Guest Article

(From the January 24, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

State and Local Pension Funding - Under Focus in the House

The funding status of state and local government employee pension plans seems to be a matter of focus among the new majority in the House of Representatives.

In December 2010, Representative Devin Nunes (R-CA), with the support of six other Republican members of the House, proposed H.R. 6484, a bill that would revoke Federal tax benefits for bonds issued by a state or political subdivision that was not compliant with new reporting requirements regarding state and local government employee pension plans. The legislation - which called for detailed reporting similar to that for private pensions (e.g., the use of prescribed valuation methods, the use of interest rates based on the Treasury yield curve to determine the value of liabilities, and enhanced disclosure of various items) - expired with the close of the 111th Congress. However, on January 6, 2011, a new resolution was proposed, H. Res. 23, expressing the sense that the Federal Government should not bail out any state or local government employee pension plan. The resolution was referred to the House Committee on Education and the Workforce, and has at least twenty three cosponsors from the Republican side of the aisle.

The resolution expresses the same concern that motivated H.R. 6484 - the fear that State and local governmental pensions may be so underfunded that they threaten the national economic health. The bill cited a recent study which found that the present value of the already-promised pension liabilities of the 50 States amounted to $5.17 trillion and that those plans were underfunded by $3.34 trillion. The report, based on 2008 data, concluded that greater disclosure and transparency was needed. It criticized the use of varying methods among the States to report pension liability, challenged the typical use of an 8 percent discount rate, and suggested improvement in investment policies. See Novy-Marx and Rauh, The Liabilities and Risks of State-Sponsored Pension Plans, Journal of Economic Perspectives (Fall 2009). A more recent study by one of the authors examined the September 2009 asset values and projected that more than half of the States will exhaust their pension funding by 2030 (based on the assumption of an 8 percent return on assets, and that future contributions are used to fund new benefits in full). See Rauh, Are State Public Pensions Sustainable? (2010).

In turn, the National Association of State Retirement Administrators has criticized such analyses as unhelpful to state and local governments as they face unprecedented financial challenges. The association points out that the recent analyses are based on 2009 or earlier asset values, and their methods for determining future pension liabilities not recognized by governmental accounting standards. Further, the association points out that since 2006 almost two-thirds of the states have made changes to their plans' benefit levels, contributions rate structures, or both, and these changes would need to be included in the analysis to realistically reflect funding gaps. The association also challenges the rate of return and contribution assumptions in the studies.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.