A Federal Carrot and Stick to Ease the Public Pension Crisis

Published: Jan 14, 2011

Author: Array

The growing crisis of public-sector employee pension liabilities is a complex web of legal loopholes, questionable funding formulas and benefit levels that threaten to bankrupt state and local governments across the country. Many states are already at an endangered level, and it is now estimated that more than half of the state pension plans will run out of funds entirely within the next 20 years. California has the highest unfunded pension liability in the country at nearly $60 billion.

How did we get here? And is there a way out of this crisis without a bailout by federal taxpayers?

The first pension in the United States was created by the Continental Congress in 1776 to compensate retired and disabled military officers, soldiers and sailors. Nearly 100 years later, the first private pension plan was inaugurated by the American Express Co. Other companies followed to remain competitive in hiring and employee retention. By the 1920s, Congress passed laws to incentivize corporate contributions to pension funds and to exempt fund income from federal taxes. The growth of private-sector pension plans ballooned, and by 1929 more than 1.4 million American workers were covered.

Meanwhile, the federal government created a defined-benefit plan for federal workers, and state and local governments created other public-sector employee pension plans, most of which provided for law enforcement, firemen and public school teachers. As the number and size of public pension funds grew, so did the opportunity for waste, fraud and abuse.

Along the way, Congress passed new laws aimed at providing stricter participation and disclosure requirements. To prevent mismanagement of benefit plans, the secretary of labor was given broad discretion for enforcement and new investigatory powers.

Of course, the temptation often proved too great for unscrupulous politicians, labor leaders and fund managers to avoid. Here in San Diego, for instance, the city government was rocked for years because of deceitful accounting practices in the pension program, numerous conflicts of interest by city officials and a nearly $2 billion deficit that smeared the city with the label “Enron-by-the-Sea” in the national news.

More recently, a group of University of California administrators – among the highest-salaried employees in the university system – has threatened legal action against the governing board unless a $245,000-a-year pension cap is lifted. Never mind that the pension fund is already facing a burdensome $21.6 billion unfunded liability, or that the vast majority of faculty and staff oppose the move for fear that lifting the cap will further threaten an already unstable pension fund.

In New Jersey, Republican Gov. Chris Christie is fighting powerful public workers’ unions and their allies in the state legislature over his efforts to meet a $46 billion pension deficit and a $67 billion health care deficit by negotiating reduced pension benefits and requiring state employees to pay 30 percent of their premiums. California and New Jersey aren’t alone.

When you add up all the pension deficits across the country, states are now facing up to $3.2 trillion in unfunded liabilities. All the while, states are facing a collective budget shortfall of more than $100 billion next year alone. Yet lucrative pension promises are still being made to public employees, and the true burden to taxpayers is often hidden behind bogus accounting and opaque reporting.

That has to change.

Recently, I joined Reps. Devin Nunes, R-Clovis, and Paul Ryan, R-Wisc., in offering the Public Employee Pension Transparency Act to enhance the reporting requirements for state and local pensions, as well as to prohibit all future public pension bailouts by the federal government.

By mandating new transparency rules, public pensions will be forced not only to disclose their current liabilities using a uniform accounting standard, but also their underlying methods and assumptions to project realistic rates of return and tie assets to reasonable fair market evaluations. Moreover, the reform plan links federal tax-exempt bonding authority to states and local governments with compliance to the law. In essence, no transparency will mean no money.

Ignoring the pension problem will only send states’ budgets on a faster downward spiral toward bankruptcy and increase the likelihood that federal taxpayers will get stuck with the bill for benefits that are not only unaffordable but also far more generous than those enjoyed by most workers in the private sector who ultimately pay for them.

Issa, R-Vista, is chairman of the House Committee on Oversight and Government Reform.