CHARLESTON — A pension expert panned federal lawmakers’ efforts to increase oversight of state and local governments’ public pension plans.
He unleashed the criticisms on the final day the National Federation of Municipal Analysts’ conference here, one day after a House panel held a hearing on a bill that would require states and localities to make annual pension-plan disclosures with the Treasury Department.
“Nothing good can come from this,” said Keith Brainard, director of research at the National Association of State Retirement Administrators. “To my knowledge, no public pension plan has asked for federal assistance and hopefully none will.”
On Thursday, the House Ways and Means Committee’s oversight panel weighed the Public Employee Pension Transparency Act, a measure sponsored by Rep. Devin Nunes, R-Calif. The bill would prevent state and local governments from issuing tax-exempt, tax-credit or direct-pay bonds if they failed to file annual reports with the Treasury Department disclosing certain information, including how they calculate their unfunded pension assets and liabilities.
The bill also would require governments to value their pension assets and liabilities using a so-called riskless rate of return pegged to a Treasury rate of 4% to 5%, which is lower than the more broadly used historic rate of return of 7% to 8%.
When questioned by an audience member about the supposedly risk-free rate of return, Brainard deferred to the Governmental Accounting Standards Board, an independent body that is currently weighing changes to pension accounting and reporting standards.
“We would like GASB to continue to be the auditor of how pension liabilities are calculated,” Brainard said. “We view federal intervention as an effort to make an end-run around GASB.”
In his remarks, Brainard also said his research does not support the notion of a widespread crisis looming for state and local governments’ pensions, something that has spurred support for Nunes’ bill from some of his colleagues.
“Every state is not in a form of crisis. Certainly, there are some states that need serious attention sooner rather than later,” he said, adding that New Jersey and Illinois had chronically failed to make their required contributions.
In a separate exchange, an audience member asked whether an 80% funding level is a good benchmark for pension health.
According to Brainard, there is “nothing magical” about a particular level of funding, including 100%.
“It really is a matter of degree, not kind,” he said.
A better test, he added, is whether funding a pension causes a state or local government fiscal stress.
“You can be 100% funded and still have fiscal problems,” he said.
Another panelist echoed Brainard’s concerns, noting that before the recent financial meltdown, state and local pension plans were not viewed as facing a crisis.
According to Jean-Pierre Aubry, a research associate at Boston College’s Center for Retirement Research, pension obligations account for only 3.8 % of state and local governments’ direct budget expenditures.
“That could become very different, very soon,” he said, adding that state and local plans needed to continue — or in some cases start — implementing reforms.
One such reform, Aubry said, is to “stack” defined-contribution plans on top of defined-benefit plans for more equitable risk-sharing.
Under a stacking approach, he said in an interview, employees who earn $50,000 or less could participate in a defined benefit plan.
For employees who earn more than $50,000, their earnings up to that threshold level would fall under the defined benefit, but their earnings over that level would fall under a defined contribution plan.
Defined-benefit pension plans include single-employer plans, multi-employer plans and cost-sharing plans. Unlike defined contribution plans, which determine how contributions are made, a defined-benefit plan focuses on how benefits are paid.
In his remarks, Brainard called stacking a “very intriguing idea.”
“And I suspect it’s going to catch on,” he added.
— Quigley writes for Bond Buyer, a SourceMedia publication.
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