Good morning, and welcome to this morning’s Oversight Subcommittee hearing on the transparency and funding levels of state and local pension plans.
Across 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 questions about the promises public employers make, how the pension liabilities are calculated, and whether greater transparency is needed to better protect the lives and livelihoods of the men and women who depend on these pensions as they plan for their futures.
Millions of state and local government employees participate in defined benefit pension plans. These include many of our most valued public servants, such as 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 to best 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 reduced 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, and take 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.
Of course, some argue that state and local affairs are generally not 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. As if to underscore this threat, the recent proposed budget of Illinois indicates that the governor might seek federal guarantees of future debt to cover pension liabilities.
Finally, we will also discuss H.R. 567, the Public Employee Pension Transparency Act, which was introduced by Congressman Devin Nunes, a member of the 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 state 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, 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 pension plans, it is critical that the Subcommittee take this opportunity to review the issue and consider how to better protect workers and retirees, as well as the federal taxpayer.
I am now pleased to yield to our Ranking Member, Mr. Lewis.