Issue Brief: Pension & Retirement
Updated January 2012
State and local governments continue to be subject to criticism regarding the condition of their pension plans. However, accurate and reliable research by experts in the pension area reveals that public pension plans are not in crisis, and that states and localities do not require and are not seeking a federal government bailout for their pensions. Claims of such a crisis are based on a handful of poorly funded plans and the use of faulty assumptions that are inconsistent with government accounting standards and do not accurately reflect their realized long-term rate of return on investments. Moreover, doom and gloom reports on public pensions often fail to take into account the current and continuing changes states and localities are making to their pension plans. In 2010-2011 more than two-thirds of states and many local governments took steps to secure the sustainability of their pensions systems by making modifications to benefit levels, employee contribution rates, or both. It is also significant to note that at the end of calendar year 2010, aggregate state and local government retirement system assets totaled $2.93 trillion, a 35 percent increase from their quarterly low point during the market collapse. For the fiscal year ending June 30, 2011, state and local government retirement systems had a median investment return of 21.6 percent.
Early in 2011, Representatives Devin Nunes (R-CA), Paul Ryan (R-WI) and Darrell Issa (R-CA) introduced legislation (H.R.567, S.347), which seeks federal regulation of state and local government pension plans. The bill would require states and local governments to report to the Treasury Department their financial data using federally-proscribed methodologies and valuations, including, among other things, a “market value of liabilities.” State and local government plan sponsors who do not comply with the legislation’s reporting requirement risk losing their ability to issue tax-exempt bonds, as well as receive direct subsidies under the Build America and other direct subsidy bond programs. While several congressional hearings were held on the bill in the House of Representatives throughout the year, no other movement appears to be underway in either the House or the Senate.
Also in early 2011, Representative Jason Chaffetz (R-UT) introduced H.Res. 23 to express a sense of the House of Representatives that the federal government should not bail out state and local government pension plans. The resolution states that overly generous employee pension benefits unfunded to the tune of $3 trillion have placed states and localities in dire fiscal condition, inappropriate asset growth rates and accounting methodologies are being employed, and claims numerous pension funds are going to be exhausted within 10 years. Finally, it suggests that states and localities must take immediate action to reform their pension plans, including replacing defined benefit plans with defined contribution plans. Representative Chaffetz was a co-sponsor of the legislation introduced by Representative Nunes.
More recently, in December 2011, the Republican staff of the U.S. Congress’s Joint Economic Committee issued an analysis of state pensions (States of Bankruptcy: The Coming State Pensions Crisis, http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=1fcd61a8-d8c9-43ab-bcfb-ecdca93c3d01), which raises concerns about declining public pension funding levels and warns that, “[t]he combination of massive unfunded liabilities and poor economic policies are setting many states up for a Greek-style fiscal death spiral.” The analysis appears to rely heavily on research conducted by Joshua Rauh and Robert Novy-Marx, who calculate pension liabilities on the basis of a so-called risk-free investment return. The report’s conclusion states:
[T]he federal government’s role in bearing the burden of irresponsible states can be mitigated through preemptive actions that will help prevent a taxpayer bailout of state pension systems. Future reports will examine the prospects for pension reform (including promising measures to confront existing unfunded liabilities and to establish fully sustainable pension plans), roadblocks that have prevented credible reform, and possible preemptive actions by the federal government to prevent a taxpayer bailout for irresponsible state and local governments.
The GFOA along with other Public Pension Network members representing both the retirement system and state and local government communities will continue to educate members of Congress regarding the true fiscal condition of public pension systems, as well as oppose the Nunes’ bill and similar measures that would only serve to undermine state and local governments’ authority to effectively govern and finance their pension plans.
Despite considerable negativity regarding public pensions, there is some good news to report on the legislative front regarding the issue of normal retirement age. In early December 2011, Representatives Ron Kind (D-WI), Jim Gerlach (R-PA) and Richard Neal (D-MA) introduced H.R. 3561, the Small Business Pension Promotion Act of 2011, "to reduce administrative burdens and encourage retirement plan formation and retention." The bill provides special rules for determining normal retirement age in certain ERISA plans, as well as clarifies that service-based retirements are permissible for governmental plans. Although the public pension community has been working with the Treasury Department for the past several years on modifications to the pending normal retirement age regulations to address the concerns of governmental plans, the agency has not yet acted to amend the regulations. The current regulations become effective on January 1, 2013. The public plan community is hopeful that a regulatory solution can be achieved before that time. However, the legislative solution presented in H.R. 3561, which clarifies that for the purposes of determining normal retirement age, service-based retirements are permissible for governmental plans, is helpful if Treasury is unable to act in the necessary timeframe.
The GFOA and its partners in the Public Pension Network will continue working with both Treasury and members of Congress to address the concerns of states and local governments and governmental plans related to the normal retirement age regulations.
In late December 2010, the Securities and Exchange Commission (SEC) issued proposed rules defining who must register as a “municipal advisor” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. With certain exceptions, the Dodd-Frank Act states that those professionals who provide advice to or on behalf of a “municipal entity” related to the issuance of municipal securities, swap transactions and/or investment strategies must register with the SEC and Municipal Securities Rulemaking Board (MSRB). To the surprise and alarm of the GFOA and many others in the state and local government community, the SEC proposed rules would require appointed board members of a municipal bond issuer or entity that invests governmental funds, such as a pension board, to register as municipal advisors with the SEC and the MSRB. The GFOA sent a comment letter to the SEC that opposes including appointed board members to governmental entities in the definition of municipal advisors. The SEC’s proposed rule can be found at: http://sec.gov/news/press/2010/2010-253.htm. The Commission has not yet issued a final rule in this matter.
The IRS and Department of Treasury are soliciting comments on possible standards for determining if a retirement plan is a governmental plan under section 414(d) of the Internal Revenue Code. This issue is important to state and local governments, as well as their employees, because the statutory rules that apply to governmental plans are different from those that apply to nongovernmental plans. The IRS and Department of Treasury have initiated this process because the lack of comprehensive section 414(d) guidance has made it difficult for government employers and their employees to have the certainty that they need in this area. Comments are due by February 6, 2012. More details on the guidance, as well as the advanced notices of the proposed rulemaking can be found at: http://www.irs.gov/retirement/article/0,,id=249178,00.html.
The GFOA and its Public Pension Network partners are in the process of reviewing the proposed regulations and plan to submit comments to the IRS/Treasury about how the proposed regulations would affect governmental plans and their sponsors.
The Governmental Accounting Standards Board (GASB) still appears to be on track for a final decision by the middle of 2012 on its proposed changes to governmental pension reporting and accounting rules contained in the Exposure Drafts issued earlier this year. In October 2011, the GFOA joined with several members of the Public Pension Network on a letter to GASB urging the continued use of the annual required contribution as an essential part of pension accounting and reporting, as GASB considers its proposed revisions to Statements 25 and 27. The letter further notes that the GASB’s decision to separate accounting from long-term funding costs represents “a radical departure from long-held practice” that will create “much confusion.” A copy of the letter can be found on the GFOA Web site at: http://www.gfoa.org/downloads/GFOA_NationalPublicOrganizationLetteronGASBED10142011.pdf
Related GFOA Public Policy Statements
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