Defined Benefits, Undefined Costs: Moving Toward a More Transparent Accounting of State Public Employee Pension Plans
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Defined Benefits, Undefined Costs: Moving
Toward a More Transparent Accounting of
State Public Employee Pension Plans
Daniel J. Kaspar*
State governments and public pension boards have failed to provide timely
and meaningful information regarding the health of their pension plans.
Because stakeholders disagree on the method of valuing these pension
plans, the public lacks information necessary to develop policy
alternatives. Thus, it is the responsibility of the federal government to step
in, as it has done with private sector pension plans. An attempt was made
with the Public Employee Pension Transparency Act, though that
legislation falls short because it lacks a mandate of uniformity.
Government Accounting Standards Board (GASB) Statements greatly
influence state plans, but they too lack uniform standards. In this article, I
propose the Uniform Pension Valuation and Reporting Act (UPVARA),
which calls for mandatory uniform valuation and reporting standards.
UPVARA also directs plans to report under three separate valuation
assumptions, thereby decreasing the acrimonious nature of plan valuation
and reporting. UPVARA is therefore a crucial step toward improving the
valuation and reporting standards for state public sector pensions.
INTRODUCTION
In 1937, President Franklin D. Roosevelt—no scourge of labor—wrote
that “[a]ll government employees should realize that the process of
collective bargaining, as usually understood, cannot be transplanted into the
public service.”1 Despite FDR’s warning, public-sector unions are now a
fixture in almost every one of the fifty states.2 In fact, the number of
*
Assistant Counsel at the National Treasury Employees Union; J.D. Chicago-Kent
College of Law; M.S. & M.B.A. Loyola University Chicago, B.S. Illinois State University.
1
JOHN WALSH & GARTH MANGUM, LABOR STRUGGLE IN THE POST OFFICE: FROM
SELECTIVE LOBBYING TO COLLECTIVE BARGAINING 85 (1992).
2
Two notable exceptions to this rule are North Carolina and Virginia, where it is
actually illegal for government entities to collectively bargain with their employees. See
N.C. GEN. STAT. § 95-79 (2010) (declaring collective bargaining to be “against the public
policy and an illegal combination or conspiracy in restraint of trade or commerce in the
State of North Carolina”); VA. CODE ANN. § 40.1-57.2 (2010) (“No state, county,
municipal, or like governmental officer, agent or governing body is vested with or
possesses any authority . . . .” to form labor unions or collectively bargain.).130 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
unionized public sector employees recently eclipsed the number of their
private sector counterparts for the first time ever. 3
Public sector unions have amassed great political power with the advent
of these collective bargaining rights. With that power, these unions have
secured many benefits, including pension payment plans for their members.
Nearly every state has one or more plans for its public sector unions. 4 The
plans differ widely in composition and contribution levels from the states
and union members. Moreover, the current level of funding of each plan
has been affected by the Great Recession and various decisions made by
state governments. Within this context, all of the stakeholders with an
interest in the level of funding rarely agree as to where that level is—i.e.,
what percentage of the plan is funded. There is also disagreement
concerning what constitutes an adequate funding level given the
circumstances.
Part of the reason for these discrepancies may be placed in the realm of
self-interested politics. All interested parties, whether state governments,
unions, taxpayers, etc., have a motive for portraying the sustainability of a
particular pension plan in a manner beneficial to their interests. Thus,
where these parties come out on these measures will generally be
predictable. How can the sustainability of a pension plan be assessed when
the underlying facts themselves are at issue?
In this paper, I propose a uniform standard, across the states, for
evaluating the funding levels of states’ public sector pension plans. This
proposal seeks to use consistent rates of return through the imposition of
common valuation methods, somewhat akin to the Generally Accepted
Accounting Principles (GAAP) in accounting.5
In Part II of the paper, I further explain the chaos and misinformation
caused by the lack of regulation of pension plan funding level reporting in
the public sector. This chaos calls for a solution that implements some
semblance of uniformity to ensure that the stakeholders (taxpayers, unions,
etc.) have access to meaningful information. In Part III, I offer a somewhat
condensed survey of the types of existing public sector pension plans, as
3
BUREAU OF LABOR STATISTICS, U.S. DEP’T OF LABOR, NEWS RELEASE USDL-10-
0069, UNION MEMBERS - 2009 1 (2010), available at http://www.bls.gov/
news.release/archives/ union2_01222010.pdf (“More public sector employees (7.9
million) belonged to a union than did private sector employees (7.4 million), despite there
being 5 times more wage and salary workers in the private sector.”).
4
According to the Center for Retirement Research, there are currently 107 different
state pension plans as of Fiscal Year 2009. See Center for Retirement Research, Public
Plans Database, available at http://pubplans.bc.edu/pls/htmldb/f?p=198:3:386114141
0824588 (last visited Dec. 19, 2011).
5
These are “the official standards adopted by the American Institute of Certified Public
Accountants (the ‘AICPA’), a private professional association, through three successor
groups it established: the Committee on Accounting Procedure, the Accounting Principles
Board (the ‘APB’), and the Financial Accounting Standards Board (the ‘FASB’).” Gaino
v. Citizens Utilities Co., 228 F.3d 154, 159 n. 4 (2d Cir. 2000).2011] DEFINED BENEFITS, UNDEFINED COSTS 131
well as their make-up and functional prerogatives. I further discuss the
present status of pension funding levels and address their sustainability,
especially in the context of the backlash currently experienced by public
sector unions across the country.
Part IV addresses two competing theories for accurate valuation of state
pension plans: market valuation and actuarial valuation. I explain the
mechanics and justifications behind each theory and compare the strengths
and weaknesses of each. In Part V, I discuss the lack of transparency and
accuracy in government disclosure of public sector pension funding levels.
This includes unrealistic rates of return, moving targets in valuation
assumptions, and the “punting” of liabilities and the means to meet those
obligations.
Finally, in Parts VI and VII, I call for comprehensive reform in the way
public sector pension plan funding levels are valued. I first discuss the
inadequacy and pitfalls of current proposed legislation, specifically the
“Public Employee Pension Transparency Act.”6 Then, in Part VII, I outline
a proposal for a better alternative, suggesting that uniformity in valuation,
not any one theory of valuation, is the sine qua non of success. The final
part of reform deals with methods and the manner of reporting, something
that has heretofore been an oversight of many pension reform proponents.
In all of the white papers, law review articles, contemporary
commentary and the like, there is a palpable absence of ideas for
transparency on the important and far-reaching topic of pension funding. A
regulatory vacuum has certainly helped to make it so, but no party with an
interest in this discussion escapes blame. After recent events, the problem
itself is no longer a hidden mystery. With any luck, neither will be a
solution.
II. PURPOSE AND OBJECTIVES
Many examples exist of politicians citing funding ratios either in
support of or against some measure to be taken with respect to state public
pension plans. 7 Certainly, there is no shortage of estimates for them to
choose from in order to best reflect their position.8 In a letter to the editor
published in the Chicago Tribune on March 4, 2011, David A. Stella took
6
H.R. 567, 112th Cong. (2011).
7
See, e.g., Mary Ellen Klas, Legislative Analysts Declare Florida’s Pension Fund
Fiscally Sound, MIAMI HERALD BLOG (FEBRUARY 28, 2011),
http://miamiherald.typepad.com/nak edpolitics/2011/02/legislative-analysts-declare-
floridas-pension-fund-fiscally-sound.html (contrasting statements made by Florida
Governor Rick Scott, who believes Florida’s state pension plan is significantly
underfunded, with a legislative analysis from Florida’s Office of Program Policy Analysis
& Government Accountability, which found that the plan was funded at an 87.9% clip).
8
See, e.g., DEAN BAKER, CENTER FOR ECONOMIC AND POLICY RESEARCH, THE
ORIGINS AND SEVERITY OF THE PUBLIC PENSION CRISIS 10 (2011), available at
http://www.cepr.net/documents/publications/pensions-2011-02.pdf (describing how
estimates of public pension funding shortfalls vary from $1 trillion to $3.2 trillion).132 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
issue with a claim by columnist Steve Chapman that Wisconsin’s pension
obligations were underfunded by more than $45 billion. 9 Mr. Chapman
cited Northwestern University Professor Joshua Rauh, an expert on state
pensions, in a column titled “The Scamming of Unions and Public
Employees.”10 Mr. Stella, the Secretary of the Wisconsin Department of
Employee Trust Funds, defended the Wisconsin Retirement System (WRS)
as “one of the best-funded in the nation.”11 He further asserted that
Wisconsin state and local governments and their employees “combine to
pay 100 percent of the annual required contributions.” 12
But which is it? There is quite a difference between a pension
underfunded by $45 billion and one that is fully or near fully funded.
Debate over myriad fiscal issues affecting the State of Wisconsin is
informed by these projections. Mr. Stella claims in his letter that “the State
of Wisconsin Investment Board professionally manages a diversified
investment portfolio that, since the inception of the WRS in 1982, has
earned annual returns averaging about 10.5 percent.”13 This perhaps gives a
clue as to why a chasm exists between the figures cited by Stella and
Chapman. If Mr. Stella is using anything near a 10.5% annual return rate in
his calculations, he is making the mistake of assuming that average past
returns will continue to approximate those experienced in the past. Such an
assumption is somewhat self-serving and is contrary to many economists’
opinions of what constitutes a plausible rate of return in today’s
conditions. 14
On the other hand, Professor Rauh may be severely underestimating the
plausible rate of return. According to Mr. Stella, Professor Rauh’s “highly
conservative, ‘risk free’” bond assumptions “don’t match reality.” 15
Moreover, in a response to a 2010 paper16 authored by Professor Rauh
advancing many of the same return assumption arguments, four financial
analysts took issue with several of his underlying assumptions. 17 Chief
among these disagreements was “his assumption that future contributions
9
David A. Stella, Letter to the Editor, State Affairs, CHI. TRIB., Mar. 4, 2011, at 20.
10
Steve Chapman, Editorial, The Scamming of Unions and Public Employees, CHI.
TRIB., Feb. 24, 2011, at 19.
11
Stella, supra note 9, at 20.
12
Id.
13
Id.
14
See, e.g., Jeffrey R. Brown et al., The Economics of State and Local Public Pensions
4–5 (Nat’l Bureau of Econ. Research, Working Paper No. 16792, 2011), available at
http://www.nber.org/papers/w16792; Lawrence N. Bader & Jeremy Gold, Reinventing
Pension Actuarial Science, 14 PENSION FORUM 1, 2 (2003), available at
http://users.erols.com/jeremygold/reinventingpensionactuarialscience.pdf.
15
David A. Stella, Letter to the Editor, State Affairs, CHI. TRIB., Mar. 4, 2011, at 19.
16
Joshua D. Rauh, Are State Public Pensions Sustainable? Why the Federal
Government Should Worry About State Pension Liabilities, 63 NAT’L TAX J. 585 (2010).
17
Paul Zorn et al., Analysis of Joshua Rauh’s Paper “Are State Public Pensions
Sustainable?” (June 1, 2010), available at http://nasra.org/resources/RauhResponse.pdf.2011] DEFINED BENEFITS, UNDEFINED COSTS 133
will be sufficient only to fund the public plans’ normal costs, and that no
contributions will be used to pay down unfunded liabilities.”18 Many public
pension actuaries also argue that using a “risk-free” rate will end up costing
the taxpayers more money, because the plans will be overfunded, resulting
in an overcharge of the taxpayers.19
These disagreements are playing out all over the states. Before the
public can digest this information, however, it must first be educated on the
types of pension plans currently offered by states, as well as trends in the
composition of these funds.
III. SURVEY OF STATE PUBLIC EMPLOYEE PENSION PLANS
Differences in compensation levels exist not only between the private
and public sectors, but also between the unionized private and public
sectors. In 2010, 36.2% of public sector employees were represented by
unions. 20 Segmenting these employees, federal employees are unionized at
a 26.8% rate, state employees at 31.1%, and local government employees at
42.3%.21 Median weekly earnings of unionized full-time wage and salary
workers in the public sector were $961 in 2010, compared to $864 with
their unionized private sector counterparts.22 Looking again at segments of
unionized public sector employees, federal government employees brought
in $977 per week, state government employees made $922 per week, and
local government employees earned $971 per week.23
While unionized public sector employees on average earned 11.2%
more in wages than unionized private sector employees in 2010, 24 the more
meaningful cause of the overall gap in compensation between the two
cohorts stems from the difference in the types of pension plans offered.
Defined benefit plans are the norm in the public sector, whereas defined
contribution plans are most common in the private sector.25 The differences
between the two plans are profound and are more fully discussed in Part
III.A. Suffice it to say that defined benefit plans are significantly more
generous—and costly—than defined contribution plans.26
18
Id. at 1.
19
Jonathan Barry Forman, Funding Public Pension Plans, 42 J. MARSHALL L. REV.
837, 864 (2009).
20
BUREAU OF LABOR STATISTICS, U.S. DEP’T OF LABOR, NEWS RELEASE USDL-10-
0069, UNION MEMBERS - 2010 8, Table 3 (2011), available at http://www.bls.gov/news.re
lease/pdf/ union2.pdf [hereinafter BLS, UNION MEMBERS - 2010].
21
Id.
22
Id. at 9–10, Table 4.
23
Id. at 10, Table 4.
24
Id. at 9–10, Table 4.
25
Brown et al., supra note 14, at 14–15.
26
Id. at 14–15, 18; see also Stephen F. Befort, The Perfect Storm of Retirement
Insecurity: Fixing the Three-Legged Stool of Social Security, Pensions, and Personal
Savings, 91 MINN. L. REV. 938, 949 (2007) (describing reductions in volatility and costs
as the major reasons employers have been shifting away from defined benefit pensions).134 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
The Internal Revenue Code (herein “the Code”) is the primary federal
law regulating state public employee pension plans. 27 These plans must
meet certain participation, vesting, and funding requirements, or otherwise
be exempted, to be tax-qualified governmental plans.28 Each section of the
Code must be carefully scrutinized to determine whether governmental
plans are subject to each generally applicable rule. The management of
state governmental plans is largely undertaken by the states themselves. 29
State statutes and regulations, and the court decisions interpreting them,
govern the wide variety of public employee pension plans that span the
United States.30
A. TYPES OF PENSION PLANS FOUND AMONG THE STATES
The two most common types of plans are “defined benefit” and
“defined contribution.” Some plans are a combination of the two. However,
for public sector pensions, defined benefit plans are still the king.
1. Defined Benefit Pension Plans
Defined benefit plans promise a pre-determined benefit to participants
of the plan.31 The amount of the payments is usually determined by a
formula composed of the plan participant’s age, years of service, and
salary. 32 It is the sponsoring employer’s (here, the government’s)
responsibility to fund these obligations. 33 The plan participants will almost
always be required to meet some minimum time of service before their
benefits will vest.34
Pension plans for state public sector employees are overwhelmingly of
the defined benefit variety. 35 As of 2007, only Alaska, Michigan, and
27
26 U.S.C. § 414(d) (2006) (defining “governmental plan” as “a plan established and
maintained for its employees by the Government of the United States, by the government
of any State or political subdivision thereof, or by any agency or instrumentality of any of
the foregoing”). Governmental plans are exempt from Title I of ERISA, which primarily
covers private sector plans. 29 U.S.C. § 1003(b)(1) (2006).
28
Deborah Kemp, Public Pension Plans: The Need for Federal Regulation, 10
HAMLINE L. REV. 27, 48 (1987).
29
Id. at 28.
30
Id. at 36–40.
31
Edward A. Zelinsky, The Aftermath of the Cash Balance Controversy: Applying the
Contribution-Based Test For Age Discrimination to Traditional Defined Benefit Pensions,
29 VA. TAX REV. 1, 5 (2009).
32
Id. at 5.
33
Id. at 6.
34
Kemp, supra note 28, at 48; 26 U.S.C. § 411(a) (2006) (minimum vesting standards).
35
Karen Eilers Lahey & T. Leigh Anenson, Public Pension Liability: Why Reform is
Necessary to Save the Retirement of State Employees, 21 NOTRE DAME J.L. ETHICS &
PUB. POL’Y 307, 308 (2007). In 2009, 7.2% of employer costs for state and local
government employee compensation came from defined benefit retirement plans; only
0.8% came from defined contribution retirement plans. EMPLOYEE BENEFIT RESEARCH2011] DEFINED BENEFITS, UNDEFINED COSTS 135
Washington, D.C., did not have defined benefit pensions as their primary
plans.36 The simplest explanation for this concentration of defined benefit
pensions in the states is the relative balance of power between private and
public sector unions. As the recent trends in unionization reflect, the
influence of private sector unions has been on the wane for quite some
time.37 Whether one believes that the influence of public sector unions has
been the inverse or just merely remained steady, there is little doubt that
their clout has risen in recent years relative to that of the private sector. 38
Another reason why states have mostly hung on to their defined benefit
plans is the existence of constitutional “contract impairment” clauses. 39
While states differ in how stringently they guard public employees’ pension
property rights, nearly all state courts have made it difficult to alter
benefits. 40 State constitutional provisions must be amended in other cases
before prospective benefits can be adjusted.41 Therefore, because of the
political and legal difficulties of shifting away from defined benefit plans,
states have largely been exempt from the wave toward defined contribution
plans that has swept over the private sector in recent decades. 42
INSTITUTE, EBRI DATABOOK ON E MPLOYEE BENEFITS, CHAPTER 3: EMPLOYER COSTS
FOR EMPLOYEE COMPENSATION, Table 3.8c (2010, April update).
36
Forman, supra note 19, at 839 n. 8. Utah recently joined this list as well. Steven
Greenhouse, Pension Funds Strained, States Look at 401(k) Plans, N.Y. TIMES, Mar. 1,
2011, at B1.
37
See note 3, supra.
38
See, e.g., Editorial, N.Y.C. vs. N.Y.S., the Pension Battle, N.Y. TIMES, Mar. 24, 2011,
at A26 (“Albany is notoriously compliant when it comes to demands from the powerful
unions that represent the state’s public employees, which is one of the reasons the state is
in such deep fiscal trouble.”). For a discussion of private sector vs. public sector union
influence, see Casey B. Mulligan, Labor Losing Influence, NEW YORK TIMES ECONOMIX
(Apr. 7, 2010, 08:27 EST), http://economix.blogs.nytimes.com/2010/04/07/labor-losing-
influence/.
39
Henry H. Drummonds, The Aging of the Boomers and the Coming Crisis in America’s
Changing Retirement and Elder Care Systems, 11 LEWIS & CLARK L. REV. 267, 287–88
(2007); see also Andrew C. Mackenzie, Note, Spiller v. State: Determining the Nature of
Public Employees’ Rights to Their Pensions, 46 ME. L. REV. 355, 359–63 (1994)
(discussing several states’ treatment of public employees’ rights to their pensions); see
generally Darryl B. Simko, Of Public Pensions, State Constitutional Contract Protection,
and Fiscal Restraint, 69 TEMP. L. REV. 1059 (1996).
40
Drummonds, supra note 39, at 287; Mackenzie, supra note 39, at 359–63.
41
PEW CENTER ON THE STATES, THE TRILLION DOLLAR GAP: UNDERFUNDED STATE
RETIREMENT SYSTEMS AND THE ROADS TO REFORM 25 (2010), available at
http://downloads.pewcenteronthestates.org/The_Trillion_Dollar_Gap_final.pdf
[hereinafter THE TRILLION DOLLAR GAP]; Joshua Rauh, The Pension Bomb, 1 MILKEN
INST. REV. at 33–34 (2011).
42
Brown et al., supra note 14, at 1–2, 12.136 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
2. Defined Contribution Pension Plans
In contrast to defined benefit plans, in which the outputs play the lead
role, inputs form the basis of defined contribution plans. 43 The Code
defines this type of pension as “a plan which provides for an individual
account for each participant and for benefits based solely on the amount
contributed to the participant's account, and any income, expenses, gains
and losses, and any forfeitures of accounts of other participants which may
be allocated to such participant's account.”44 Thus, the employee
contributes amounts (usually a percentage of each paycheck) to an
individual account maintained for the employee. 45 The typical account is
the 401(k), into which an employee has the ability to invest his or her tax-
free contributions.46
The employer generally also makes contributions to the employee’s
account, either matching the employee’s contribution or some percentage
thereof.47 Once the employer makes its contributions, it is relieved of any
further funding responsibilities.48 Therefore, the ultimate benefit in a
defined contribution plan either rises or falls based on the investment
portfolio purchased with the combined contributions of the employer and
employee plan participant.49
Though very few state public pensions are defined contribution plans,
trends indicate that this will not always be so.50 Until now, defined
contribution plans have generally been offered only as supplemental
retirement savings for state employees. 51 However, Steven Greenhouse of
the New York Times recently reported that “[l]awmakers and governors in
many states, faced with huge shortfalls in employee pension funds, are
turning to a strategy that a lot of private companies adopted years ago:
moving workers away from guaranteed pension plans and toward 401(k)-
type retirement savings plans.” 52 As Greenhouse pointed out, such a shift
may actually exacerbate the funding problem because “[a]s contributions
move to individual investment accounts, less money goes into the
traditional plan to help finance pensions promised to other workers.”53
43
Zelinsky, supra note 31, at 6.
44
26 U.S.C. § 414(i) (2006). “[T]he term ‘defined benefit plan’ means any plan which is
not a defined contribution plan.” Id. § 414(j).
45
Zelinsky, supra note 31, at 6.
46
Id.; 26 U.S.C. § 401(k) (2006).
47
Zelinsky, supra note 31, at 6.
48
Id. at 6–7.
49
Id.
50
Drummonds, supra note 39, at 287; Eilers Lahey & Anenson, supra note 35, at 326–
27.
51
Eilers Lahey & Anenson, supra note 35, at 326 n. 125.
52
Steven Greenhouse, Pension Funds Strained, States Look at 401(k) Plans, N.Y.
TIMES, Feb. 28, 2011, at B1 (citing Florida, Kansas, North Dakota, Oklahoma, Virginia,
“and several other states” as examples).
53
Id.2011] DEFINED BENEFITS, UNDEFINED COSTS 137
Moreover, the recent performance of 401(k) plans provides additional
reason for caution.54
3. Hybrid Pension Plans
Some states have been combining characteristics of the traditional
defined benefit plans with those of defined contribution plans. 55 The most
common hybrid-type pension is a “cash balance plan.”56 Cash balance
plans require employees to contribute some amount of their salary (defined
contribution), but also promise a set payment upon retirement (defined
benefit).57 If the earnings on the contributions fall short of what is needed
to pay the benefit, the employer steps in to fund the gap.58 Should the
employee leave the job, her accrued hypothetical benefit is distributed to
her “as a lump sum at that time.” 59
B. CURRENT STABILITY OF STATE PENSION PLANS
In its 2010 Report on State Retirement Systems, Wilshire Associates—
an oft-cited global investment consulting firm—estimated the funding ratio
(total pension assets divided by total pension liabilities) of 126 state
pension plans to be 65% in 2009.60 This ratio was a drastic drop from the
85% rate in 2008. 61 In significant part, this decline can be blamed on the
crippling recession that wiped out much of the savings gained by workers
54
See E.S. Browning, Retiring Boomers Find 401(k) Plans Fall Short, WALL ST. J.,
Feb. 19, 2011, at A1 (“The median household headed by a person aged 60 to 62 with a
401(k) account has less than one-quarter of what is needed in that account to maintain its
standard of living in retirement. . . .”).
55
The Internal Revenue Code defines such plans as follows:
A defined benefit plan which provides a benefit derived from employer contributions
which is based partly on the balance of the separate account of a participant shall (1)
for purposes of section 410 (relating to minimum participation standards), be treated
as a defined contribution plan, (2) for purposes of sections 72(d) (relating to treatment
of employee contributions as separate contract), 411(a)(7)(A) (relating to minimum
vesting standards), 415 (relating to limitations on benefits and contributions under
qualified plans), and 401(m) (relating to nondiscrimination tests for matching
requirements and employee contributions), be treated as consisting of a defined
contribution plan to the extent benefits are based on the separate account of a
participant and as a defined benefit plan with respect to the remaining portion of
benefits under the plan, and (3) for purposes of section 4975 (relating to tax on
prohibited transactions), be treated as a defined benefit plan.
26 U.S.C. § 414(k)(1)–(3) (2006).
56
Edward A. Zelinsky, The Cash Balance Controversy, 19 VA. TAX REV. 683, 685
(2000).
57
Zelinsky, supra note 31, at 7–8.
58
Id. at 8.
59
Id. at 8–9.
60
JULIA K. BONAFEDE ET AL., 2010 WILSHIRE REPORT ON STATE RETIREMENT
SYSTEMS: FUNDING LEVELS AND ASSET ALLOCATION 1 (2010), http://web.wilshire.com/
BusinessUnits/Consulting/Investment/2010_State_Retirement_Funding_Report.pdf
[hereinafter 2010 WILSHIRE REPORT].
61
Id. at 3.138 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
in the 1990s. 62 However, during those flush times, politicians continued a
pattern of underfunding state pension plans with the expectation that the
stock market and other plan-invested assets would continue their meteoric
rise ad infinitum.63 When the inevitable correction arrived and the absurdly
high return rates plummeted, many states’ funding problems were
exposed.64 The rest of the story is playing out as this is written, 65 and the
backlash against public employees has been palpable. 66 However, perhaps
the most significant factor in this crisis stems from state governments’
failures to properly fund these plans.
1. Patterns of Underfunding
One major reason for the underfunding of state public pensions is the
failure of the states to sufficiently meet their funding obligations. 67 Many
states are guilty of having taken “pension holidays.” 68 For example, five
years ago the Illinois General Assembly elected not to make its scheduled
pension contributions for Fiscal Years 2006 and 2007.69 This trend is not
unique to Illinois, however, and is rarely mentioned by governors as a
reason why state pensions are in their current predicament.
In a 2010 report from The Pew Center on the States, much of the blame
is aimed at the “states’ own policy choices and lack of discipline.” 70 In the
62
See, e.g., BAKER, supra note 8, at 2–3.
63
Brown et al., supra note 14, at 10. Moreover, the typical portfolio of a public pension
fund was too heavily invested in the stock market, leaving it especially vulnerable to a
market swing. Id.
64
One estimate indicated that public pensions had a negative return of 24.91% in 2008.
Forman, supra note 19, at 850 (citing a Standard & Poor’s report); see also BAKER, supra
note 8, at 1.
65
See, e.g., Monica Davey & A.G. Sulzberger, Dueling Protests in a Capital as Nothing
Much Gets Done, N.Y. TIMES, Feb. 19, 2011, at A24 (describing the scene at the
Wisconsin state Capitol building where mostly pro-union protestors had gathered to
oppose a bill seeking to eliminate most Wisconsin public employee bargaining rights).
66
Michael Powell, Public Workers Face Outrage as Budget Crises Grow, N.Y. TIMES,
Jan. 1, 2011, at A1; see also Richard A. Oppel, Jr. et al., Discord, State By State, N.Y.
TIMES, Feb. 28, 2011, at A17 (summarizing anti-union legislation pending in Wisconsin,
Indiana and Ohio); Steven Greenhouse, Strained States Turning to Laws to Curb Labor
Unions, N.Y. TIMES, Jan.3, 2011, at A1 (discussing legislative pushes too curb or ban
public sector unions). But see Michael Cooper & Megan Thee-Brenan, Majority in Poll
Back Employees in Public Sector Unions, N.Y. TIMES, Feb. 28, 2011, at A1(citing a New
York Times/CBS News poll, taken from Feb. 24–27, 2011, which found that Americans
oppose weakening public sector union bargaining rights, 60% to 33%).
67
Olivia S. Mitchell & Robert S. Smith, Pension Funding in the Public Sector, 76 REV.
ECON. STAT. 278, 281 (1994); Brown et al., supra note 14, at 10.
68
Forman, supra note 19, at 861.
69
CHRISSY A. MANCINI & RALPH MARTIRE, CENTER FOR TAX AND BUDGET
ACCOUNTABILITY, THE ILLINOIS PENSION FUNDING PROBLEM: WHY IT MATTERS 23–25
(2006) (discussing Ill. P.A. 094-0004 (S.B. 27), which amended the Illinois Pension Code
to allow for the “Pension Holiday”).
70
THE TRILLION DOLLAR GAP, supra note 41, at 1.2011] DEFINED BENEFITS, UNDEFINED COSTS 139
Executive Summary, the authors of the report blame state governments for
“failing to make annual payments for pension systems at the levels
recommended by their own actuaries; expanding benefits and offering cost-
of-living increases without fully considering their long-term price tag or
determining how to pay for them; and providing retiree health care without
adequately funding it.”71 For those governors who blame the economy for
their state pension fund woes, the Pew Center for the States found that
“[m]any states had fallen behind on their payments to cover the cost of
promised benefits even before they felt the full weight of the Great
Recession.”72
Because of the states’ failure to adequately fund the pensions during
both the good and bad times, their required contributions thereafter began
to climb:
In 2000, when pension systems were well funded, states and participating
local governments had to pay $27 billion to adequately fund promised
benefits. By 2004, following the 2001 recession, their annual payment for
state-run pensions should have increased to $42 billion. In fiscal year
2008, state and participating local governments were on the hook for more
than $64 billion, a 135 percent increase from 2000. In 2009 and going
forward, that number is certain to be substantially higher. . . . In sum,
states and participating localities should have paid about $108 billion in
fiscal year 2008 to adequately fund their public sector retirement benefit
systems. Instead, they paid only about $72 billion. 73
In fact, from 2005–2009, twenty-one states failed to make average
pension contributions of at least 90% of their actuarially required
contributions.74 This means that these states did not even meet the
minimum standards set by their actuaries, much less the more conservative
standards for adequate funding advocated by other scholars. 75 The states
that met their funding requirements are therefore in much better shape
because they did not ignore their obligations. 76
2. Contemporary Public Outcry for Reform
Partially as a result of many states ignoring their pension problems, the
issue of underfunded pensions has recently become a critical part of daily
discourse.77 Calls for austerity were the norm during the 2010 midterm
elections, and a wave of “tea party” politicians were swept into office based
71
Id.
72
Id.
73
Id. at 1–2.
74
Id. at 3. See also id. at 4, Exhibit 1 (listing the 2008 required annual pension
contributions for each state and what the states actual contributed).
75
See, e.g., Rauh, supra note 41, at 32–33 (advocating an assumed rate of return closer
to the yield rate for U.S. Treasury bonds).
76
THE TRILLION DOLLAR GAP, supra note 41, at 8.
77
Id. at 7, 30.140 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
on promises to rein in the federal and state deficits.78 Candidates often cited
state pension plans as a cause of these deficits, and many called for
substantial reform in benefit and contribution levels. 79
The issue reached a crescendo recently in Wisconsin, where protestors
staged a three-week sit-in at the Wisconsin State Capital building in
Madison.80 Labor unions and their supporters descended upon the capital to
voice their displeasure with legislation that would severely curtail public
sector employees’ ability to bargain collectively with the state.81 After a
surreal scene in which Democratic legislators fled the state to avoid a vote
on the measure, 82 and Republican lawmakers used every procedural trick in
the book to pass it,83 the bill was signed by Wisconsin Governor Scott
Walker on March 10, 2011.84 Combined with movements to curb collective
bargaining rights in Indiana and Ohio, 85 the Wisconsin standoff mobilized
the labor movement and its opponents in ways not seen for years. 86
Regardless of the causes of the current situation, almost everyone
agrees that something needs to be done. 87 But the consensus often ends at
that general line, because there are numerous suggestions for reform. 88
Adding to the degree of difficulty is the fact that interested stakeholders
cannot even agree on the size of the problem, i.e., funding ratios of the
various states.89 Unfortunately, the primary cause of this divergence—
competing valuation theories—does little to simplify matters.
78
See, e.g., Mark Leibovich & Ashley Parker, Tea Partiers and Republican Faithful
Share Exuberant Celebrations, N.Y. TIMES, Nov. 2, 2010, at P9; Matt Bai, Another
Election, Another Wave, N.Y. TIMES, Nov. 2, 2010, at P3.
79
BAKER, supra note 8, at 1–2.
80
Monica Davey & A.G. Sulzberger, In Wisconsin Battle on Unions, State Democrats
See a Gift, N.Y. TIMES, Mar. 10, 2011, at A1.
81
Id.
82
Monica Davey, Wisconsin Bill in Limbo as G.O.P. Seeks Quorum, N.Y. TIMES, Feb.
18, 2011, at A14.
83
Monica Davey, Wisconsin Senate Limits Bargaining by Public Workers, N.Y. TIMES,
Mar. 9, 2011, at A1.
84
Monica Davey & A.G. Sulzberger, In Wisconsin Battle on Unions, State Democrats
See a Gift, N.Y. TIMES, Mar. 10, 2011, at A1.
85
See Sabrina Tavernise, Ohio Senate Approves Union Bill, N.Y. TIMES, Mar. 2, 2011,
at A18; Monica Davey & Jeff Zeleny, A Three-Man Band of Budget Cutters, N.Y. TIMES,
Feb. 27, 2011, at A11.
86
Richard A. Oppel, Jr. & Timothy Williams, Rallies for Labor, in Wisconsin and
Beyond, N.Y. TIMES, Feb. 26, 2011, at A4; Steven Greenhouse, A Watershed Moment for
Public-Sector Unions, N.Y. TIMES, Feb. 18, 2011, at A14.
87
Brown et al., supra note 14, at 3. The authors further state that “the extent of
disagreement over the liabilities is nonetheless surprising.” Id.
88
See THE TRILLION DOLLAR GAP, supra note 41, at 7–11 (outlining several of these
options).
89
Brown et al., supra note 14, at 3.2011] DEFINED BENEFITS, UNDEFINED COSTS 141
IV. COMPETING VALUATION METHODS OF STATE PENSION
PLANS
Actuarial asset models (the primary models for state public pensions)
differ slightly across plans, but there are common threads in the models’
function.90 The first step entails estimating the output of the plan
investments using rate of return assumptions. 91 Next, the difference
between this expected investment output and the plan’s historical
performance is compared.92 Then, this difference is “smoothed” over a
period of years, meaning that a declining weight is assigned to the
difference over those years until none of the historical performance is
weighted.93 But the most important variable in this computation is the
assumption of return on the assets of a plan. 94 This variable drives the
“hottest debate in public pension plan accounting”: market valuation vs.
actuarial valuation.95
Financial economists and pension plan actuaries both spend a great part
of their careers forecasting. In essence, each is tasked with determining
what percentage rate of return—taking into account myriad measures of
risk, historical performance, and the like—a certain asset will earn over a
period of time. It is an inexact science, but it is the best we have for now.
This means that an accurate prediction of an asset’s performance is only
as good as the accuracy of the prediction of its rate of return. 96 The higher
the predicted rate of return, the better the predicted performance, which
allows for states to make smaller contributions to their pension funds.
Conversely, the lower the predicted rate of return, the worse the predicted
performance of the funds, thus obligating states to make larger annual
contributions to their pensions. From this reasoning, it becomes clearer
which stakeholders favor which return assumptions. But what do experts,
the financial economists and the plan actuaries, think?
A. MARKET VALUATION
Advocates of market valuation generally prefer the more conservative
route. Financial economists are primarily in this camp, and they tend to
believe that assets should be valued at their market price, i.e., the price a
market buyer would pay for that asset at the time of valuation. 97 These
economists and finance scholars also favor the use of a “risk-free” return
90
ALICIA H. MUNNELL ET AL., CENTER FOR STATE & LOCAL GOVERNMENT
EXCELLENCE, ISSUE BRIEF: THE FUNDING OF STATE AND LOCAL PENSIONS: 2009–2013
15, Appendix B (2010).
91
Id.
92
Id.
93
Id.
94
Brown et al., supra note 14, at 3.
95
Forman, supra note 19, at 861.
96
See THE TRILLION DOLLAR GAP, supra note 41, at 5.
97
Forman, supra note 19, at 861–62.142 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
rate, or something approaching this rate.98 A risk-free return rate is often
approximated by the rate of return on long-term U.S. Treasury bonds—
roughly 4%.99
Financial economists believe that using a higher rate usually
underestimates the liabilities of a given pension fund. 100 In turn, this
understatement of liabilities leads to an overstatement of a pension plan’s
funding ratio.101 Therefore, groups advocating the market valuation
approach often suggest what is called “asset-liability management.”102 This
term refers to the practice of matching assets with liabilities, a practice long
used by many financial intermediaries and insurance companies.103
Essentially, if a plan has promised a group of plan participants a 4.2%
return, it would need to invest in assets guaranteeing that return—for
example, a 30-year U.S. Treasury bond with a 4.2% yield.
B. ACTUARIAL VALUATION
Advocates of actuarial valuation are generally more liberal in their
forecasting assessments. Members of this camp eschew the “risk-free” rate
and usually even see the slightly higher average corporate bond rate, used
by many private sector pension plans, as unrealistically low. 104 Instead,
public plan actuaries tend to use the “expected” rate of return. 105 This
method is also favored by public pension plan administrators, labor unions,
and many policy-makers. 106
The expected rate of return can be a volatile variable, and it affords
wide latitude to plan actuaries in forecasting rates of return.107 Many public
pension plans use about an 8% assumed rate of return, or approximately
double that advocated by financial economists. 108 These actuaries defend
the use of this rate “because state and local governments will be around for
the long haul, they have historically earned those high rates of return on
plan assets, and they can reasonably be expected to earn these high rates of
return in the future.”109
98
Id.; Brown et al., supra note 14, at 4.
99
Forman, supra note 19, at 862. As of May 12, 2011, the yield on a 30-year U.S.
Treasury bond was 4.35%. Wall Street Journal, Market Data Center, http://online.wsj.com/
mdc/public/page/marketsdata.html#mod=mdc_topnav_2_3027 (last visited May 12, 2011).
100
See Brown et al., supra note 14, at 4–5; Forman, supra note 19, at 863; Bader & Gold,
supra note 14, at 2.
101
Forman, supra note 19, at 863.
102
See, e.g., Rauh, supra note 41, at 34.
103
Id.
104
Forman, supra note 19, at 862.
105
Brown et al., supra note 14, at 4.
106
Id.; see also BAKER, supra note 8, at 4–5.
107
Rauh, supra note 16, at 597–98.
108
Forman, supra note 19, at 863.
109
Id. at 864.2011] DEFINED BENEFITS, UNDEFINED COSTS 143
Whatever the merits of market and actuarial valuation, more
information, properly disseminated, is more often helpful. Professor
Forman and others have suggested that the ideal approach is to present
funding ratios using both types of valuation. 110 However, while this may
aid academics and others with a certain level of financial literacy, it is not
alone likely to benefit the overall public understanding of the funding issue.
To the contrary, such a split-the-difference approach, without proper
parameters, may further complicate a process already mired in opacity.
V. LACK OF CONSISTENCY AND TRANSPARENCY IN
VALUATION OF STATE PENSION PLANS
Much of the obfuscation in valuing public pension funding levels
results from government accounting rules 111 because these rules serve only
as guidelines and need not be followed by public plan actuaries. 112 There is
currently no federal requirement that state public pensions disclose their
plans’ liabilities or funding ratios, despite the resurfacing of this issue year
after year.113 Public plan actuaries will usually follow the standards set
forth in the Government Accounting Standards Board (GASB) guidelines,
which use the expected return rate favored by advocates of the actuarial
valuation method.114 This reliance on a method that one group of
commentators claim “has no rigorous theoretical foundation” contributes to
several problems in determining the accuracy of a plan’s funding level. 115
110
Id. at 865.
111
Robert Novy-Marx & Joshua Rauh, Public Pension Promises: How Big Are They and
What Are They Worth? 66 J. FIN. (forthcoming 2011), available at http://papers.ssrn.com/
sol3/papers.cfm?a bstract_id=1352608 (manuscript at 2).
112
THE TRILLION DOLLAR GAP, supra note 41, at 2. As the Center for State & Local
Government Excellence points out, this is unique to the public sector:
This arrangement is very different from what occurs in the private sector, where the
actuary is required to make a number of valuations for different purposes. In the
private sector, the actuary must produce 1) a traditional actuarial valuation to
determine funding, which presents the actuary’s best estimate of the plan’s liabilities,
assets, the annual contribution required to cover benefits accrued that year (the normal
cost), and the amortization of any unfunded obligations, all assuming the plan will
continue indefinitely; 2) a valuation as stipulated by the accounting profession for
reporting purposes that again determines assets, liabilities, and the sponsor’s annual
pension expense, to be reported on the financial statements of the sponsor and the
plan; and 3) a determination of the plan’s “current” funding status for compliance
purposes to determine minimum and maximum contributions and Pension Benefit
Guaranty Corporation insurance premiums. While actuaries attempt to keep
assumptions as consistent as possible across these valuations, the discount rates used
to value future obligations, a critical variable, can differ considerably[.]
MUNNELL ET AL., supra note 90, at 9 n. 5.
113
See James H. Dulebohn, A Longitudinal and Comparative Analysis of the Funded
Status of State and Local Public Pension Plans, PUB. BUDGETING & FIN., June 1995, at
52, 52–53.
114
Brown et al., supra note 14, at 4.
115
Id.144 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
In its 2010 Report, Wilshire Associates forecasted a long-term median
plan return equal to 6.9% per year. 116 This prediction was 1.1 percentage
points lower than the median assumed rate of return of plan actuaries
(8%).117 In its just recently released 2011 Report, Wilshire downgraded this
forecasted return to 6.5% per year.118 With the median plan actuary
assumption remaining at 8%, there is now a 1.5 percentage point gap
between these two sources.119 In fact, “nearly all public plans discount their
liabilities using an inappropriately high discount rate, usually 7 to 9
percent. . . .”120 For example, the Florida Retirement System (FRS) Pension
Plan assumes rising rates of return ranging from 7.75% (1-Year) to 8.10 %
(30-Year).121 These rates of return assumptions are developed
independently by the Plan’s actuary and have faced criticism recently from
Florida Governor Rick Scott.122 In an interview with two Miami Herald
columnists, Governor Scott explained why he felt the FRS was “a ticking
fiscal time bomb”:
My concern is the return expectations [of 7.75 percent] are high. I don't
think that’s easy to do, and my concern is that if we say we're 13 or 14
percent underfunded, but that's assuming a 7.75 percent return, I don’t
believe that’s realistic. It’s going to be difficult unless you take more risk
than pension funds ought to be taking.123
However, when asked by the interviewers what a realistic return
expectation would be, Governor Scott said, “I don’t have a target
number.”124 Instead, he simply stated that “realistic” bond and stock
portfolio returns should be used.125
The FRS is deemed to be 87.9% funded by the plan’s actuary, assuming
a 7.75% annual return rate.126 This is well above the 80% threshold
116
2010 WILSHIRE REPORT, supra note 60, at 1.
117
Id.
118
JULIA K. BONAFEDE ET AL., 2011 WILSHIRE REPORT ON STATE RETIREMENT SYSTEMS:
FUNDING LEVELS AND ASSET ALLOCATION 1 (2011), available at http://www.wilshire.com
/BusinessUnits/Consulting/Investment/2011_State_Funding_Stuey.pdf [hereinafter 2011
WILSHIRE REPORT].
119
Id.
120
Brown et al., supra note 14, at 4.
121
FLORIDA LEGISLATURE, OFFICE OF PROGRAM POLICY ANALYSIS & GOVERNMENT
ACCOUNTABILITY, COMPARED TO OTHER STATES THE PENSION PLAN IS BETTER FUNDED,
INCURS LOWER INVESTMENT FEES AND HAS FEWER TRUSTEES; INVESTMENT RETURNS
ARE AVERAGE, REP. NO. 11-10, at 18, Table 1 (2011), available at http://www.oppaga.
state.fl.us/MonitorDocs/Reports/pdf/1110rpt.pdf.
122
Sydney P. Freedberg & Kris Hundley, Scott Casts Skeptical Eye on State Pension
Funding, MIAMI HERALD, Jan. 2, 2011, http://www.miamiherald.com/2011/01/02/v-
fullstory/1997830/scott-casts-skeptical-eye-on-state.html.
123
Id.
124
Id.
125
Id.
126
Jed Graham, Public Pensions in the Red Even With Rosy Assumptions, INVESTOR’S
BUSINESS DAILY, Mar. 25, 2011, http://www.investors.com/NewsAndAnalysis/Article/567
229/201103251914/Public-Pension-Plans-Underfunded-Even-With-Rosy-Forecasts.aspx.2011] DEFINED BENEFITS, UNDEFINED COSTS 145
commonly accepted as sufficiently funded in the public sector.127 Yet,
assuming a 6% annual rate of return, which is closer to the
recommendation of the 2011 Wilshire Report, the funding ratio of the FRS
Plan would fall to 69%, well below the 80% threshold. 128 This mere
difference of 1.75 percentage points, when compounded, represents an
underfunded Plan liability of $16.7 billion (assuming a return of 7.75%)
versus $52.7 billion (assuming a return of 6%).129 Moreover, Florida’s
pension plans have returned only 2.6% annually over the past decade.130
This doesn’t mean that the FRS Plan actuary is wrong in forecasting a
7.75% return. In fact, looking at the Florida pension plans over the past
thirty years, they have managed a 9.6% rate of return. 131 But, with the 2.6%
rate over the past decade, it becomes apparent that the 30-year return
largely occurred in the earlier years.
The question must therefore be asked: given the trends, which scenario
seems more likely for 2011, 2012, and 2013? The Pew Center on the States
questions the reasonableness of states assuming an 8% return rate, given
the returns during the most recent market crash. 132 As early as 2001,
Warren Buffett, the “Oracle of Omaha” and CEO of Berkshire Hathaway,
called for an estimate around 6.5%,133 which is, incidentally, the rate of
return suggested for states in Wilshire’s 2011 Report.134
Some states have taken this advice, albeit incrementally. In 2008, Utah
downgraded its 8% rate of return assumption to 7.75%.135 Although this is
only a quarter of a percentage point, it still makes a difference, as
evidenced by the discussion of Florida’s FRS Plan above. In 2009, the
Pennsylvania State Employees Retirement System reduced its rate of return
assumption from 8.5% to 8%.136 Rhode Island’s Treasurer recently
convinced the state retirement board to decrease its expected rate from
8.25% to 7.5%.137 But such reforms, which result in lower funding ratios
and higher required contributions are, unsurprisingly, not uniformly
127
Forman, supra note 19, at 859–60; THE TRILLION DOLLAR GAP, supra note 41, at 3.
128
Graham, supra note 126.
129
Id. “Some commentators state a general rule of thumb that a 1% increase in the
expected rate of return (projected over thirty years) creates a 20% decrease in the
sponsor’s current contribution.” David Hess, Protecting and Politicizing Public Pension
Fund Assets: Empirical Evidence on the Effects of Governance Structures and Practices,
39 U.C. DAVIS L. REV. 187, 202 (2005).
130
Graham, supra note 126.
131
Id.
132
THE TRILLION DOLLAR GAP, supra note 41, at 5.
133
Bloomberg.com, Warren Buffett Says That Pension Accounting Encourages Cheating,
July 17, 2009, www.bloomberg.com/apps/news?pid=10000103&sid=aCb9PTevRP3g&
refer=news_index (last visited Apr. 10, 2011).
134
2011 WILSHIRE REPORT, supra note 118, at 1.
135
THE TRILLION DOLLAR GAP, supra note 41, at 8.
136
Id.
137
Michael Corkery, The Softer Approach on Pension Problems, WALL ST. J., Jul. 25,
2011, at C1.146 WILLIAM & MARY POLICY REVIEW [Vol. 3:129
popular. In March 2011, the California Public Employees Retirement
System (CalPERS) voted down a rate reduction from 7.75% to 7.5%.138
CalPERS did so not because of a disagreement over the proper rate, but
because it did not want local governments to be required to make the higher
contributions that would be required. 139 Similarly, the Treasurer of Rhode
Island had to do some arm twisting after six of seven board members
initially resisted a rate change.140
A 2010 Stanford study found that the big three California pension plans
suffer from a funding shortfall “several times the amount reported by the
funds.”141 Whereas CalPERS’ actuaries had used rate of return assumptions
of 8%, 7.75%, and 7.5% for the three pension plans, the Stanford group
applied a risk-free rate of 4.14%, taking a page from the Rauh and Novy-
Marx method.142 The Stanford researchers point out in their study that,
because these pension obligations are backed by the California constitution,
the obligations carry almost no risk for the beneficiaries. 143 Thus, the group
argues, the funding levels should be reported using risk-free rates.144
CalPERS responded to the Stanford report by stating that it had
achieved annual investment returns of 7.9% over the past twenty years. 145 It
further stated that “CalPERS does not believe that using a risk-free rate as
suggested in the study is appropriate since the fund can earn a premium
over the risk-free rate with high certainty by investing in a diversified
portfolio with an acceptable level of risk.” 146 CalPERS even went so far as
to claim that it “would be violating actuarial standards of practice” were it
to implement the Stanford group’s suggested reforms. 147
The truth is, no one can predict a given year’s rate of return. In 2008,
the median loss on investment for public pension plans was 25.3%. 148 Yet,
in the 1990s, these same plans were earning such high returns that states
actually began to lower their contribution rates to avoid overfunding. 149
With the Great Recession and recent fiscal trends, many economists are
138
Graham, supra note 126.
139
Id.
140
Corkery, supra note 137.
141
Mary Williams Walsh, Analysis of California Pensions Finds Half-Trillion-Dollar
Gap, N.Y. TIMES, Apr. 6, 2010, at B3. The study may be found at
http://siepr.stanford.edu/system/files/shared/GoingforBroke_pb.pdf. STANFORD INSTITUTE
FOR ECONOMIC POLICY RESEARCH, GOING FOR BROKE : REFORMING CALIFORNIA’S
PUBLIC EMPLOYEE PENSION SYSTEMS (2010).
142
Id.
143
Id.; STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH, supra note 141, at 2.
144
Id.
145
CalPERS, CalPERS Response to Stanford Policy Brief on Public Pension Funds, Apr.
6, 2010, http://www.calpersresponds.com/issues.php/response-stanford-policy-brief.
146
Id.
147
Id.
148
THE TRILLION DOLLAR GAP, supra note 41, at 23.
149
Id. at 24.2011] DEFINED BENEFITS, UNDEFINED COSTS 147
beginning to advocate for what they deem to be more realistic return
assumptions for pension plans.150 Regardless of what valuation
assumptions are used, the absence of state pension plan regulation has
caused confusion, frustration, and even contributed to fraud. 151
Unfortunately, current attempts and future ideas for reform fall well short
of what is needed.
VI. INADEQUACY OF CURRENT AND PENDING LEGISLATION
AND REGULATION
As previously discussed, the majority of public pension plans follow
the GASB’s recommended actuarial guidelines. 152 However, they are not
compelled to do so. Moreover, those guidelines have been subject to
criticism from financial experts for being unrealistically optimistic. 153
Additionally, a bill recently introduced in the U.S. House of
Representatives aims to set standards comparable to those faced by the
Employee Retirement Income Security Act’s (ERISA) regulated plans in
the private sector. Although the “Public Employee Pension Transparency
Act,”154 as the legislation is titled, comes close to addressing the problems
in the public sector, the absence of express mandatory uniformity weakens
the bill.
A. THE “PUBLIC EMPLOYEE PENSION TRANSPARENCY ACT”
The “Public Employee Pension Transparency Act” (PEPTA), was
introduced by Representative Devin Nunes (R., Calif.) in February 2011,
ostensibly to improve the way states value and report on their public
pension funds.155 A summary from the Congressional Research Service, a
non-partisan research segment of the Library of Congress, outlined the
major aspects of the bill. 156 If enacted, PEPTA would require state public
pension plans to file an annual report with the Treasury Secretary detailing:
(1) a schedule of the funding status of the plan;
(2) a schedule of contributions by the plan sponsor for the plan year;
(3) alternative projections for each of the next 20 plan years relating to the
amount of annual contributions, the fair market value of plan assets,
150
Mary Williams Walsh, Analysis of California Pensions Finds Half-Trillion-Dollar
Gap, N.Y. TIMES, Apr. 6, 2010, at B3; THE TRILLION DOLLAR GAP, supra note 41, at 35.
151
THE TRILLION DOLLAR GAP, supra note 41, at 39 (discussing pension fund scandals
in New York and California).
152
See supra note 115 and accompanying text.
153
See supra note 116 and accompanying text.
154
H.R. 567, 112th Cong. (2011).
155
Sara Murray, GOP Bill Takes Aim at Pension Disclosures, WALL ST. J., Feb. 22,
2011, at A5.
156
Govtrack.us, Congressional Research Service Summary of H.R. 567: Public
Employee Pension Transparency Act, http://www.govtrack.us/congress/bill.xpd?bill
=h112-567&tab=summary (last visited Aug. 3, 2011).You can also read
