Republicans Seek Ban on Pension Fund Bailouts

Politics Reuters

Republicans in the U.S. Congress on Wednesday will introduce legislation to get tough on public pensions as worries grow that chronic underfunding will drive states, cities and counties to demand help from the federal government and drag it into a financial mess.

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Republican Representatives Paul Ryan, Darrell Issa and Devin Nunes, along with Senators Richard Burr and John Thune, plan to unveil a bill for "enhanced transparency for state and local pensions," and prohibit the federal government "on any future public pension bailouts."

Ryan, Issa and Nunes introduced similar legislation in the last session of Congress, but that was before Republicans took control of the House of Representatives.

Issa now chairs the powerful Oversight and Government Reform Committee, and Ryan chairs the House Budget Committee, easing the way for the bill to pass.

Of the longer-term problems in state and local governments' budgets, none currently looms as large as underfunded pensions for public-sector employees. Estimates for state pension underfunding range from $700 billion to $3 trillion because of disparities in calculating future returns on investments.

The funds' investments took a bad turn during the financial crisis, and many struggling states cut their contributions to pensions during the economic recession to save money and avoided cutting vital programs when their tax revenue collapsed.

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As they seek to reduce a projected $1.5 trillion federal budget deficit, congressional lawmakers are concerned that states will turn to them for help in keeping pension promises.

Some conservative leaders are going so far as to suggest states be allowed to declare bankruptcy -- which they cannot do currently because the U.S. Constitution recognizes them as sovereign governments -- so they can renege on pension agreements. 

The solvency position of public pensions deteriorated last year, according to financial research and management services company Greenwich Associates, in Connecticut.

Average levels of cash contributions from public employers dropped, as did the funds corporations put into their pensions, "probably reflecting the difficult and uncertain economic conditions faced by companies, states and municipalities," Greenwich Associates said.

To try to boost their returns and wipe out budget gaps, public pension funds are shifting funds to risky investments over the next three years, according to the study.

But states say they have already funded the majority of future pension costs and, according to two leading government groups, states and local governments have more than $2.7 trillion in assets held in trust for current and future retirees.

"State and local government retirement systems do not require, nor are they seeking, federal financial assistance," said the National Governors Association and the National Conference of State Legislatures in a joint statement on Tuesday.

"One-size-fits-all federal regulation is neither needed nor warranted and would only inhibit recovery efforts already underway at the state and local levels."

In the legislation the three Representatives introduced last December, the federal government could charge pension funds penalties for not reporting problems and would provide a check on the funds' gaps.

The state and local groups that opposed that bill said it would set a precedent for federal intervention into areas that are the domains of state and local governments.