Saturday, January 29, 2011

Public Pension Hygiene Act

The first reform step is exposing the true size of the funding hole.
January 22, 2011


We're so accustomed to misnamed legislation like the Employee Free Choice Act (card check) that it's hard to believe that a welcome proposal called the Public Employee Pension Transparency Act describes what it actually purports to do. To wit, prohibit public pension bailouts by the federal government and expose the $3.5 trillion of unfunded public pension liabilities that local and state governments have obscured.

Most state and local governments currently use their own estimated rate of return on their investments to discount their liabilities. By projecting unrealistically high rates of return, states minimize their unfunded liabilities, at least on paper. Lower unfunded liabilities in turn allow them to reduce how much they and public employees must contribute to their pension funds. Inflated investment assumptions are one reason that public pension funds are unfunded to the tune of $3.5 trillion.

Public pensions typically assume an 8% annual return on average, but over the past five years state pension funds with more than $5 billion in assets have earned only 4.5%. Taxpayers must make up the difference between what the funds earn and what they need to pay retirees. For Californians that is roughly $5 billion this year.

Local taxpayers are already seeing their services whacked and taxes raised to fill these pension holes. University of California students will have to pony up 8% more next year for tuition to offset an expected $500 million in state budget cuts. Illinois residents will soon pay 67% more in income taxes, but taxpayers won't feel the full brunt for another decade when the funds begin running out of money. When Chicago's pension fund goes dry around 2019, over half of the city's revenue will be dedicated to pensions.

In the 1950s and 1960s, many private employers obscured their liabilities the way governments are doing today, though they didn't have a public backstop. Many funds went broke. In 1974 Congress established minimum funding requirements and penalized companies that underfunded pensions. The law also required companies to report and discount their liabilities using a more conservative rate of return.

These changes exploded liabilities and prompted many companies to switch from defined-benefit plans to defined-contribution plans like 401(k)s. While a majority of private workers now have defined-contribution plans, defined-benefit plans remain the norm in government.

Enter the Public Employee Pension Transparency Act, which is sponsored by House Republicans Devin Nunes and Darrell Issa of California and Wisconsin's Paul Ryan. Their bill would encourage governments to switch to defined-contribution plans by revealing the true magnitude of their unfunded liabilities. States and municipalities would have to report their liabilities to the U.S. Treasury using their own rosy investment forecasts as well as a more realistic Treasury bond rate (to be determined by a formula).

This data would make clear how much taxpayers potentially owe and increase pressure on lawmakers to fix their plans. For instance, Illinois estimated in 2009 that it had a roughly $85 billion unfunded liability. Using a Treasury discount rate, that unfunded liability balloons to $167 billion.

Out of respect for state sovereignty, the federal government shouldn't and can't tell local governments how to run or fund their pensions. But the bill doesn't do so and it also doesn't force states to fund their plans using a lower discount rate. States don't even have to comply with the law, though they would forego their ability to sell federally subsidized, tax-exempt bonds if they don't.

The bill may not persuade states like Illinois and California to revamp their pensions, but it will reveal how broken they are—and that's a start.

Printed in the Wall Street Journal on January 22, 2011.

Thursday, January 27, 2011

Crying Over Unspilled Milk

Land Of Milk and Regulation
Preventing the next dairy farm oil slick

President Obamasays he wants to purge regulations that are "just plain dumb," likehis humorous State of the Union bit about salmon. So perhaps he should review anew rule that is supposed to prevent oil spills akin to the Gulf Coastdisaster—at the nation's dairy farms.

Two weeks ago,the Environmental Protection Agency finalized a rule that subjects dairyproducers to the Spill Prevention, Control and Countermeasure program, whichwas created in 1970 to prevent oil discharges in navigable waters or nearshorelines. Naturally, it usually applies to oil and natural gas outfits. Butthe EPA has discovered that milk contains "a percentage of animal fat,which is a non-petroleum oil," as the agency put it in the FederalRegister.

In other words,the EPA thinks the next blowout may happen in rural Vermont or Wisconsin. Otherdangerous pollution risks that somehow haven't made it onto the EPA docketinclude leaks from maple sugar taps and the vapors at Badger State breweries.

The EPA rulerequires farms—as well as places that make cheese, butter, yogurt, ice creamand the like—to prepare and implement an emergency management plan in the eventof a milk catastrophe. Among dozens of requirements, farmers must train firstresponders in cleanup protocol and build "containment facilities"such as dikes or berms to mitigate offshore dairy slicks.

These plans mustbe in place by November, and the U.S. Department of Agriculture is even runninga $3 million program "to help farmers and ranchers comply with on-farm oilspill regulations." You cannot make this stuff up.

The final ruleis actually more lenient than the one the EPA originally proposed. The agencytried to claim jurisdiction over the design specifications of "milkcontainers and associated piping and appurtenances," until the industrypointed out that such equipment was already overseen by the Food and DrugAdministration, the USDA and state inspectors. The EPA conceded, "Whilethese measures are not specifically intended for oil spill prevention, webelieve they may prevent discharges of oil in quantities that areharmful."

We appreciateMr. Obama's call for more regulatory reason, but it would be more credible ifone of his key agencies wasn't literally crying over unspilled milk.

For the article online: