By Lisa Lambert
WASHINGTON, July 9 A top Republican senator
unveiled legislation on Tuesday that would radically change
public pensions by having life insurance companies pay benefits
through annuity contracts, helping to alleviate the underfunding
that has engulfed many plans.
The bill introduced by Utah Senator Orrin Hatch, the
highest-ranking Republican on the Finance Committee, would have
the government pay a premium each year to a state-licensed
insurer in an amount equal to a set percentage of salary.
Employees would then receive fixed income annuity contracts from
the insurance company.
"A new public pension design is needed, one that provides
cost certainty for state and local taxpayers, retirement income
security for state and local employees and one that does not
include an explicit or implicit government guarantee," Hatch
said in a speech to the Senate.
Annuities function similarly to pension plans by paying set
amounts in regular installments. The accumulation of annuity
contracts would even out interest-rate fluctuations, according
to Hatch, who would have insurers competitively bid for them.
Underfunding is "not possible," he added.
The bill would not cover past pension liabilities, but allow
state and local governments "to stop digging the hole with their
existing defined benefit plans," said Julia Lawless, a
spokeswoman for Hatch.
For years, states short-changed their retirement systems.
When state and local revenues plunged during the 2007-09
recession, they cut contributions even more. At the same time,
the financial crisis ravaged earnings on investments, which
provide more than half of all pension funding.
There is no official figure for how badly public pension
plans are underfunded. Pew Center on the States estimates they
are short more than $850 billion for future retirees' benefits.
In 2012, pensions in aggregate had enough assets to cover 73
percent of their liabilities.
Still, pension finances have improved in 2013, with states
making greater contributions just as the stock market pushes
pension assets to record levels.
Almost all the states, 47, have reformed their pensions in
the last four years, although places such as Illinois have
encountered political and legal resistance.
"We disagree with the premise of the bill that public plans
are vastly underfunded, that it would lead public plans to come
running to the federal government for a bailout," said Hank Kim,
executive director of the National Conference on Public Employee
Kim said public pensions have lower costs than the private
sector and the bill, which essentially shifts responsibilities
to insurance companies "doesn't make sense."
"How is a for-profit entity going to have a better outcome
than a non-profit entity that doesn't have to worry about
shareholders and about turning a profit every quarter?" he said.
Hatch, who has been looking for a uniform solution to public
pension problems for at least three years, noted that the cities
of Stockton and San Bernardino, California, recently filed for
bankruptcy, largely because of pension obligations, while some
states face huge pension bills.
According Lawless, Hatch talked to insurers, unions state
regulators and pension groups while drafting the legislation.
"From day one, however, this bill was driven by Senator
Hatch alone and not at the urging of industry or outside
groups," she added.
The U.S. Chamber of Commerce endorsed the bill, which would
also put employees at small or start-up companies into annuities
for retirement, as well as change federal oversight of 401(k)s
and Individual Retirement Accounts. Trade groups related to
annuities and insurance also back it, including the National
Association for Fixed Annuities. The organization for insurance
regulators said it would work with lawmakers.
Hatch's bill still faces challenges as it must pass the full
Senate, where Democrats hold control.
Devin Nunes, a Republican Congressman from California who is
active on public pension issues, has introduced his own bill in
the House of Representatives.
"I welcome a debate on any well-meaning reform proposals,
including Senator Hatch's bill, that seriously attempt to solve
this critical problem," he said.