Public Pension Hygiene Act

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

by THE WALL STREET JOURNAL

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.

Crying Over Unspilled Milk

Land Of Milk and Regulation

Preventing the next dairy farm oil slick

by THE WALL STREET JOURNAL

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: http://on.wsj.com/fhqu0w

Feinstein Embraces “Pearl Harbor Style” Legislating

by DEVIN NUNES

Radical environmentalists have realized that they cannot win a public debate arguing that a two-inch bait fish is more important than families in the San Joaquin Valley and are scrambling for a new message. They are also crafting a sneak attack to take control of our water.

The Left’s need to re-image the Delta water debate is particularly desperate due to a ruling in the U.S. District Court which rebuked the federal government as having used “sloppy science” to justify the man-made drought. Judge Oliver Wanger ordered federal agencies back to the drawing board.

However, the Left is already pressing ahead with its backup plan with the help of Senator Dianne Feinstein. That plan is concealed in massive $1.1 trillion federal spending bill for 2012 and would designate the entire Sacramento-San Joaquin River Delta as a National Heritage Area. If it becomes law, the Heritage designation would establish a new federal mandate to protect the natural, scenic, historic, cultural, and recreational resources of the Delta - a thinly veiled effort to cut off valley water supplies.

Feinstein’s controversial proposal is opposed by water users, farmers, and rural communities. They understand that National Heritage Areas create another layer of government between water rights owners and the government who controls delivery. Many others would also raise concerns if they knew Congress was considering the creation of this new National Heritage Area. However Democratic leaders, at the request of Senator Feinstein, are working to bypass public debate. They want to sneak the Heritage designation into law by air-dropping it into the nearly two thousand page Fiscal Year 2012 Omnibus Appropriations bill (see page 880).

The action taking place this week is particularly outrageous coming from Senator Feinstein, who just over a year ago came unhinged when Senator Jim DeMint (R-SC) tried to restore Delta pumping through an amendment on the Senate Floor.

Senator DeMint’s amendment came in the light of day and was subject to both a full public debate as well as a separate vote. Yet Senator Feinstein persisted in describing it as a “Pearl Harbor” style of legislating (see the outrageous video here).

What a difference an election makes. With her allies losing power in the House, Feinstein apparently has changed her view on sneak attacks.

Public Pension Bill Making Headlines

Pension Woes Prompt GOP Move
by THE WALL STREET JOURNAL

The new Republican House leadership, whose party benefited in November from public antipathy toward the bailout of banks, is moving to avoid a federal bailout of state and local pension funds.

Congress has little authority over, or responsibility for, state and local public-employee pensions. But with pension liabilities increasingly stressing state and municipal finances, the prospect that the problem will end up in Washington's lap has some academics and politicians urging that the federal government move preemptively.

In New Jersey, concerns about cuts in public pensions have led to a rise in retirements this year.

The latest wrinkle: A bill introduced last week by three prominent House Republicans to deny states and localities the ability to sell tax-exempt bonds—the lifeblood for many governments—unless they report their pension-fund liabilities to the Treasury Department. The federal tax-free status of interest on municipal bonds helps generate demand for the bonds and lowers government borrowing costs.

The goal, the congressmen say, is to get a better handle on funding woes of public pensions, which they say are not always forthcoming about the true extent of their financial exposure.

For decades, the federal government has regulated corporate pension funds and a federal agency, the Pension Benefit Guaranty Corp., can bail them out.

But there is no such federal backstop for state and local employee pensions. Some argue that Washington would be hard pressed to ignore a pension plan if it threatened a major government insolvency.

"The point of this is to smoke the rats out of their holes," said Rep. Devin Nunes of California, who introduced the bill. "What is the total amount of pension debt? No one really knows."

Read the full article from the Wall Street Journal here.

Pension reality check
The Washington Post
December 8, 2010

State and local government spending stands at 12.6 percent of U.S. gross domestic product - the highest share ever. To be sure, this largely reflects the recession, during which state and local spending has been growing more slowly than it did earlier in the decade while GDP has been falling or stagnant. Still, long-term state and local financial commitments, above all for pensions and health-care benefits of public employees, are driving much of the cost. And since states have to balance their budgets, spiraling employee compensation threatens to crowd out the provision of public services such as education, recreation and road maintenance.

Getting states, counties and cities back on a sustainable budget path is primarily their own responsibility. But federal policies can help - or hurt. At the moment, Congress is considering one of each type. On the helpful side, a trio of Republican members of the House - Paul Ryan (Wis.), Darrell Issa (Calif.) and Devin Nunes (Calif.) - have proposed a bill that would require all state and local governments that issue federally tax-exempt bonds to file accurate annual reports of their pension liabilities with the Treasury Department.

Public-employee pension funds are notorious for understating their liabilities through the use of vague projections and rosy investment-return assumptions. This proposal would force pension funds to show what they would earn if invested only in super-safe Treasury securities - a reasonable point of comparison given that pension benefits are usually guaranteed by law. And the bill would declare that the federal government is not liable for covering state and local pension fund shortfalls, another incentive for such plans to enact reforms.

Read the column in the Washington Post here.

Accounting for Public Pensions
The New York Times
December 10, 2010

As companies moved away from defined-benefit plans, most cities and states did not follow. One reason for that may have been that the Government Accounting Standards Board — the public sector equivalent of FASB — has done much less to force good disclosures, or comparable ones.

Having limited information available can obscure problems, but when concerns arise, a lack of good data can have the opposite effect; people assume the worst.

Estimates of unfunded pension liabilities can be breathtaking. Two economists, Robert Novy-Marx of the University of Rochester and Joshua Rauh of Northwestern, put the figures at $3 trillion for state governments and almost $600 billion for municipalities. Those figures are far greater than official government figures, and are highly dependent on interest rate levels, which can and do fluctuate. They may be too high, but there is no way to be sure of that.

Some people say the 1974 passage of the Employee Retirement Income Security Act, known as Erisa, led to the demise of private pension plans because companies for the first time really had to honor pension promises. But the trend did not pick up steam until the accountants forced disclosure of real numbers. Most state constitutions have long barred cutting public pension benefits that have been earned, but that fact alone did not force change.

This week, three Republican members of Congress, led by Representative Devin Nunes of California, a senior member of the Ways and Means Committee, proposed legislation to force states and cities to report pension fund liabilities on the same basis, and to force them to disclose market values of assets. The bill would not even allow smoothing, so the state of pension funding will seem volatile as markets rise and fall. Such volatility could be reduced by putting more pension money into bonds than stocks, but doing so would force governments to admit they were likely to earn less on investments, and thus need to put even more money into pension plans.

Read the complete column in the New York Times here.

Immigrant Children Used as a Political Prop by House Democrats

by DEVIN NUNES

Today, all of America witnessed one more example of the current majority’s failed leadership when immigrant children were used as a political prop by House Democratic leaders.

For the past four years, Democrats had significant majorities in Congress as well as two Presidents – a Republican then a Democrat - willing to sign an immigration reform bill. However, instead of dealing with the issue in the light of day with public hearings and a thoughtful, deliberate, and responsible process, Democrats chose to force a vote on legislation during the waning days of a lame-duck Congress with little chance for debate, no chance of amendment, and no chance of getting to the President’s desk.

Make no mistake, the activity in the House today was nothing more than an attempt by Democrats in Congress to pander to Hispanic voters for partisan political purposes.

High Speed Train Wreck

by DEVIN NUNES
Originally printed in the Fresno Bee.

Just days before Halloween and about a week prior to the general election, the White House announced billions in stimulus spending around the country. These grants, a by-product of the stimulus slush fund created by Congressional Democrats last year, were used to provide last-minute re-election assistance to struggling Democrats.

Republicans, including myself, unanimously opposed passage of the trillion dollar boondoggle that financed these grants. At the time, I told The Bee and others that stimulus spending would not create sustainable employment, which it hasn't, but that it would be used to finance the re-election efforts of Democrats, which it was. The Bee not only failed to report my observations during the stimulus debate, but also failed to report the facts as they unfolded in our own community days before the election.

The president's effort to secure the re-election of Democrats who voted for ObamaCare manifested itself locally in a $715 million grant for high-speed rail in the San Joaquin Valley. The announcement of this funding rightly spurred outrage on the part of fiscal conservatives who not only see the stimulus spending as reckless, but view the high-speed rail project to be inappropriate, given California's financial crisis.

Setting aside the timing and manner in which the funds were awarded, as well as the fact that this spending has driven the national debt to an unprecedented and unsustainable level, it is important to understand the facts about high-speed rail in the San Joaquin Valley.

California's effort to establish a high-speed rail system has been chugging along since 1996 at anything but high speed. The projected cost of the system now exceeds $40 billion, but does anyone believe that this will be the true cost?

In one year, from 2008 to 2009, the High Speed Rail Authority was forced to raise its cost projections from $32.6 to $42.6 billion. Indeed, the final price tag of high-speed rail could easily exceed the combined federal highway spending in California for the 50 years from 1957-2007.

Given the enormous cost increases of California's high-speed rail so far, it is not unreasonable to question whether this project really has the necessary funding. Yet some have suggested that the $715 million grant announcement by the White House solidifies the future of the project. The fine print tells a different story and shows that this enormous undertaking will require billions in bonds, if the state can sell them.

However, even if the funding arrives as planned, Californians are likely to witness obstacles to their first ride on their new bullet train. The nonpartisan state auditor's report on California's High Speed Rail Authority says that the plan "risks delays or an incomplete system because of inadequate planning, weak oversight, and lax contract management."

Recent celebrations over high-speed rail in the Valley should be viewed with skepticism by taxpayers. Particularly when those dollars are promised by the now infamous Dustbowl Democrats who helped take away our region's water supply, decimated our timber industry and fueled a mass exodus of small businesses and entrepreneurs. Indeed, recent years have witnessed high levels of domestic outmigration as long-time residents vote with their feet by leaving the state.

The Bee and other proponents of the high-speed rail plan need to take an honest look at the cost of this plan within the context of the fiscal realities we face. To do otherwise risks a high-speed train wreck of public debt, which may or may not include a completed bullet train.

Now is not the time for fairytales about the future of travel in California, nor is it time to celebrate jobs that have yet to materialize.

The passage of time will tell taxpayers whether they were tricked or treated by President Obama's Halloween surprise. In the meantime, I would hope that Bee writers would refrain from mischaracterizing my remarks in an attempt to blame Republicans in order to protect the Dustbowl Democrats from their own political stunts.