The introduction of legislation to force states and municipalities to adopt strict standards and report on the finances of their employee pension funds seems to be a regular occurrence. "It's like Groundhog Day," says Ted Goldman, senior pension fellow for the American Academy of Actuaries.
The actuaries have taken notice of the Public Employee Pension Transparency Act, re-introduced March 21 in the U.S. House by Rep. Devin Nunes, R-Calif. Among other things, the bill would prevent states and cities from issuing tax-exempt bonds without publicly disclosing the cost of their pension plans and estimating their ability to pay those obligations. The legislation would also prohibit bailouts of state or local pension obligations by the federal government.
"Millions of Americans -- including state and local workers, retirees and taxpayers -- have a stake in the financial health of these plans," said Academy President Tom Wildsmith in a published statement. "Ensuring that relevant, useful information is readily available about the assets and obligations of state and local pension plans is in the public's best interest."
Shortfall a point of disagreement
How much money are we talking about? A lot. According to a statement issued by Nunes, pension officials put the tab of unfunded liabilities at $1.2 trillion. But that number grossly understates the actual debt, which is estimated to be triple that amount, according to a Stanford University study.
This bill is controversial for a variety of reasons. In the first place, these are not inarguable numbers. The way these liabilities are calculated differs from one state and municipality to the other.
For instance, there is fundamental disagreement over whether the calculation be done using a "market-based" method or an "expected-return-based method."
The difference between 2 methods
The market-based method: If the municipality had $1 million in pension obligations due in 10 years, it would need to buy something like a 10-year zero coupon Treasury note with an effective yield of 3% at a cost of $744,000 to be absolutely certain that it had enough money to pay for the debt.
The expected-return method: Past experience indicates the average return on a variety of reasonably safe investments is 6%. So if the state or municipality invests $558,000, in 10 years it is likely to have enough to pay its obligations.
Obviously, the amount of money needed to fund the shortfall is significantly different, depending on which calculation method you choose.
Which is the right approach?
The academy isn't taking a position, but Goldman says consistency and simplicity is key. "It is a complicated issue. These liabilities need to be calculated in a way that people who don't eat, sleep and breathe pensions can understand them and make good decisions."
And no matter how the liabilities are calculated, he adds, "The first time you see this information, it is hard to understand, but if you see it year over year, it tells you more of the story. You see patterns, and you are better able to make decisions around them."
Probably one of the reasons that this bill has not gotten traction in Congress for so long is that it could lead to increased difficulties meeting obligations for those states and municipalities with overwhelming debt. Opponents also see it as a way for Republicans to chip away at the power of government and municipal unions.
Will it ever pass? "I don't know," Goldman says. "But it is healthy that this is an issue that continues to be raised, and that makes it more likely that ultimately it will be addressed."
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