Washington’s misguided pension panic
Many state and local pension funds are still struggling from the financial crisis. Between 2007 and 2008, they recorded a loss of 27 percent. Pension assets have bounced back some — they stood at $2.664 trillion at the end of Q3 2011 — but are still approximately 17 percent below their 2007 high. Although many state legislatures and city councils have taken steps to shore up their pension funds, including the elimination of cost-of-living adjustments and requirements for higher contributions from employees and taxpayers as well as later retirement ages, there are still struggles ahead.
Now Washington seems to want to “help” fix the problem of underfunding. Lisa Lambert of Reuters reports the Washington chatter:
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.
There are surely troubles in muniland, but does that require federal intervention? Given all the economic difficulties at the federal level, it strikes me as a little odd that members of Congress are hinting at new legislation designed to fix a problem at state and municipal pension funds that’s not urgent. If Congress is looking for problems to solve, it might want to start with the “permanent conservatorship” of Fannie Mae and Freddie Mac, which may saddle the nation with $5 trillion worth of bad credit, according to the Washington Post.
Congress’s messing around with muni pensions also seems to be a violation of the 10th Amendment, which reserves areas of the law to the states unless they are enumerated in the Constitution as federal powers. Now if Congress intends to guarantee the liabilities of the state and local pension funds, the legal interference might be welcome. Somehow, given the crushing debts and underfunded entitlements of the federal government, I don’t imagine they plan to step up and guarantee municipal pensions.
Congress might consider giving more authority to the Securities and Exchange Commission to require states and municipalities to report their financials on a more timely basis and adopt more standardized accounting. I hear a lot of complaints about how long it takes to get the Consolidated Annual Financial Reports (CAFRs) published for municipals, in some cases up to 450 days after the end of the fiscal year. Financial reporting is important because the municipal bond market and rating agencies can exert a lot of pressure on state and local governments to get their fiscal house in order.
Now if Washington had its fiscal house in order and spare time to try and get the states in shape, this all might make sense. But states, by and large, are in better shape than the federal government. It would be great to see more comparative reporting about the financial condition of the various levels of government. I think politicians in Washington, DC might be surprised to find that out in the hinterlands, state and local officials have been doing their public duty and reining in fiscal imbalances.
Chart source: Federal Reserve Flow of Funds Account of the United States – Flows and Outstandings Third Quarter 2011 (page 79)