Republicans poised to take control of the U.S. House are seeking wider disclosures from state and city pension funds, whose assets have shrunk because of market declines.
A bill introduced today by incoming House Budget Committee chairman Paul Ryan would force public retirement funds to make annual reports on their financial status and expected liabilities, using uniform assumptions. It also would bar federal bailouts of ailing public pensions.
“We need to ensure that state and local governments are accurate and honest in detailing their financial liabilities, including the cost of pension plans for public employees,” Ryan, a Wisconsin representative, said in a statement.
The gap between assets and what the plans will need to cover the retirement benefits they’ve promised has swelled because of losses suffered since the stock market’s slide two years ago. The deficit has forced higher contributions to retirement funds, putting pressure on localities struggling with a drop in tax collections.
Estimates vary for the scale of the liabilities because pension funds are allowed to adjust assumptions to account for expected investment returns. The higher those expected returns are set, the smaller the reported liability.
Because of that, forecasts for the additional sums that public pensions need have ranged from $500 billion to $3 trillion, according to separate studies.
Some funds estimate returns of 8 percent or more. New York City is among municipalities reconsidering such assumptions given the turn in financial markets. The Governmental Accounting Standards Board is also considering revising rules for the way pension liabilities are calculated.
Local governments may oppose the bill. Jeffrey Esser, the executive director of the the Government Finance Officers Association in Chicago, said some studies have overstated the pension liabilities by assuming that the funds earn low returns or skip their contributions.
“It’s just ridiculous,” he said in an interview. “It creates unnecessary paperwork and is just another unfunded mandate on state and local governments.”
The state of retirement funds has drawn the scrutiny of regulators. In August, New Jersey settled claims with the Securities and Exchange Commission that it misled investors in $26 billion of municipal bonds by masking underfunding of its two biggest pension plans, the first SEC case against a state.
The Republican bill would require public funds to spell out the assumptions used in their calculations. It would also require them to calculate the liabilities with formulas based on Treasury bond rates, which would produce a larger shortfall estimate because they are lower than the typically expected investment returns.
Lose Bond Subsidies
Governments that don’t comply with the reporting requirements would lose their ability to sell bonds subsidized by the U.S. Treasury, including tax-exempt securities and Build America Bonds.
Representative Devin Nunes of California, another sponsor of the pension bill, said the regulation is needed to improve disclosure of municipal finances.
“Lucrative pension promises are being made to public employees that taxpayers simply cannot afford,” Nunes said in a statement. “The true level of unfunded liabilities associated with these plans -- perhaps more than $3 trillion -- is being hidden thanks to unrealistic accounting standards.”