenues crumbled during the 2007-2009 recession, they cut back even more.
The financial crisis wrecked the pensions' chief revenue source, investment returns. Recently, the holdings of public pension funds have recovered, but the debate over the size of their revenue gaps continues.
The Pew Center on the States estimates that states combined are short at least $757 billion to cover retirement benefits and cities are short $99 billion.
Many conservative economists and lawmakers such as Nunes say the pensions project rates of return that are too high. They say using overly optimistic investment expectations makes shortfalls appear artificially small.
Meanwhile, they question the funds' methods of "smoothing" expenses over time, which they say masks the depth of the problems. Because pensions do not have to pay all their liabilities at once, many spread, or smooth, the amounts over a span of years. Some have smoothed liabilities across decades to create a sense that they are more manageable.
While the bill includes a variety of measures on reporting, the key requirement is to provide "realistic rates of return and tie assets to more reasonable fair market valuations."
Under the bill, pensions that do not report their asset levels using the prescribed formulas could cause considerable financial damage. States and municipalities with employees enrolled in those pensions would lose their abilities to issue tax-exempt bonds, the key source of infrastructure funding.
Much has changed in the last two years in the pension landscape. States such as Rhode Island instituted their own sweeping reforms as their localities tottered toward bankruptcy, and many plans have lowered their projected rates of investment returns.
On Wednesday the board of the largest pension fund, the California Public Employees' Retirement System, known as Calpers, voted to change its smoothing methods.
"While some states have improved their pension funds, a lot of the reforms comprise the same kind of accounting gimmicks we've seen before. Meanwhile, municipalities such as San Jose that tried to institute real reforms are facing lawsuits from unions," said Nunes. "With our bill, all we're saying is that pension systems need to clearly report their true financial condition."
Last summer, the Governmental Accounting Standards Board approved an overhaul of projecting rates of return on investments, which provide 60 percent of pensions' revenues. Funds lacking sufficient cash to cover benefits must lower their projected rates to about 4 percent.
GASB also requires governments to disclose what their actuaries recommend they contribute to the pension plans - a way of checking if they are underfunding the systems. Employing governments provide about 20 percent of pension revenues.
Moody's Investors Service is reviewing the ratings of 29 local governments because of concerns about pension gaps. Moody's created its own methodology for evaluating pensions, "because the manner in which these obligations are reported varies widely, and we believe liabilities are underreported from a balance sheet perspective," it said on Wednesday.
Editing by Vicki Allen