New legislation that would force states to report more accurate unfunded pension liabilities is being pushed by House Republicans, according to the Wall Street Journal.
The Public Employee Pension Transparency Act was introduced on Feb.9 by California Rep. Devin Nunes, and would require states and municipalities to report more accurately on the financial health of public-employee pension funds. Under proposed rules, most states would be forced to report even larger funding deficits than already disclosed.
If passed, the law would require that states provide a more conservative calculation on investment earnings, which they now typically estimate at 8 percent per annum. Under new rules, a second calculation would be conducted using a 4 percent investment earnings assumption. Private companies generally use a 6 percent factor.
States would be required to file annual reports with the Treasury on the status of their funds. Failing to do so would cost them their ability to issue tax-exempt bonds which they rely on for infrastructure and other projects.
The bond-rating agency, Moody’s Investor Service, expressed support for the legislation, saying it “would provide new incentives to state and local governments to take action to ensure public-employee pension plans’ long-term viability.”
Predictably, state government officials expressed opposition for the legislation.
“Transparency is not the issue here,” said Jeffrey Esser, executive director for the Government Finance Officers Association. “The effort is designed to make public-employee pension plans look bad.”
The legislation would also explicitly ban the federal government and the Federal Reserve from bailing out insolvent public pension plans. Although states and municipalities contend they are not looking for the federal government to do so, Illinois Gov. Pat Quinn’s recent proposed budget plan suggested that the state may consider “seeking a federal guarantee of the debt” to help stabilize its massively underfunded plans.
Republicans hope the bail-out provision will prevent states from counting on the feds to step in to prop up sick pension funds. “You still need to put that policy out there so that the states know that there’s not going to be any bailouts coming,” said Mr. Nunes. “We don’t want to get in a position to where people even think that that’s an option.”
The Pew Center on the States recently calculated state and local pension plans had unfunded balances of $1 trillion based on 2008 data, although some sources estimate the shortfall is now closer to $3 trillion.