Skip to content

Hearing on the Transparency and Funding of State and Local Pension Plans

May 05, 2011










May 5, 2011


Printed for the use of the Committee on Ways and Means




DIANE BLACK, Tennessee
JIM GERLACH, Pennslyvannia

RON KIND, Wisconsin

JON TRAUB, Staff Director
JANICE MAYS, Minority Staff Director




Advisory of May 5, 2011 announcing the hearing


Honorable Walker Stapleton, Colorado State Treasury

Josh Barro, Walter B. Wriston Fellow, Manhattan Institute for Policy Research

Jeremy Gold, FSA, CERA, MAAA, PhD, Jeremy Gold Pensions

Robert Kurtter, Managing Director, U.S. Public Finance, Moody’s Investors Service

Iris J. Lav, Senior Advisor, Center on Budget and Policy Priorities




Thursday, May 5, 2011
  U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.

The subcommittee met, pursuant to call, at 9:30 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.

[The advisory of the hearing follows:]


Chairman Boustany.  Welcome to this morning’s Oversight Subcommittee hearing on the Transparency and Funding Levels of State and Local Pension Plans.  According to the Federal, State and local levels of government, our country faces a growing burden of public debt.  Too often, governments have deferred difficult choices by pushing obligations off into the future without responsibly saving for the day when those obligations are due. 

At the State and local levels, public employees are often promised defined benefit pension plans subsidized through the Tax Code that guarantee payments down the road.  But the numbers suggest public employee pensions may be dangerously underfunded.  This raises critical questions about the promises public employers make, how pension liabilities are calculated, and whether greater transparency is needed to protect the lives and livelihoods of the men and women to depend on these pensions as they plan for their futures.  Millions of State and local government employees participate in defined benefit plans.  These include many of our most valued public servants, firefighters, police officers, emergency personnel, nurses and teachers.  But too often, State and local governments have not kept their end of the bargain and are failing to adequately fund employee pensions. 

Though there is argument about how best to calculate pension assets and liabilities, it is clear that there is not enough money set aside to meet future obligations.  Economists estimate the plans were underfunded by as much as $3.8 trillion in 2009.  The corresponding increases in State and local pension contributions threaten to affect all Americans through higher State and local taxes and reduce services. 

This hearing will consider how accounting standards differ for public and private pensions.  There is growing consensus that accounting standards for public sector pensions encourage State and local governments to overpromise, underfund by taking on risky investments by discounting guaranteed future benefits against unrealistic rates of return.  Unlike private pensions, which are required by law to use more realistic accounting standards, public plans are held to a lesser standard and suffer from lax accounting methods that can hide the magnitude of the problem.  Public plans can discount future liabilities by making risky investments, a practice that imposes added risk on the taxpayers according to a new Congressional Budget Office report just released. 

Of course, some argue that State and local affairs are generally not in the business of the Federal Government.  But these plans are of increasing Federal concern because of our Tax Code which subsidizes retirement savings and gives preferential tax treatment to State and local debt.  Furthermore, in our age of public and private bailouts, there can be little question to where State and local governments will turn when trillions in pension payments come due.  And as if to underscore this threat, the recent proposed budget of the State of Illinois indicates that the Governor might seek Federal guarantees of future debt to cover pension liabilities. 

Finally, we also will discuss H.R. 567, the Public Employee Pension Transparency Act, which was introduced by Congressman Devin Nunes, a member of the full committee.  As a condition to receiving preferred treatment under Federal income tax law, H.R. 567 requires public plans to disclose funding data and honest valuations of plan assets and liabilities.  Respecting the rights of States and local governments, the bill does not try to tell States how to fund or pay pensions, it merely promotes transparency in their funding. 

Whether the underfunding of State and local pension plans is hundreds of billions or several trillion dollars, it is a serious concern.  With more retirees drawing pensions by the day, and some in government already raising the threat of a Federal bailout of these public plans, it is critical that the subcommittee take this opportunity to review the issue and consider how better to protect workers and retirees as well as the Federal taxpayer. 

Before I yield to the ranking member, Mr. Lewis, I ask unanimous consent that all members’ written statements be included in the record and the recently released CBO‑issued brief entitled underfunding of State and local pension plans.  Without objection, so ordered. 

Now I will turn to Mr. Lewis for his opening statement. 

Mr. Lewis.  Thank you, Chairman Boustany, for holding this hearing.  Last month, this subcommittee held a hearing to attack an organization that represents millions of seniors.  At that hearing, I asked the chairman, “who is next?  Who else is on your list?”  Now, I have an answer. 

This week is Teacher Appreciation Week 2011.  Today, Republicans have set their sights on the teachers who educate our children, police officers who keep our communities safe, and first responders in moments of crisis.  They paint teachers, firefighters, librarians and nurses as villains in their quest to widen the gap between the rich and the poor. 

Our neighbors are not the villains.  They are not the cause of the current economic situation.  They are simple, hardworking Americans trying to retire with dignity and escape poverty as they age. 

The Republicans have made many arguments to support today’s attack.  Republicans blame pension plans for State budget shortfalls.  This is not true.  States spend less than 4 percent of their budget on pension contributions.  The Republicans claim that pension benefits are too high.  This is not true.  The average State pension benefit is modest; about $20,000 a year. 

The Republicans also claim a Federal bailout may be needed.  This is not true.  The losses in the plan are related to the market and the recent recession.  The Republicans claim that their solution would create transparency.  It would not.  It would create confusion and lead to unnecessary cuts in vital State services.  Given the facts, I ask myself why are we here today?  We both know that there is no immediate need for the Federal Government to take action.  The committee has been looking at this issue since the 1970s. 

I am also mindful that under the committee rules of this Congress, this subcommittee’s jurisdiction is limited to oversight of existing laws.  Our jurisdiction does not extend to select revenue measures.  The subcommittee does report out legislation.  Therefore, any consideration of House bill 567 would need to take place elsewhere under the regular order of the committee.

Based on all of this, I believe today’s hearing is simply a distraction from the Republican failure to create jobs.  While the American people continue to wait for jobs, the Republicans are playing a dangerous game with the welfare of women, seniors, and now teachers.  It is time for the American people to take notice, stand up, and speak out.  Today, I stand for America’s middle class and State and local workers across the Nation.  I thank the teachers for all that they do.  And with that, Mr. Chairman, I yield back my time.

Chairman Boustany.  I thank the ranking member for his opening statement. 

We will now turn to our panel of witnesses.  I want to welcome the Honorable Walker Stapleton, Treasurer of the State of Colorado, welcome sir; Mr. Josh Barro, who is a fellow with the Manhattan Institute for Policy Research; Mr. Jeremy Gold, who provides pension finance consulting with Jeremy Gold Pensions, Mr. Robert Kurtter, managing director of the U.S. State and regional ratings of Moody’s Investors Services; and Ms. Iris Lav, senior adviser for the Center on Budget and Policy Priorities. 

I want to thank you all for being here today with us.  You will each have 5 minutes to present your testimony here before the subcommittee with your full written statement submitted for the record. 

Mr. Stapleton, you can now begin.


Mr. Stapleton.  Thank you, Mr. Chairman. 

Chairman Boustany, Ranking Member Lewis and members of the Subcommittee on Oversight, thank you for the opportunity to testify this morning in support of the Public Employee Pension Transparency Act.  My name is Walker Stapleton, and I am the treasurer of Colorado. 

Before being elected treasurer last November, I spent my entire career in the private sector.  I am fortunate to have both an MBA and a graduate degree in business economics.  One of the most important duties I have as treasurer of Colorado is to serve as the only elected official on the board of our State’s Public Employee Retirement Association or PERA.  PERA has nearly 500,000 members including State workers, members of the State judicial branch, teachers in our public K‑12 and higher education systems, local government workers and members of our State Patrol, among others. 

Last year the Colorado legislature passed pension reform legislation which accomplished two main objectives:  It lowered the cost of living adjustment from 3.5 percent to 2 percent, and it raised the eligible retirement age of members from 55 to 58 for educators and from 55 to 60 for everyone else.  These are worthwhile reforms, but they unfortunately fell far short of the systematic improvements needed in Colorado’s pension system to protect current and future retirees as well as Colorado’s taxpayers. 

Let me discuss the lingering and growing challenges facing PERA and the key factor that Colorado’s pension reform legislation did not address.  The system is operating with an unrealistic and unachievable rate of return which is now set at 8 percent.  In Colorado’s case, PERA currently maintains an unfunded liability of more than 21 billion based on this 8 percent expectation.  Of course, if this rate of return is lowered, the unfunded liability becomes far greater, and in my view, more realistic and transparent for PERA members and Colorado taxpayers alike.  The question is whether States like Colorado should be in the business of guaranteeing market returns.  If the answer to this question is no, as I believe it should be, then public pension plans like PERA need to start adopting rates of return in line with Treasury yields and stop the pervasive underfunding of plans.  Overestimating a pension system’s expected return is essentially gambling with the financial welfare of the next generation of Americans. 

As you may know, Wilshire Associates, a nationally recognized financial consulting firm, recently completed a study of 126 public pension plans, including Colorado’s.  Wilshire found that not a single plan would meet an 8 percent return expectation over the next 10 years.  In PERA’s case, they have used an 8 percent rate of return to claim solvency over 30 years, meaning the only way they will achieve an average of 8 percent over the next two decades will either be to raise the rate of return even higher, which is fiscal fantasy, or to require members to contribute more for the benefits that they receive.

It is also worth noting that approximately 25 percent of PERA’s portfolio of investments is currently invested in fixed income products, yielding in the neighborhood of 4 percent, which requires the rest of the portfolio to return closer to 10 percent in order to average an overall return of 8 percent.  The only way to achieve this unrealistic return is to take outsized market risk, further exposing our public pension plans to more volatility.

If a default occurs, States, unlike private businesses, cannot declare bankruptcy and restructure, and taxpayers will be obligated to backfill resulting pension liabilities. 

The Public Employee Pension Transparency Act makes a lot of sense.  While it is not mandatory for States to adopt, it categorically states that the Federal Government will not bail out a State’s public pension system. 

This Act increases transparency standards for public pension systems.  Unfortunately, the Government Accounting Standards Board, or GASB, refuses to require this minimum level of transparency from public pension plans in its accounting standards.  The GASB currently does not and will not in the future require plans to disclose the sensitivity analysis of discount rates so that plan members, local government leaders and the public can assess for themselves what the underlying liabilities in these plans may be. 

Greater transparency and better information is important for everyone, for the fiscal health of our States, for elected leaders to make decisions and for our taxpayers to use when it comes to evaluating the significant liabilities associated with public pension systems in this country. 

I strongly support this legislation and am here today to urge every member of this committee to support the Public Employee Pension Transparency Act.  Thank you.

[The statement of Mr. Stapleton follows:]

Chairman Boustany.  Mr. Barro, you may proceed with your testimony.


Mr. Barro.  Good morning.  Thank you, Chairman Boustany and Ranking Member Lewis for having me here today to talk about this important issue. 

If you are trying to evaluate the pension plan serving a State and local government, there are some simple questions you might want to ask about it, such as how much do the pensions we provide cost?  How much do we owe to active workers and retirees?  And over the next few years, how much more cash are we going to have to come up with to make our required contributions into the pension fund?

But if you pick up the comprehensive annual financial report of most State and local pension funds in the United States, you will either find no answers to these questions or you will find incorrect answers to them. 

The recession has been driving pension contributions skyward in States and localities all around the country.  And many State and local governments are currently feeling the need to reform their pension systems.  Indeed, 18 States enacted some sort of pension reform law in 2010.  But because of this lack of useful financial information, many States have made underwhelming pension reforms, and a lot of them are even coming back to do a second round of reform having just done reform within the last 18 months.

As a couple of examples of the pressure that localities are feeling, Newark, New Jersey, made $37 million in pension payments in 2009.  They had to make $62 million for 2010.  San Francisco will make $357 million in payments this year, and their city treasurer expects that that will rise to $800 million within 2 years. 

So how can the financial disclosures around pension funds be improved so that State and local law makers have better ability to make good choices about pensions?  H.R. 567 would make several improvements to the way that pension funds make their disclosures, and there are some additional disclosures that these funds should also be encouraged to make. 

The most important change relates to the valuation of pension liabilities using a practice called fair valuation of liabilities, or market valuation, as would be encouraged by H.R. 567.  As the CBO said in a report just yesterday, fair valuation provides a more complete and transparent measure of the costs of pension obligations.  Using a fair valuation method will help States and municipalities and their taxpayers and bondholders better understand where they stand with regard to pension liabilities. 

States and cities also don’t know what their future outlook looks like for the year‑to‑year cost of pension obligations.  Even though pension funds the way they smooth their asset returns means that we can expect pension contribution rates to keep rising through about 2014, because of stock market losses in 2008 and 2009, most pension funds are not releasing projections of how those costs will move, so municipalities and States can’t do effective budget planning because they don’t know how big those cost explosions are going to be. 

H.R. 567 will require a 20‑year projection of cash flows which will give States and localities better clarity about what their future costs will look like. 

There are some additional transparency measures that States and localities would be wise to adopt.  One, again, relates to asset smoothing, that process of gradually recognizing unusual gains and losses.  Over the last decade, many States and localities, their pension funds have made opportunistic changes in the way they perform smoothing, either increasing or decreasing the length of the smoothing period to artificially inflate the appearance of financial solvency in their funds. 

In one case, New Jersey, such a shift was actually used to justify a 9 percent increase across the board in pension benefits that appeared affordable just because of this accounting trick.  States should be encouraged to adopt a standardized smoothing practice so they do not have the option to game that system. 

Finally, public pension plans do not disclose what is called a normal cost of the pension benefits that they are awarding in a given year.  That is to say, what is the present cost of all the promises we made to active workers this year in exchange for their labor?  This is a standard feature of private sector pension disclosures.  But you can’t figure out when you look at a public employee pension, and it is not the same amount as the cash contribution that is being made into a pension fund.  For this reason, it is extremely difficult to do comparisons of the value of public and private sector compensation packages.  We don’t really have a good sense now of what the pension benefits that public employees are getting are worth.

So why should Congress involve itself in this which is a State and local issue?  States don’t understand how big a hole they have dug for themselves.  And in certain States such as Illinois where the funding ratio of public plans has fallen to 38 percent, even under the current GASB standards which are too aggressive in terms of valuing the liabilities, the risk is that eventually you will have clamor for a Federal bailout of insolvent State and local pension funds that appear to be on the brink of being unable to make payments to the State and local employees.  It is better to avoid that situation now by giving State and local leaders the clarity they need to fix their own pension problems so that Washington does not have to later. 

Chairman Boustany.  Thank you, Mr. Barro.

[The statement of Mr. Barro follows:]

Chairman Boustany.  Mr. Gold, you may proceed.


Mr. Gold.  Good morning, Chairman Boustany, Ranking Member Lewis and members of the subcommittee.  Thank you for this opportunity to present my views with respect to transparency and funding of State and local pension plans.  My views are my own and do not represent any other persons or organizations.  I am an independent consulting actuary specializing in the financial aspects of pension plans.  I will address the disclosure of the assets, liabilities and costs of public pension plans in the context of H.R. 567. 

The disclosures at the heart of H.R. 567 are long overdue, and I welcome this bill.  H.R. 567 is conceptually right. 

I will suggest three changes that will keep it right in concept and make it more useful and efficient in practice. 

The bill calls for two financial measures that are so fundamental that they must be made available to every decision maker and every interested party, the market value of plan assets and the current liabilities. 

H.R. 567 requires that the current liability be determined by discounting future cash flows using rates of interest derived from U.S. Treasury securities.  In my written testimony, I quote former Federal Reserve vice chair Donald Kohn, who has explained why bulletproof promises should be discounted at rates derived from bulletproof securities. 

My first recommendation ‑‑ H.R. 567 calls for averaging Treasury rates over 24 months and for segmenting rates for three different future periods.  These ideas have been borrowed from private pension funding law where they are used to reduce contribution volatility.  H.R. 567, however, is not a funding bill.  It is a disclosure bill.  Good disclosure should use the Treasury spot rates at one point in time.  We cannot spend averaged dollars, nor can we make good decisions based on liabilities that have been averaged.  H.R. 567 calls for the fair value of assets at one point in time.  The proper comparison liability must be based on spot rates at one point in time. 

The comparison of assets at market and liabilities at spot rates answers two questions that cannot be answered accurately in the pre‑H.R. 567 world.  First question ‑‑ will future generation of taxpayers be paying for services provided to earlier generations?  Second question ‑‑ how does this plan’s funding compare to plans in other jurisdictions? 

My second recommendation:  H.R. 567 calls for extensive projections of future statistics that would be expensive and potentially uninformative.  The subsections calling for these projections should be stricken.  Eliminating the projection along with the rate averaging and segmenting should reduce compliance costs to a level that I would call modest in the first year and nearly negligible in subsequent years. 

My third recommendation:  The bill should add a new item which will be very valuable and easy to calculate.  Mr. Barro just referred to it.  I call it the current cost.  It is the portion of the current liability that has been accrued in the latest fiscal year.  Current cost asks a third question that cannot be answered in the pre‑H.R. 567 world:  What is the market value of benefits earned by public employees this year?  Current costs will make it possible to fairly compare compensation from jurisdiction to jurisdiction and between private and public sector employees. 

In summary, I recommend that we use spot Treasury rates, not averaged, not segmented.  I suggest the elimination of the 20‑year projection requirement, and I suggest the inclusion of a defined current cost computed on the same basis as the current liability.  I thank you.

Chairman Boustany.  Thank you, Mr. Gold.

[The statement of Mr. Gold follows:]

Chairman Boustany.  Mr. Kurtter, you may proceed.


Mr. Kurtter.  Thank you.  Good morning. 

Mr. Chairman, Congressman Lewis, members of the subcommittee, my name is Robert Kurtter.  I am a managing director in U.S. Public Financial Group at Moody’s Investors Service.  Thank you for inviting Moody’s to participate in today’s hearing. 

My comments will focus on our views of the potential credit impact of transparency initiatives like H.R. 567 and the Governmental Accounting Standards Board project on pension disclosure.  While Moody’s does not rate pension plans themselves, we monitor proposals like these and the related developments because our assessment of government pension plans is one of the many factors in our credit analysis of government‑issued bonds.  Moody’s comments on policy initiatives, however, should not be taken as an endorsement or criticism of any such initiative or the conduct of any particular issuer. 

In recent years, we have observed increases in the unfunded pension liabilities of State and local governments.  This growth has occurred for several reasons.  First, during peaks of the stock market in 2001 and 2007, some State and local governments enhanced benefits and/or reduced employer contributions.  Second, the recent economic downturn significantly diminished the value of pension plan assets.  Third, adoption of early retirement incentive programs shifted costs from payroll to retirement systems.  And fourth, demographic factors, including an aging workforce and the increasing life expectancy of beneficiaries are adding to liabilities. 

State and local governments have needed to increase their pension contributions at a time when declining revenues are also requiring them to impose budget cuts.  These developments have prompted a discussion about whether the existing disclosure standards of our government pension plans remain appropriate and also about whether and to what extent government pension plans are underfunded. 

In addition to the proposed legislation, the GASB is considering changes to its financial reporting rules for public sector pension plans.  As I described in my written testimony, if the GASB changes were adopted, as proposed, employers subject to its disclosure requirements could calculate their funding requirements as they do now, but they would have to use different methods to calculate certain elements of the pension expense they disclose in their financial reports. 

Moody’s believes H.R. 567 would increase public access to State and local government pension plan data.  Additionally, both the bill and the GASB proposal would increase comparability of that data.  At the same time, they could also increase the amount and complexity of the information disclosed.  If these or other initiatives help investors and government issuers have more informed discussions about the credit risks associated with these obligations, we believe these proposals could create incentives for issuers to address their unfunded pension liabilities. 

Governments have many options to improve the funded status of public plans.  These include increasing government or employee contributions or adjusting benefits.  Depending on the specific measures taken, these actions could be positive, neutral or negative for bond holders.  Though as noted earlier, any changes in the funded status of the pension plan would be one of the many factors that we would consider in our credit analysis. 

Of course, the decisions that governments make about their pension plans affect much more than their credit profile as bond issuers. 

Our opinions do not speak to the wider implications for an issuer or its stakeholders of any actions it takes.  Also, as a credit rating agency, Moody’s does not take a position on whether or how a State or local government should address a pension funding shortfall.  Our role is limited to providing opinions and research about issuers’ likely ability and willingness to pay their bonds in full and on a timely basis. 

Thank you again for inviting me to testify on this important matter.  I look forward to answering your questions. 

Chairman Boustany.  Thank you, Mr. Kurtter.

[The statement of Mr. Kurtter follows:]

Chairman Boustany.  Ms. Lav, you may now proceed.


Ms. Lav.  Thank you.  Mr. Chairman, Congressman Lewis and members of the subcommittee, I appreciate the invitation to appear before you today.  I will make six related points and I will then elaborate on the problems that I see with H.R. 567.  

First, as was mentioned, most State and local employees receive modest pension benefits, averaging less than $23,000 a year.  Second, most States can address underfunding in their pension plans with relatively modest measures, such as increases in contributions from employers and employees and some sensible and moderate changes in benefits.  Only a few States, those with pensions that are grossly underfunded and a history of failing to make required contributions, would have to make more extensive changes. 

Third, pension funds, according to the Federal Reserve data, have already recouped two‑thirds of their recession market losses.  But smoothing and data lags have led recent studies to portray the situation as worse than it is. 

Fourth, the use of a so‑called riskless rate, as we are discussing, to discount liabilities makes underfunding appear much greater than what pension funds report.  But, the somewhat academic debate over whether or not to discount liabilities using a riskless rate is quite distinct from the actuarial finding of how much States and localities have to deposit in their pension funds to meet their future obligations.  States and localities should use a realistic measure of future investment returns to set their deposit levels. 

Fifth, H.R. 567 I view in many ways as a solution in search of a problem, one that would override the careful process that the Governmental Accounting Standards Board has nearly completed.  The Board’s proposed new rules would standardize State pension fund reporting and make it more transparent. 

Sixth, and finally, moving State and local employees from defined benefit to defined contribution plans, which some sponsors of H.R. 567 have said they would like to see, would not address the funding problem that public pension systems now face.  On the contrary, it would raise annual costs in many instances.  Some States that were considering such a conversion have backed away after concluding that they would face higher costs. 

I will now elaborate on the problems with H.R. 567.  For the past 4 years, GASB has been conducting extensive research and consultation and holding hearings with well over 100 stakeholders in order to develop new pension financial reporting standards. 

The draft GASB standard makes clear that the liability amount that results from the riskless rate does not properly reflect State and local government pension liabilities.  Instead, GASB has carefully crafted rules that reflect market expectations and applies a lower discount rate only to the least well‑funded plans in order to reflect the greater risk to their solvency. 

Congress should not replace GASB standards and the financial market discipline that induces State and local governments to comply with those standards with H.R. 567’s unnecessary Federal intrusion into the issue.  Unlike the GASB process, H.R. 567 would likely increase public confusion between liabilities based on a riskless rate and actual liabilities.  That could spook bond markets and lead States and localities to cut spending for education and other key areas or raise taxes more than necessary.  It also would create an entire new Federal bureaucratic structure to regulate something that market forces should manage. 

Most States with significant pension underfunding are moving to address it.  And they are doing so in a variety of ways.  They are increasing employee contributions.  Eleven States did that last year, and 16 States made changes that will reduce benefits for future employees.  Some 12 States have raised their retirement ages.  Other States have made changes that will require consistent employer contributions.  States should be able to gradually solve their underfunding problems with the steps they are already taking, with modest increases in employer and employee contributions, with a greater recovery in the markets, and by adhering to the new rules that GASB will promulgate.  The Federal Government does not need to intervene in this issue.  In fact, that would do more harm than good.  Thank you.

Chairman Boustany.  Thank you, Ms. Lav.

[The statement of Ms. Lav follows:]

Chairman Boustany.  We will now begin questioning, and I will begin here with Mr. Barro. 

Some States and local governments have actually borrowed money in order to make contributions to their pension funds.  And in these cases, the government borrows money in hopes that the pension fund earns investment returns greater than the interest rates so that they can remain solvent and meet their liabilities.  This might work well if the investments actually earn a great deal on returns.  But what happens if the investment actually loses money?  Is this really constituting buying stocks on margin in effect?

Mr. Barro.  That is really exactly what it is.  One of the great champions of this was Governor Rod Blagojevich of Illinois who pushed forward a $10 billion pension obligation bond issuance in, it was either 2003 or 2004.  And yes, this practice is purely a creature of the use of discount rates roughly in the range of 8 percent; the idea is the government can borrow around 5 percent, invest, earn an 8 percent return and they are just getting free arbitrage there.  Now, of course, the problem with is that the equity investments are risky and the payments that you have to make to the bondholders are fixed. 

And so, yes, if the market performs poorly, it is exactly like buying stock on margin and losing.  You shouldn’t be under the illusion that because the State issues pension obligation bonds and uses them to buy assets to put in a pension fund that it has somehow improved its overall fiscal solvency. 

The other thing I would note is that it creates avenues for other chicanery, which we saw in Illinois where the State issued 10 billion in bonds but only used about 7.3 billion of the issuance to shore up the pension funds.  The rest was used to service debt on the bonds and to close gaps in a couple of years of State budgets.  So it is just another way for the government to make its books more complicated, hide borrowing and further actually worsen a State’s fiscal situation.

Chairman Boustany.  Thank you, Mr. Barro.

Mr. Gold, do you want to comment on that? 

Mr. Gold.  I think you have got it right.  I think Mr. Barro has it right.  It is borrowing to invest in risky assets.  I began writing about this when I did my dissertation in 1999.  And all I have seen since then is greater and greater issuance.  Illinois is one of the poster children, but a number of other States have ventured down that risky route. 

Chairman Boustany.  Thank you. 

A new report released yesterday by the Congressional Budget Office said, and I quote, “By accounting for different risk associated with investment returns and benefit payments, the fair value approach provides a more complete transparent measure of the cost of pension obligations than the actuarial standards that are currently in use.”

So for the panel I would like each of you to address this.  Do you think that CBO is correct?  Or are current standards more accurate?  Why don’t we start with Mr. Stapleton. 

Mr. Stapleton.  Thank you, Mr. Chairman.  One of the many reasons why I am a strong supporter of this particular piece of legislation is that, in my view, the Government Accounting Standard Board has not done its job in maintaining uniform standards that are in line with the financial accounting standards boards which govern private sector companies.  You can look at any number of things, including not fair value assessing what the liabilities are.  You can look at amortization rates.  They allow the amortization period to be far greater under GASB rules than under FASB rules allowing for a smoothing of write‑offs over a much longer period of time.

In the private sector, plan liabilities are valued separately.  Under GASB plan liabilities, the expected rate of return equals the actual rate of return.  In the private sector, liabilities are valued using corporate high yielding bonds which come out around 6 percent. 

And the issue of the sensitivity analysis, I was with Mr. Attmore, the Chairman of the Government Accounting Standards Board a number of week ago.  I asked him from a disclosure standpoint, will you simply provide a sensitivity analysis so that people, State leaders and public policy makers can judge for themselves what these liabilities may be?  And he said no. 

And so I view this as simply transparency of information, of people being able to reach their own conclusions, whether it be State leaders or public policy makers.  Thank you.

Chairman Boustany.  Thank you. 

Mr. Barro. 

Mr. Barro.  Yes.  I would just say briefly that I think CBO was absolutely right in its characterization of the appropriateness of the fair value method for valuing liabilities.  And frankly, I think it is a reflection of the near unanimity on this question in the financial economics community.  It is often portrayed as a debate.  But the main parties that you see defending the 8 percent discount rate practice are pension fund managers and actuaries.  I think that there isn’t a good financial economics argument for the use of a discount rate associated with risky investments to value a liability that is not risky.

Chairman Boustany.  Mr. Gold. 

Mr. Gold.  In my comments, I made a distinction between a funding law such as the PPA of 2006 and a disclosure bill or proposals coming out of GASB.  There is a history which is built into actuarial methods for guiding funding over long periods of time, and from that history, developed many of the practices which found their way into ERISA, found their way into accounting and so on. 

Financial economics is exactly the ‑‑ well, financial economics addresses the difference between an engineering approach to developing contributions, which at some future date will be adequate if things work out, and valuing promises made today.  And the financial economics, or fair value approach, is far superior for accounting purposes.

Chairman Boustany.  Thank you. 

Mr. Kurtter. 

Mr. Kurtter.  Yes, thank you.  We do believe that pension fund unfunded liabilities may be overstated because earning rate assumptions don’t reflect current market conditions, that directionally those rates are too high.  GASB is considering initiatives to lower those rates, and several States and pension plans have already taken actions to begin lowering those rates. 

We don’t have an opinion about what the right rate is other than to note that directionally these are moving towards more realistic number.  We look at pension funding on a case‑by‑case basis for each credit involved, and that this is really only one factor that we look at in our overall credit assessments.

Chairman Boustany.  Thank you. 

Ms. Lav. 

Ms. Lav.  I would not say that 8 percent is the exact right number right now.  As Mr. Kurtter said, a number of pension funds are bringing that down, and one needs to figure out what the right number is.  But CBO’s preferred method is using municipal bond rate, adjusted for its tax exemption, and as they note in a footnote, there are a number of anomalies to that idea.  This is for disclosure.  I should back up and say they say that that does not mean that that should be the way that funds contribute. 

As I said, those are two different things.  But even using municipal bond rate for disclosure has its problems.  For example, the bond rate is higher in the States with the weakest fiscal system.  So you have a situation with a higher rate, you have lower pension liabilities disclosed if you have the worst fiscal system because your bond rate, the interest you have to pay is higher.  That doesn’t make any sense.  Also, if you compare with corporate bonds, which have interest rates in the 6, 6‑1/2 percent range, they use their bond rates to discount liabilities.  But everybody knows that corporate bonds are more risky than municipal bonds.  So they get to use a higher discount rate and show lower liabilities because their bonds are more risky than State and local bonds?  So there is some basic fundamental problems with these conceptions that don’t necessarily make sense in the actual world.

Chairman Boustany.  Thank you. 

Mr. Lewis.

Mr. Lewis.  Thank you very much, Mr. Chairman.  I want to thank each of you for being here this morning.  This question is for the entire panel.  My time is limited, so I ask each witness to answer either yes or no to the following question. 

Do you support closing public pension plans? 

Mr. Stapleton.  No.

Mr. Barro.  It depends on the State, but in most cases yes. 

Mr. Gold.  I am sorry.  I missed a word.  I am not very good at hearing.  Do I support what? 

Mr. Lewis.  Closing. 

Mr. Gold.  No, I do not. 

Mr. Kurtter.  Moody’s does not have an opinion on that matter.

Ms. Lav.  No, I do not.

Mr. Lewis.  Do you have a personal opinion or are you speaking for Moody’s.

Mr. Kurtter.  I am speaking for Moody’s.

Ms. Lav.  No.

Mr. Lewis.  Let me just ask, does closing public pension plans save money?  Ms. Lav? 

Ms. Lav.  No.

Mr. Lewis.  Why not? 

Ms. Lav.  If you have unfunded liabilities that exist from past service or from market losses, you still have to pay off those unfunded liabilities.  And if on top of that you are creating a defined contribution plan, you haven’t lost those liabilities.  You still have to pay them off, and you have to put money into a defined contribution plan.  And in fact, a defined contribution plan for any given level of retirement security you want to provide for your employees, which is important for attracting quality employees, then you have to put more money in a defined contribution plan like a 401(k) kind of plan because then you don’t have the benefits of pooled investment and professional management.

Mr. Lewis.  Ms. Lav, I would like to understand more about the people who benefit from public pension plans. 

Ms. Lav.  Sure. 

Mr. Lewis.  What type of State and local workers are eligible for public pension plans? 

Ms. Lav.  Most State and local workers benefit, so we are talking about first responders, we are talking about correction officers, we are talking about teachers, we are talking about social workers and nurses and bus drivers, school bus drivers, a whole range of State and local workers.

Mr. Lewis.  To continue, how much, on average, do these retirees receive in pension benefits? 

Ms. Lav.  Across States, the Census reports that they receive an average of about $23,000 a year.

Mr. Lewis.  Could you tell us whether all State and local workers participate in Social Security? 

Ms. Lav.  No.  All State and local workers do not participate in Social Security.

Mr. Lewis.  What are the exceptions? 

Ms. Lav.  The exceptions are quite a number of teachers, about 40 percent of teachers and a majority of public safety workers like police and fire, and then there are some States, a few States, where most of the workers don’t participate.  So those workers need more from their pensions because they don’t also have Social Security.

Mr. Lewis.  Could you tell the members of the committee what is the purpose behind providing workers with pension benefits?  What is the intent? 

Ms. Lav.  Well, first of all, studies that do what we call apples-to-apples comparisons find that public workers particularly at middle and higher income, or middle and skilled areas, are paid less than their private sector counterparts.  So pensions are part of their compensation. 

But in general, it is important that people have retirement security.  And this is part of how State and local governments attract quality workers to do the work.  And so they provide deferred compensation as well as current compensation.  It is a choice that has been made, an important one.

Mr. Lewis.  Thank you.  I thank all members of the panel.  Mr. Chairman I yield back. 

Chairman Boustany.  I thank the ranking member. 

Mr. Buchanan, you are recognized 5 minutes. 

Mr. Buchanan.  Thank you, Mr. Chairman, for doing this most important hearing.  I also want to thank our colleague, Congressman Nunes, because I think it is very critical.  I just think back, we were being in business for a lot of years we had profit sharing plans and 401(k)s that we have now.  But I look back on the last 10 years and if you take a look at S&P, for example, they are flat‑lined. 

So my point is, I am looking at these, I was thinking in 2008 I was sitting around with a bunch of people having dinner at Christmas just before that news, maybe 15, a lot of them were investors and everything, and the market, everybody lost a third of their net worth then. 

So when we talk about someone put a number together at 8 percent or 4 percent or 12 percent, in these uncertain times, you can come up with any number you want.  I always refer back to the rule of 72 that if you have got an 8 percent number, it doubles in 9 years.  But the bottom line, these are different times.  So it just seems like we have to reassess where we are at.  We need more transparency so that it doesn’t lead everybody into bankruptcy. 

So I will start with you, Ms. Lav.  What do you think a number should be today when you are looking to put together what you might have to pay out in the next 10 or 20 years, what number?  Because if you look at the bond rate, maybe there has been some appreciation, but if I look at interest rates today, it is almost free money if you are going to go into Treasuries, and the equity markets have been zero for 10 years on average, but historically for a lot of years, they were 10 percent.

But where do you even begin to get a number that makes any sense?  That is why I am concerned as more people retire, someone mentioned 8 percent, do we need to be dealing with 1 percent?  What makes sense going forward for the workers? 

Ms. Lav.  I am not going to put a specific number on it.  I haven’t done that research.  That is not what I do.

But I do know it is not ‑‑ it is very unlikely to be 4 percent.  You know, I think that it would be somewhat irresponsible for States and localities just to invest in Treasury bonds.  I think that would not make any sense.  That would not ‑‑

Mr. Buchanan.  But you understand the S&P, in the last 10 years, went down, has been down, it has been flat‑lined at zero and it went down 38 percent in 2008.  How do you get to a number of 4, 6, 7 percent with any confidence going forward? 

Ms. Lav.  Well, I mean pension returns have not been, the returns to pension funds have not been zero. 

Mr. Buchanan.  What have they been in the last 10 years?

Ms. Lav.  In the past couple years, they were in the double digits, they were down in the recession ‑‑

Mr. Buchanan.  Do you know what the returns have been in these pension funds on average?  Take them across the board.  What is the average for the last 10 years?  Do you have any idea?  I don’t even know that number, but I know my overall returns have not been good.

Ms. Lav.  I think CBO had a number, it was in the neighborhood of 3 percent or something like that.  But this was through two back‑to‑back recessions.  I certainly don’t think you necessarily want to plan for the future of having two recessions, one of them the largest since the Great Depression within 10 years, I don’t think that that is a realistic way to plan either, to assume that that is going to happen.

Mr. Buchanan.  These are different times today.  I am an optimist, but at the same token, the reality of it is a lot of people are reassessing where they are at.  I can’t tell you ‑‑ I represent Florida ‑‑ how much retirees that were hoping to retire based on a 6, 8, 4 percent number.  They are not seeing those returns, so now they are working longer and those kinds of things. 

Mr. Nunes.  Would the gentleman yield? 

Mr. Buchanan.  Yes. 

Mr. Nunes.  Mr. Buchanan, I want to thank you for your kind words on the bill.  I want to make sure, I know the bogeyman is out here and people are talking about 4 percent or 3 percent and the detractors to this bill that are against transparency continue to use that rate of return as if that rate of return was meant that the Federal Government is now going to say this is what the return is going to be. 

The purpose in drafting the legislation had nothing ‑‑ when we looked at that rate, was to do nothing other than to protect the workers from the employers, meaning the government.  Because really, when we look at that discount rate of today, which would be around 4 percent, it is not to do anything but compare oranges to oranges or apples to apples, so that you can compare a plan in Fresno, California, to a plan in Florida.  And that was the purpose of this discount rate.  That is why we put this in there just to have a conservative rate so you would be able to compare these plans across State lines and from entity to entity.

Mr. Buchanan.  I thank the gentleman.  But I guess my point in saying all this is I was trying to work towards the uncertainty that we have faced in the last 10 years.  And we need more transparency.  And I appreciate your effort. 

Thank you. 

I yield back. 

Chairman Boustany.  I thank the gentleman.  Ms. Jenkins, you are now recognized for 5 minutes. 

Ms. Jenkins.  Thank you, Mr. Chair.

And I want to thank you all for being here today. 

I find it a bit ironic that Congress, which doesn’t have the political will to take action to fix Social Security is here to today talking about our grave concern with our State and local government pension plans. 

So I am not sure that any of us have much credibility on this issue.  But I have great respect for the panel in particular as a former president of the National Association of State Treasurers, a State treasurer myself, and a board member on our public employee retirement system in Kansas, I really have the utmost respect for State treasurers.  So I would like to address some questions to Treasurer Stapleton.

Some have commented that this bill, H.R. 567, is unnecessary because the Government Accounting Standards Board, GASB, already provides standards for State and local pension plans.  I would just like your response to that. 

Mr. Stapleton.  This is not the case.  GASB standards, in my opinion, have basically permitted plans not only to adopt their own rates of return, but basically act like the wild West when it comes to assuming plan returns.  That is why there is no credible levels of comparison between plans. 

I spoke earlier about differences in amortization length.  Obviously, the longer the amortization period, the less you have to write off in a given amount of time.  Under the Financial Accounting Standards Board, which governs the private sector it is a much shorter length of time to write off plan assets.

I have been very disappointed with the oversight of the Government Accounting Standards Board and their refusal to transparently invest in information that will allow public policymakers to make informed decisions.  I see this bill as a nonpartisan bill, as a bill to increase information, whether 4 percent is the right rate of return, I can guarantee you that 8 percent is not the right rate of return.  If you go into the insurance market and try to get a private contract or somebody to guarantee you a rate of return, you will never find somebody that will guarantee you an 8 percent rate of return. 

States have increasingly tried to regulate the insurance industries, and when they have done that, they have required plans to have more assets than liabilities.  And so if GASB had done its job or would do its job and require the same standards that are applicable in the private sector, we wouldn’t need to be here today.  But it is refusing to do that.  And so plan members are not getting a uniform level of information to assess liabilities.  And public policy makers need this information for State governments to responsibly respond to these liabilities because the fact of the matter is that plans are not taking the advice of their own actuaries. 

Just look at what happened which was chronicled in The Wall Street Journal with Calpers a few weeks ago.  They told the board to lower the rate of return, then they started getting letters in from school districts, from local governments around the State that said, we cannot afford for you to lower the rate of return.  And they said, we are going to discount the professional advice of our actuaries and create in effect a deferred liability for future generations.  And we cannot allow that to happen.

Ms. Jenkins.  Excellent.  Thank you.  The bill, the Public Employee Pension Transparency Act, is not mandatory, but does condition the continued ability to issue tax exempt bonds upon filing certain information about State and local pension plans to the Internal Revenue Service.  As a State elected official, do you think that is fair? 

Mr. Stapleton.  Absolutely.  This does not force compliance.  There is a carrot, which is tax exempt bond financing.  But even if States comply, after they comply and issue this information back to the plan holders and back to their States, they still don’t have to adopt the rate of return.  It is just a way to get greater information.

And as I said earlier, I asked Mr. Attmore at the Government Accounting Standards Board what is the problem with providing a sensitivity analysis of different discount rates?  Let’s look at 8 percent, let’s look at 6, let’s look at 4 percent, but let’s make sure that public policy makers at the State level have a wide range of information from which to reach conclusions.  And he said no, in the coming standards, that they will not provide that information.

Ms. Jenkins.  And finally in your testimony, you said overestimating a pension system’s expected return is essentially gambling with the financial welfare of the next generation of Americans.  Can you explain what this gamble places at stake for the next generation?  And is it fair to say that this gamble could also impact the current generation through decreased services, increased taxes? 

Mr. Stapleton.  One of the things that opponents of this legislation and of transparency with public pension plans in general like to point out is they try and make apples to oranges comparisons with private sector plans.  They will say, well, look at the underfunding in private pension systems.  The problem is that structurally you are talking about two different things. 

First of all, as I mentioned earlier, private plans have a different valuation assessment for what their liabilities are.  They peg it to high‑yielding corporate bonds at 6 percent.  That does not happen in public pension plans where the expected rate of return equals the actual rate of return.  But structurally, unless I am an investor in a private company with a lucrative defined benefit plan, I don’t really care, because I am not going to be on the hook. 

But in the public pension system, all taxpayers at the State level are on the hook if the plans become insolvent because the State of Colorado is not going to let the Jefferson County School District go insolvent without finding a way for funding.  And we are bankrupt, like a lot of States.  And the only people that can actually make up the difference are the taxpayers.  And that is why it is important that we have this level of transparency so that everybody can know where we stand and can take public policy actions to remedy what I believe is a very serious problem. 

Ms. Jenkins.  Thank you, Treasurer. 

I yield back. 

Mr. Boustany.  Thank you. 

Mr. Kind, you are now recognized for 5 minutes. 

Mr. Kind.  Great.  Thank you, Mr. Chairman. 

I thank the panelists for your testimony here today.  As a Democratic representative from the great State of Wisconsin, I have to admit we kind of received our fair share of attention in the last couple of months in the media, both at home and nationally.  

This may seem a little heretical to my Democratic colleagues up here on the dais, but I commend Governor Scott Walker and what he did.  I think what he proposed in the State of Wisconsin was incredibly bold and courageous in recognizing the deep fiscal hole that we were in and coming forward with the bold proposals that he did. 

And quite frankly, the fact that hundreds of thousands of people showed up in subfreezing weather, braving bitter wind chills, blowing snow, bitter winds in their face in both the square in Madison and virtually every city throughout the State of Wisconsin, I have got to believe they wouldn’t have done that if they had all the facts, if they knew the real fiscal crisis that our State was facing and how boldly the Governor was really trying to address these issues. 

Because if they had known that the State public pension fund was only funded at 99.8 percent and that that 2 percent ‑‑ .2 percent shortfall was creating a deep fiscal hole for our state, I cannot believe that they would have been out there for weeks and months on end protesting what the Governor was trying to do with the State public pension system.  I meanF, they wouldn’t have been so selfish and so self‑centered in the demonstrations that they were conducting throughout the State of Wisconsin. 

No, I think not. 

I think those individuals, those workers, those families knew exactly what they were doing when they were out there protesting what the Governor and the Republican legislature was trying to jam down their throats.  This had nothing to do with the budget crisis that the State of Wisconsin was facing. 

In fact, Governor Walker was just here in this town a few weeks ago and admitted in testimony before Congress that his assault on worker rights had absolutely nothing to do with the budget situation that we face in the State of Wisconsin. 

In fact, they stripped that portion out of the bill and therefore admitted before the entire world that it had nothing to do with the budget implication. 

But nevertheless, the public employees knew that they had to be a part of the solution, and they were willing to contribute more to their State public pension system.  They were willing to contribute more to their health care system. 

In fact, Governor Walker got every concession that he was asking for from those public employees, but that wasn’t good enough.  He had to go after those worker’s rights and strip that away, basically telling them, you no longer have a seat at the table, and your voice isn’t going to matter anymore, and we are going to jam these decisions down upon you. 

So it was not surprising seeing hundreds of thousands of people going out and braving that cold weather and that bitter wind chill day after day protesting what Governor Walker was doing to the State of Wisconsin.  If we want to have a serious conversation about the fiscal hole we are facing at the State and Federal and local level, let us talk about the real cause of what is driving these budget deficits, which is rising health care costs. 

Now, my Republican colleagues have a proposal on how to deal with it and that is going to the workers of the country, to seniors, to disabled people, the children and saying, you contribute more to your health care plans, and that is it. 

They are not proposing anything to deal with rising health care costs.  And that is just going to shift the burden more and more on working‑class families throughout the Nation. 

Or there is another approach that we can take and that is through the health care reform measure that we passed that will reform the way health care is delivered in this country and ultimately how we pay for it.  So it is based on the value and no longer the volume of care that is given.  And surprise, surprise, this has been a bipartisan agreement for many, many years.  Some of the most prominent names in the Republican party from Newt Gingrich, to Bill Frist, to my former Governor and former Secretary at HHS, Tommy Thompson, Mark McClellan, they have all been saying we have got to go to a value‑ or outcome‑based reimbursement system in the health care system, or it will bankrupt us.  That is what is driving the fiscal crisis at the State and at the local level.  That is the largest and fastest growing area of spending at the Federal level.  That is what we should be focused on, instead of some one‑size‑fits‑all Washington approach to the State public pension system, 99.8 percent funded in the State of Wisconsin, and yet look at all the attention that we garnered as a State over the last couple of months. 

Mr. Chairman, I would like with unanimous consent to submit for the record a letter dated May 4, 2011, to me from the Secretary of the Department of Employee Trust Fund, Dave Stella, from the State of Wisconsin. 

Mr. Boustany.  Without objection.

[The information follows: Mr. Kind]

Mr. Kind.  In the letter, he adamantly opposes H.R. 567. 

And, in fact, in the last paragraph ‑‑ and I quote him ‑‑ he says, “thus, contrary to what the proponents of the legislation suggest, the issue is not a current lack of transparency and disclosure; it is simply an effort to justify a Federal takeover of areas that are the financial and regulatory responsibility of State and local governments.” 

For the party that claims to be the party of less government in Washington and more responsibility at the State, proposing this one‑size‑fits‑all approach with this Federal legislation is contrary to even I think your principles.  And our own Secretary back in the State of Wisconsin is opposed to this legislation.  So I think we could spend a lot more time on the issues that are really driving these budget deficits rather than some type of Washington one‑size‑fits‑all approach. 

Mr. Boustany.  The gentleman’s time has expired.  We just had a vote called.  There are two votes.  One is a 15 and one is a 5.  I think what we will do now is go to Mrs. Black for questioning, and then we will recess afterwards. 

Mrs. Black.  Thank you, Mr. Chairman. 

Under the current government accounting standard for rules, public plans can discount their pension obligations based on expected rates of return on pension assets, as has already been talked about in some detail.  By putting their value into the stockmarket, private equity and other risky investments, State and local plans can decrease the current actuarial value of their liability. 

Now, GASB rules are contradictory to basic finance theory that I think has already been said here by a number of our panelists in the practice of financial markets where discount rates are based on characteristics of liability, not asset.  And Congress actually had banned this type of accounting for single employer private pensions, but yet we are still using it in the government. 

Do you believe that GASB rules encourage State and local governments to take on inappropriate risks with these planned assets?  And also, added to that, do you believe that H.R. 567 would have an effect on this practice?  And you can start with Mr. Stapleton, if we can, and just go down the panel. 

Mr. Stapleton.  Thank you, Mrs. Black. 

Yes, I do believe that the lack of uniform standards required by the government accounting standards board has allowed State plans to very dangerously adopt overrealistic rates of return.  Even if you look at an actuarial analysis, which is called a Monte Carlo analysis, that is often provided to States, they talk about the probability of achieving different rates of return. 

In Colorado’s case, there is almost a 30 percent chance that we will not achieve an 8 percent rate of return.  If I told you and other members of this committee that there was a 30 percent chance that they would be in a life‑threatening car accident on the way to work today, I think I would have a lot of people biking.  Yet essentially that is the risk that we are taking day in and day out with the State’s tax money, assuming these rates of returns. 

Mrs. Black.  Mr. Barro. 

Mr. Barro.  I would agree with that, and I think we see that in the political resistance to plans that are lowering assumed rates of return.  In New York, we just had a reduction in the rate of return assumed for the State employee retirement system and yet, just coincidentally, the plan happened to at the same time adjust other actuarial assumptions with regard to longevity and such that happened to largely offset the effects of the reduction and the rate of return. 

So I think there is significant resistance to reduced rates of return.  And in order to not lower the rate, you have to invest in an aggressive manner.  The other thing I had noticed is that the defense of this aggressive investment is essentially that the government can be indifferent to variability and risk in asset returns.  Because the government is going to be around forever, it has this superior ability to take on risk.  And the implications of that are really kind of perverse. 

Pension funds happen to be vehicles through which we make promises to public employees and through which we invest in assets.  But these are fundamentally unlinked activities, and there is no reason that a government couldn’t just create essentially a sovereign wealth fund by issuing bonds and using the proceeds to invest in equities.  If the government really has a superior ability to take on risk, we should be doing a lot more of that.  They should issue as many bonds as they can, use them to buy up as much stock as they can and use that as a cheap source of financing for government activities. 

Now, obviously, that makes no sense because it would involve governments taking on tremendous and inappropriate investment risks.  But that is exactly what they do through public employee pension plans. 

Mrs. Black.  Thank you. 

Mr. Gold. 

Mr. Gold.  The best financial theory, brought to our attention by famous economist Fischer Black indicates that pension plans should not be investing in risky assets but should be investing in bonds.  I have written that liability measurement using the “expected return on assets” rather than a bond “reference portfolio” does enable, at the very least, and encourage, perhaps, risky investing which financial theory would not support.

Mrs. Black.  Mr. Kurtter. 

Mr. Kurtter.  Yes.  We think that the preliminary review’s report of GASB, their project to review pension and accounting standards for public‑sector pensions, this bill, the many reports that have been issued on this subject recently help to increase transparency and improve the quality of the debate between issuers and investors, thereby improving the amount and the quality of information in the market.  To the extent that transparency is improved, comparability is improved, we think this helps to create incentives to issuers to help address funding shortfalls and improves the overall quality of information available to investors. 

Mrs. Black.  Ms. Lav. 

Ms. Lav.  The fact is that over the last 20 or 25 years, the funds have earned close to 9 percent.  Over the last 10 years, they have earned 5 percent.  I didn’t have that number in front of me before.  And over the last about 25 years, 60 percent of the revenue to these funds has come from investing.  It has been investment income.  So it does appear that the funds have invested prudently.  They have made very good returns.  And I think having them invested entirely in bonds would be wrong for the taxpayers of the State who are missing out on the potential of these returns to finance the pensions. 

Mrs. Black.  Thank you. 

Mr. Boustany.  The gentleman’s time has expired. 

We will now go to Mr. Marchant for 5 minutes. 

Mr. Marchant.  Thank you, Mr. Chairman. 

Ms. Lav, who in your opinion is the biggest loser if a pension fund goes broke or is severely underfunded? 

Ms. Lav.  Well, ultimately, the pension funds are in essence backed up by the full faith and credit of the State.  So, in the very unlikely situation that a major pension fund would not be able to pay benefits, presumably they would pay it from current tax dollars.  That is how they paid ‑‑ prior to the 1970s, all State and local pensions just about were paid on a pay‑as‑you‑go basis.  There were not these forward-funded pension funds.  And then they started investing and prefunding their pension funds around 1980, and they built up this $3 trillion fund in the pensions. 

And pensions are not in danger of not being able to pay their benefits.  That is just not the case in most situations.  I mean, if you want to look at the most extreme, even Illinois will be able to pay its pensions. 

Mr. Marchant.  So you don’t feel like there is any benefit to an additional amount of transparency for the employees that are going to benefit from the pension system? 

Ms. Lav.  Transparency is a word that is used in a lot of different ways.  And when what is called transparency puts up a construct that is different from how much States and localities have to invest in order to make their pension funds whole and to pay their obligations, then you have confusion rather than transparency, in my opinion, because you have two different numbers and people don’t know what to think about it.  And if they look at an inflated and a very large liability, then some other things are going to happen.  People are going to try and raise taxes to fill it.  People are going to cut other programs, or they are going to say, oh, we can’t keep this pension fund; we are going to have to go to a defined contribution or something else, because of the liability.  It is confusion. 

Mr. Marchant.  So your theory is that transparency increases confusion? 

Ms. Lav.  No, not necessarily any transparency.  I am saying that I don’t think that what we are talking about here is good transparency. 

I think that what GASB is proposing in its new rules is good transparency.  It has a much more realistic view of the funding level and the liabilities of pension funds. 

Mr. Marchant.  In my previous career in the State legislature, I served on the Texas Pension Review Board.  And it was not a review board that took very seriously its responsibility for years until we got a Governor that decided that maybe we ought to meet and maybe we ought to actually do our job.  And our job was simply to just publish the same kind of information that is in this bill.  And we found that we got the most resistance from the public entities that administrated these plans, and we got the most enthusiasm and the most inquiries from the actual employees that once they were able to look at the disclosure and the comparisons of the Dallas Police and Fire Pension Fund versus the El Paso Police and Fire Pension Fund, that is when we began to ‑‑ our main input came from the employees. 

And we found that the increased transparency benefited really the employees because they then began to demand an accountability from the pension funds that they were depending on for their retirement. 

I think your first answer was very telling in that, in your opinion, the ultimate loser is not the employee but the State or the entity.  And I think that, at some point, the employee needs to be more worried about the content and the investment policies and the transparency of their pension planning and cannot always rely on the State or the county or the city or the school district in bailing a system out. 

Ms. Lav.  That would be a very rare situation.  I think the GASB rules will create the kinds of transparency and comparability that you are talking about, which I think is good and important and ‑‑

Mr. Marchant.  We found that GASB was a reactive entity and not a proactive entity. 

Ms. Lav.  Well, it has ‑‑

Mr. Marchant.  That was our experience.

Mr. Boustany.  The gentleman’s time has expired.  The committee will stand in recess until we complete the round of votes on the floor.  I anticipate it will be about 20 minutes. 


Mr. Boustany.  The committee will resume business. 

At this time, Mr. Becerra is recognized for questioning. 

Mr. Becerra.  Thank you, Mr. Chairman. 

And thank you all for your testimony today.  I appreciate that very much. 

One of the things that I am sensing is that there is a disconnect between what we are doing here in Washington, including this conversation here, and what the American public is feeling.  In a recent survey of the public ‑‑ and let me go ahead and cite it, the National Institute on Retirement Security’s survey, that survey found that the vast majority of Americans believe that the disappearance of pensions has made it harder for them to achieve the American dream.  Some 75 percent of Americans believe that.  And it sounds like more and more politicians are talking about eroding or eliminating the opportunities for Americans to have these pension plans.  Sometimes the public conveys to us that they don’t believe that we are listening or that we understand how difficult it is for them to prepare for retirement.  Some 80 percent of Americans responded to the survey saying that precise point.  And they responded by a percentage of 81 percent saying that they think that we should make it a higher priority to ensure more Americans, not less, that more Americans can have a secure retirement.  And so as we hear this discussion about public pensions and we take a look at the real facts, I wonder if the American public is actually not way ahead of us in talking about this.  Because if the public believes that we don’t get it, they might be right because my understanding is that the average pension in America for most public employees is somewhere in the low $20,000s.  Not $80,000, not $150,000. 

Now, they may be confusing that with the big parachutes and buyout plans that they heard about during this Wall Street scandal where executives were getting billions of dollars or millions of dollars in buyout moneys, even though their companies were failing.  But these are public employees who put in many, many years, most of them more than a decade or two, to be able to collect some $20,000 to $25,000 a year in retirement. 

At the same time, my understanding is that for most States, the cost of having these pensions for their public employees translates to less than 4 percent of their State budget.  Now, I know my State is having a tough time.  I know any number of States have been having a hard time.  But I daresay that eliminating the pensions that have been paid into by employees over decades and getting rid of the opportunities for American workers to lead out their lives in retirement and dignity is not what folks would expect of us.  I have got to believe that the teachers who have been paying into the system who have been working for so many years, the firefighters, the police officers, the public employees throughout America who have been working for less money than their private sector counterparts, because pay scales in the public sector are a little lower, but they get a little bit stronger and better protected pension benefits; I have got to believe that those American workers are saying, you are not listening to us; well, we want some help, but please don’t target our pensions at a time when we want the most safety. 

So I have a question to ask.  Is it the case that there is any State that has said to us, we need to have a Federal bailout of our pension system?  I know Illinois was mentioned. 

Ms. Lav, you may have already commented on this I was told.  But has Illinois requested a bailout from the Federal Government for its pension program? 

Ms. Lav.  No, it has not.  In a 472‑page budget, there was one phrase, not even a sentence, which says; “significant long‑term improvements will come only from the additional pension reforms, refinancing the liability and seeking a Federal guarantee of the debt, or increasing the annual required contributions.” 

So there was that one phrase in which a Federal guarantee was mentioned.  But a couple of weeks later, the Wall Street Journal asked Governor Quinn, and there is an article which says he said, no, no, we are not planning on doing that. 

Mr. Becerra.  Let me ask a quick question.  Is there anyone that challenges the figure that the average pension benefit for public employees throughout America is around $23,000, $24,000 a year? 

Ms. Lav.  That comes from the U.S. Census.

Mr. Becerra.  So no one would question it. 

Ms. Lav.  No. 

Mr. Becerra.  Does anyone question that the average cost for a State throughout the country or the 50 States is somewhere around 4 percent or less of their State budgets? 

Ms. Lav.  Right.  The most recent data shows 3.8 percent. 

Mr. Barro.  I would challenge that idea. 

Mr. Becerra.  Okay.  Mr. Barro. 

Mr. Barro.  That is a measure of the actual cash payments made by governments.  That is not the cost of pension benefits that are being provided. 

Mr. Becerra.  Doesn’t that go to the question of what we are talking about in terms of a State’s budget?  A State is budgeting for a fiscal year, not for 20 years from now. 

Mr. Barro.  Well, that is part of the problem. 

Mr. Becerra.  If I could finish my point.  And so while I think where you are heading is that we want to make sure that these pension plans are solvent for years to come just the way we want Social Security to be solvent, we wouldn’t use today’s money that is contributed for a program we need today to pay for a program that has to go long term.  And so what we have to do is deal with the long‑term costs of the pension program through ‑‑ and I know my time is expired, if I could just finish this point ‑‑ we want to deal with the long‑term costs of the program through long‑term solutions, not short‑term solutions.  So the short‑term solution of fixing a State budget should not be foisted on a long‑term program that has been funded for decades and is supposed to last for decades to try to solve a short‑term State budget, which is caused principally by the downfall, the economic recession and so forth. 

So it could be in a few years we are doing very well, and that means that pensions will be doing very well.  So what we want to do is budget long term for pensions, not have a short‑term sight and deal with State budgets through our pension programs for our workers. 

Mr. Chairman, thank you for allowing me the additional time. 

Mr. Boustany.  The gentleman’s time has expired. 

Mr. McDermott, you are recognized for 5 minutes. 

Mr. McDermott.  Thank you, Mr. Chairman. 

This morning we are gathered once again to watch the Republicans attack the middle class and watch them ignore the problem of jobs in this country. 

Although there is a twist this morning because this is a subcommittee that has no jurisdiction whatsoever on pending legislation.  They had to find a committee that would have the hearing because other subcommittee chairmen would not attack unions, so they brought it into this committee. 

Now, we are sitting here while they cynically abuse the committee process to beat up on the working people of this country.  If the public wonders why our politics are polarized, it is because of all of the incremental steps of abuse.  This morning is another example. 

Let us be clear:  The Republicans hate defined benefit pensions, whether it is Social Security at the Federal level or it is a public pension at the State level.  They want rid of them all. 

That is what Wisconsin was about, and it is what this whole exercise here today is.  Now, instead of focusing on jobs, they are going after their political enemies, once again, the regular whipping boys, the unions.  Let us drag the unions out here and kick the living daylights out of them when, in fact, they are not the problem. 

Unions built this country.  They built the highways, the ports, the schools.  They created fairness, the 8‑hour work day, safe working conditions, health care, pensions.  They are not the robber barons in this society.  And union workers are under attack because they haven’t gotten poor enough.  They are under attack because they haven’t given up, as they showed in Wisconsin. 

After two decades, the 1980s and then the 2000s, where the Republican policies led to huge deficits, transferring most of the wealth to the top 5 percent in this country, you would think they would be satisfied, but they aren’t.  Here we are, back to the same old stand, attacking the pensions of policemen and firefighters and teachers and sanitation workers.  Now, it is good that we found who the enemies are in this society; the police, the firefighters and the teachers and the sanitation workers.  Let’s take away their pensions.  Let’s destroy the system we have developed in this country. 

There is no problem with most State pensions.  The State of Washington is 99 percent financed.  Wisconsin is 99 percent financed.  If you look at all the records that come from all of the agencies, the Pew Foundation and others, and it is very clear that these pensions are not in trouble in most places.  There are some States, but for the Federal Government to leap in to fix New Jersey or Illinois or whatever and make Washington go through that process is an abrogation of State rights, and there is no sense in doing it. 

Some of the witnesses here have said things about public officials at the local level, which I think you ought to take back, because some of them have been very responsible.  In my State, we have a functioning system that is well financed. 

Now, the CBO put a report out and the chairman kindly put it into the record. 

And, Ms. Lav, I would like you to comment on this line in this:  It says, “by indicating a larger amount of underfunding, adopting a fair‑value approach and reporting pension financing could indicate a need for significant increase in funding which would further strain State budgets, despite the fact that on average a much smaller increase in funding might turn out to be significant to cover pension plan funding.” 

It sounds to me like what they are trying to do with this bill is jack up the pressure on States; therefore, they will dump the pension plans.  Is that a fair reading of what this bill is about? 

Ms. Lav.  Well, I think that is a pretty fair reading.  I think that some of the sponsors have said that, as is indicated in my written testimony. 

I think that what it will do is create this idea that there is just this massive underfunding, and people will demagogue that.  You would have it all in one place.  You have a so‑called transparent ‑‑ maybe it is on a Web site and everything, and with these very large liabilities, and people are going to demagogue and say, oh, my God, we can’t afford this, and it is going to create pressure either to eliminate the plans or pressure to cut other spending or pressure for higher taxes.  And given the volatility of the bond markets and people that invest in State and local mutual funds that ‑‑ mutual funds for State and local bonds ‑‑

Mr. McDermott.  Let me stop you there, because you brought up the bonds, the bond market. 

Mr. Chairman, I would ask unanimous consent to put into the record the Huffington Post article called “Credit Rating Agency Analyst Covering AIG, Lehman Brothers Never Disciplined.”  I think we ought to have a hearing on that. 

I yield back the balance of my time.

Mr. Boustany.  Without objection, that report will be put in the record.

[The information follows: Mr. McDermott]

Mr. Boustany.  I would remind the gentleman that it is a little unseemly to impugn motives of members of the committee and other Members of the House.  The purpose of this hearing is simply to explore the issue of transparency and whether or not the accounting methods being used accurately depict liabilities. 

So, with that, the chair now recognizes Mr. Nunes. 

Mr. Nunes.  Thank you, Mr. Chairman. 

I also would like to remind the committee here that when the public employee transparency bill was introduced in the House, it was the House Parliamentarian that referred the bill to the committee. 

Also, it amazes me that now CBO is part of the vast right wing conspiracy to take out public employee unions.  I have a quote here that I would like to read from another far right winger.  Some of you may recognize the name of Mayor Willie Brown, the mayor of San Francisco.  He was also the California assembly speaker for many years.  I guess he is now a right winger because I am going to read this, and he must be against unions.  But here is his quote:  “The deal used to be that civil servants were paid less than private‑sector workers in exchange for an understanding that they had job security for life.  But we politicians, pushed by our friends in labor, gradually expanded pay and benefits to private‑sector levels while keeping job protections and layering on incredibly generous retirement packages that pay ex‑workers almost as much as current workers.  Talking about this politically is politically unpopular and potentially even career suicide for most office holders.  But at some point, someone is going to have to get honest about the fact that 80 percent of the State, county and city budget deficits are due to employee costs.  Either we do something about it at the ballot box or a judge will do something about it in bankruptcy court.  And If you think I am kidding, just look at the City of Vallejo.”

So when the bill was put together, it was put together to protect the employees.  And Ms. Lav, it amazes me that you don’t believe that transparency is good for the employees.  Why is it that you want to hide the numbers from the public employees? 

Ms. Lav.  I think transparency is very good. 

Mr. Nunes.  You said earlier that it would create confusion. 

Ms. Lav.  Well, because I am saying that I am not defining forcing this estimation of liabilities at a riskless rate as transparency because I think it is more in the category of something that is not relevant particularly to the level of contributions that State and local employees should be making to their plans.  And what should be disclosed to people is how much it is that this State and this locality have to put into their plans to reach full funding over the next couple of decades as we recover from these back‑to‑back recessions. 

And that is the amount that I think you should be transparent about so people have an idea, so employees have an idea, so the public has an idea, so the investing public and everybody else has an idea what has to be put into those accounts. 

Mr. Nunes.  The bill allows for basically two basic things.  One is for the pension plan to show how they feel they are going to meet the needs.  The other is this discount rate that you seem to be fixated on and that the left seems to be fixated on.  And for some reason, you can’t get off this fixation about 3 percent, 4 percent, 5 percent.  The truth of why the rate was picked is what I said earlier to Mr. Buchanan, is so that you would have a conservative ability to compare public employee pensions across the line.  And I will also say that it amazes me how this has now turned into a union‑Wisconsin vast conspiracy bill here when I think half of the public employee pensions are actually for non‑union employees.  So, I think hopefully we can just really raise the rhetoric level down a little bit here.  This is a good government bill.  It is trying to create transparency so that public policymakers can make better decisions. 

And with that note, Mr. Stapleton, could you just kind of comment on ‑‑ I know you didn’t get a chance to respond to some of the members on the Democrat side and some of their accusations, so I would like to give you an opportunity to respond. 

Mr. Stapleton.  Thank you, Congressman Nunes. 

I would simply say that everybody benefits in my opinion from greater information.  I think that a risk‑free rate of return is absolutely as justifiable, if not more justifiable, than assuming an 8 percent rate of return. 

In Colorado, we had the market returns compounding ‑‑ the market compounding at nearly 18 percent over the last 20 years.  And as a result, our plan was only fully funded once.  To assume that we are going to have that type of run‑up again over the next 20 years is a complete fallacy.  Also, the notion that everybody is contributing the same amount is a fallacy. 

Using Colorado as an example, Congressman, we have government workers, who according to this year’s budget, have been asked to contribute a mandatory of 12.5 percent of their paychecks into the pension system.  The problem in Colorado is that government workers only represent 15 percent of the membership in the pension system.  Everybody else, all 85 percent of other members, school teachers, higher education, local government workers, they only have to contribute 8 percent, and they get the same benefits.  So if we are talking about fairness here, let’s have everybody contribute the same amount.  Let’s have everybody retire at the same age; not some get to retire at 60, others get to retire at 58.  There is no uniformity, and Colorado is not alone.  Many States don’t have uniformity in contribution levels or retirement ages.  So this is about economic fairness. 

Mr. Boustany.  The gentleman’s time has expired. 

Mr. Nunes.  Mr. Chairman, I would like to just thank all of the panel for being here today and for their contribution.  I know they spent a lot of time on these public employee pensions, and I appreciate the panel’s time today. 

And I appreciate your time, Mr. Chairman, for holding this hearing. 

Mr. Boustany.  I thank the gentleman.  Let me just remind members on both sides that we want to try to keep from impugning motives and stick to really what the heart of the subject is.  And it was really dealing with the transparency, the accounting methods and ultimately, are these pension plans fair to the workers at the end of the day?  So we will continue to work on this issue.  And I want to thank the panelists for joining us today.  You all have been very helpful.  Please be advised that members may have written questions that they will submit to you.  And those questions and answers will be made a part of the official record. 

With that, this hearing is now adjourned.

[Whereupon, at 11:27 a.m., the subcommittee was adjourned]


Rep. John Lewis
Rep. Ron Kind


Rep. Ron Kind
Rep. Jim McDermott


American Federation of State, County And Municipal Employees Statement
International Association of Fire Fighters Statement
Joint Group Statement
Labor Coalition Statement
Municipal Employees Retirement System Statement
National Education Association Statement
National Conference on Public Employee Retirement Systems Statement
Public Plans Community Statement
Service Employees International Union Statement
Securities Industry and Financial Markets Association Statement