It’s said that sunlight is the best disinfectant. But unless the Republican-led Congress steps up, the fetid world of public employee pension financing may remain a danger to taxpayers and government budgets.
As I’ve discussed several times over the past week, the Congress has a tremendous opportunity to require state and local government employee pension plans to accurately disclose their multi-trillion dollar unfunded liabilities. Those plans currently calculate their liabilities using rules issued by the Governmental Accounting Standards Board, which many believe to be a captured regulator. These accounting rules significantly understate public pensions’ benefit liabilities. Moreover, GASB rules tell public pensions that if they take greater investment risk, their liabilities – and the contributions needed to fund them – drop even further. If you want to know why public pensions have doubled their investments in risky hedge funds and private equity since the Great Recession, there’s your answer.
For years, economists and government agencies like the Congressional Budget Office have called for so-called “fair market valuation,” which both more accurately calculates the value of public pension liabilities and accurately tells those plans that taking more investment risk doesn’t make their plans cheaper.
Bankruptcy legislation for Puerto Rico is the perfect vehicle to require state and local pensions to accurately disclose their liabilities. Puerto Rico’s own pensions, which are practically unfunded after years of insufficient contributions, excessive investment risk and giveaways like low-interest vacation loans for employees, are a case in point. Moreover, the Puerto Rico legislation would deal directly with pensions, since the Obama administration’s Treasury Department has insisted that – despite what Puerto Rico’s own laws say – public employees should be given precedence over bondholders in any financial settlement. Senate Finance Committee Chairman Orin Hatch (R-UT) favors adding disclosure language to a Puerto Rico rescue bill.
Moreover, there’s legislative language already written: Rep. Devin Nunes’sPublic Employee Pension Transparency Act (PEPTA), which has a number of Congressional co-sponsors including House Speaker Paul Ryan, would require state and local plans to accurately disclose their liabilities using fair market valuation. The federal government would respect state and local rights by not forcing any changes to how pensions are funded, but Nunes’s plan would require that state and local governments to tell the public – including people thinking of purchasing municipal bonds – how much they really owe to their pensions. Bond markets could then reward governments that fully fund their pensions while punishing those – like Illinois – that fail to fund or use actuarial tricks to hide their costs.
But there’s a kink: according to the New York Times, the Puerto Rico rescue legislation drafted by the House would only require Puerto Rico’s pensions to accurately disclose their liabilities. Everyone still gets to use the funny-money accounting. This would be a disastrously wasted opportunity: pensions around the country are highly underfunded, and despite doubling down on investment risk most governments aren’t making their full pension contributions. If state and local governments can’t fund their pensions today, five years past the end of the recession and using accounting standards that are much more lenient than private sector pensions most follow, they can’t fund their pensions.
It’s to be expected that many Congressional Democrats would oppose greater pension disclosure. Public employee unions fight disclosure, because it makes their retirement plans appear both more generous and more expensive, and unions are a powerful Democrat constituency.
But many Republican lawmakers at the state and local level also oppose greater pension funding transparency. Accurate pension accounting would put pressure on Republican lawmakers to either reduce benefits – which means a fight with the unions – or raise contributions, which implies either tax increases or cuts to other government programs. Remember, the second word in “Republican politician” is still “politician.”