Republicans draw attention to public pension gaps

Reuters News
Posted: Dec 08, 2011 5:13 PM
Republicans draw attention to public pension gaps

WASHINGTON (Reuters) - Republicans in Congress on Thursday sought to shift attention back to public pension shortfalls, with estimates of the total deficit ranging from $600 billion up to $3 trillion.

Leaders on a joint congressional committee on the economy are releasing a series of reports on states' struggles to cover the costs of pensions for future retirees.

"States are already $3 trillion in the red, a crisis four times larger than the Wall Street bailout," said Sen. Jim DeMint of South Carolina, who released the report with Kevin Brady, a Representative from Texas.

Differences in the estimated gaps spring from varying investment return projections.

DeMint hinted legislation on pensions may be coming soon.

"The deeper we get into this research, the clearer it becomes that federal legislation may be necessary to force states to use honest accounting, fix their pension debt and protect taxpayers from the mother of all bailouts," he said.

Earlier this year, Republican lawmakers considered allowing states to declare bankruptcy in order to allow them to escape employee contracts and public pensions. Concerns about the idea's legality and practicality - states were not interested in bankruptcy - pushed it to the side.

Recent fights over the federal debt and deficit, unemployment and Europe's financial problems further drew attention away from the states' shortfalls.

The report primarily relied on research from Joshua Rauh, an economist at Northwestern University who has put forward the $3 trillion figure. He has also sounded some of the loudest alarms about public pensions.

Rauh assumes public pension investments, which make up the majority of the funds' revenues, will only receive 4 percent annually.

Most pensions budget for 8 percent, a return closer to historical averages and one that allows governments to make smaller contributions than the lower 4 percent.

The Republican report also criticized current accounting standards saying that "if states were forced to use private sector market value liabilities, their projected unfunded liabilities would rise exponentially over time."

"Current accounting methods assume pension funds can earn high investment without risk, typically 8 percent. When pension liabilities fall short, taxpayers are required to make up the undisclosed difference," it added.

Of late, returns have inched closer to that rate after the financial crisis and economic recession pushed them to negligible levels. In the second quarter of 2011, public pensions total holdings and investments rose 17.6 percent from the same quarter in 2010, according to the U.S. Census.

Using the lower rate of return, Republicans on the Joint Economic Committee compared how much the states are liable for pensions to their gross domestic products.

"The median pension debt-to-GDP ratio among the states was 21 percent, with Nebraska having the lowest ratio of 9 percent and Ohio having the highest at 41 percent," it said.

The lawmakers are not alone in wanting to change pension accounting. The Governmental Accounting Standards Board, which sets public finance accounting rules, will have new requirements for pensions in place in June.

The board would require pensions lacking sufficient assets to cover future benefits to lower their projected rate of return on investments to 3-4 percent. Adequately funded pension systems could continue to forecast higher rates in line with what they have historically received on investments.

While almost all pensions have enough money to cover the benefits of current retirees, some are already struggling. The city of Central Falls in Rhode Island was recently felled by its pension obligations and filed for bankruptcy.

(Reporting by Lisa Lambert, Editing by Gary Crosse)