Friday, February 15, 2013

Federal Oversight of State and Local Pension Funding Is Lacking Big Time

Private sector companies' pension plans are carefully monitored and subject to the mandates of the ERISA federal law enacted in 1974 (Employee Retirement Income Security Act). There's no such federal legislation in existence for monitoring state and local pensions.

Back in 1974, Congress legislated that private sector pension plans needed the feds to make the rules for such things as rate of return assumptions, contributions and funding requirements in order to keep the plans solvent and capable of satisfying their beneficiaries' promised payments. At that same time, however, the sages in Congress in their infinite wisdom also decided that state and local public sector plans needed no such oversight.

Forty years later the state and local pension plans are for the most part an absolute mess. An approximately $3 trillion mess, in fact. Yet, still they operate under no federal rules. Where's Congress when we need them?

Certainly not paying any attention to what's been happening in states like California and Illinois, to name just two of the worst offenders. Oh, to be a retired librarian in San Diego or a retired lifeguard in Orange County.

Revoking the Federal Free Pass on Pensions is subtitled 'Congress can help fix the irresponsible promises of state and local governments:'

"As if fiscal cliffs and debt ceilings weren't exciting enough, Congress today is ignoring a gathering financial tsunami—the unaffordable pension promises of state and local governments.

Consider California, where just 10 individual pensioners will cash $50 million in pension checks from state and local governments over the next 25 years. Already some 30,000 retired California government employees pull in pensions higher than $100,000 a year. One retired librarian in San Diego receives a $234,000 annual pension. Beach lifeguards in Orange County are retiring at age 51 with $108,000 annual pensions plus health-care benefits.

A 2011 study by the Congressional Research Service pegged the combined liabilities faced by state and local pension funds at over $3 trillion. That is more than all the bonded debt officially listed on state and local balance sheets combined. To put the issue in perspective, all the federal tax hikes approved by Congress on Jan. 1 would pay less than 20% of America's state and local pension debt over the next 10 years.

The good news: While the federal government isn't technically responsible for these pension debts, Congress could enact tough reform legislation to protect taxpayers and prevent further abuses. Washington has tightly regulated private pension systems since the 1974 Employee Retirement Income Security Act, but that law exempted the pension systems of state and local governments. Four decades and $3 trillion in debt later, it is clear Congress made a mistake.

In the absence of federal rules, state and local pension systems have become governed by a confusing patchwork of state statutes, constitutional provisions, judicial rulings and local ordinances. While some government unions have argued that state and local pensions cannot be reformed by federal legislation because they are "vested," or owned by their intended beneficiaries, there are many changes that Congress could enact.

Lawmakers could begin by imposing tough financial-disclosure rules on state and local pension systems. Without tough Erisa standards for financial accounting and disclosure of costs, too many state and local pension boards have cooked their books. To mask true pension costs, some boards have inflated earnings via rosy economic forecasts, allowed states and localities to skip required contributions, and pushed debt repayment far into the future.

Scores of state and local governments are using "pension obligation bonds" to bail out troubled pension programs on the risky wager that they can beat Wall Street investment returns. There is $64 billion in such bond debt outstanding in the U.S., with more expected to flood the market this year.

Recent studies summarized by the Congressional Research Service have shown that the vast majority of pension obligation bonds are costing taxpayers billions in increased costs on the bonds themselves plus poor returns on the proceeds deposited in troubled pension systems. The city of Stockton, Calif., declared bankruptcy last year largely due to its misguided use of such bonds.

Congress's opportunity, then, is to tweak the Internal Revenue Code to discourage the use of pension obligation bonds—for example, by eliminating tax exemptions for any state or locality that issues them. . . .

Every dollar saved by such congressional action would reduce the need for tax increases and allow state and local authorities to restore vital services, improve schools, fix streets and invest in the future."

Summing Up

California is just one example of many state and local public sector pension plans which have run amok.

And to add insult to injury, too many state and local financial reports making disclosures concerning pensions and related future liabilities have been mere exercises in creative fiction.

These works of fiction have been published by our "dedicated" state and local "public servants."

Some of this fiction undoubtedly resulted from an abundance of bureaucratic ignorance about pension funding, but much resulted from outright malfeasance. 

How much of each -- ignorance or malfeasance -- nobody knows, but by now almost everybody either knows or should know that a $3 trillion mess has been made and awaits a solution.

Of course, that means that many of the promised benefits are destined to go unfulfilled.

Using the cash method instead of accrual accounting (ignores future liabilities such as not enough money on hand to fund promised pensions) and borrowing to pay current benefits (incurring future interest and debt repayment obligations for future taxpayers with no money currently set aside to pay them) are two of the most egregious ways that truth telling has been missing in action.

So now maybe the time is nigh when the WHOLE truth finally will be shared with We the People --- all of us.

Until then, the political hand wringing, union opposition, finger pointing and senseless arguing about the reason for the shortage in funds to pay the previously promised benefits will all get worse, much worse, and it's bad enough now.

That's my take.

Thanks. Bob.

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