Republicans Beat Unions With Pension ‘Fright,’ Fund Lawyer Says

Congressional Republicans are using scare tactics to push a bill blocking bailouts of state pensions as a way to undermine government unions, said John Stanton, a lawyer for the California State Teachers’ Retirement System.

“They are peddling fright about the supposed imminent insolvency of public pension plans,” Stanton said yesterday at a meeting of the second-largest U.S. public pension fund’s board. “It really is an attack on the public-employee unions.”

U.S. Representative Devin Nunes, a California Republican, has proposed requiring state pension plans to report their liabilities based on more common accounting techniques, such as Treasury rates. That would enlarge estimated unfunded obligations because Treasuries typically provide lower returns than are projected now for pension assets. The bill would strip noncompliant states of their ability to issue tax-exempt debt.

“The congressman’s legislation is intended to protect the interests of government employees and their employers, namely the taxpayers,” Andrew House, a Nunes spokesman, said today by e-mail. “Allegations beyond this clear intent are little more than an effort to hide the truth by peddling fright,” he said, turning Stanton’s words back on him.

Called the Public Employee Pension Transparency Act, Nunes’s bill would prevent the federal government from sending aid to help states cover unfunded pension obligations. Nunes cited estimates that state pension plans are underfunded by as much as $3 trillion.

Funding Study

A study released in October by Joshua Rauh and Robert Novy- Marx, who teach finance at Northwestern University and the University of Rochester, respectively, said state and local pensions have unfunded liabilities of about $3.6 trillion, if their returns on assets were projected using Treasury discount rates to adjust for risk. Republicans are using the study as proof that the public funds need bailouts, which is a “red herring,” Stanton said.

Representatives of the $146.4 billion California fund’s board should convey to legislators and the public that “states are working on this issue,” Stanton said at the meeting in West Sacramento. Board members should make it clear that they “don’t need a one-size-fits-all solution” from Congress, he said.

“It’s not been lost on the Karl Rove crowd that the only group that was able to keep up with them in federal campaign spending was public-employee unions,” said Stanton, a partner in the Washington office of Hogan Lovells, referring to the Republican political strategist and former White House adviser.

Rove’s Role

Rove, 60, helped run two organizations, which with other Republican groups operating independently of the parties and candidates, spent almost $100 million more than Democratic organizations in 2010, according to the Campaign Finance Institute, a Washington-based research group. Rove was a top aide to former President George W. Bush, a Republican.

A Bloomberg analysis of state pensions showed funding levels across the 50 states, as of fiscal 2009, ranged from 51 percent of projected liabilities in Illinois to more than fully funded in New York. The median level was 76 percent of estimated obligations, according to the analysis.

The California teachers plan reported a funding level of 78 percent in June 2009, according to a statement last month. That’s the most recent figure available, said Ricardo Duran, a spokesman. The fund, which covers 852,000 public-school educators and their families, had a 12.7 percent return in 2010.

No Crisis

“In our state, there is not a crisis, funding levels are improving with investment performance,” Stanton said.

Requiring states to put an additional $3 trillion into their pensions would result in surpluses, he said. Talk of a crisis, meanwhile, has spooked holders of municipal bonds, many of them individual investors, who have pulled $24.8 billion out of municipal-bond mutual funds since mid-November, according to Lipper US Fund Flows in Denver.

The ultimate goal of the Republicans is to prompt local governments to eliminate traditional defined-benefit pensions and replace them with 401(k)-like contributory retirement plans, Stanton said.

“The federal bill has been described as air cover for folks working on the ground,” Stanton said.

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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