[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
             STATE AND MUNICIPAL DEBT: TOUGH CHOICES AHEAD 

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 14, 2011

                               __________

                           Serial No. 112-39

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director



















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 14, 2011...................................     1
Statement of:
    Biggs, Dr. Andrew, resident scholar, the American Enterprise 
      Institute for Public Policy Research; Mark Mix, president, 
      National Right to Work Committee; Dr. Robert Novy-Marx, 
      professor of finance, University of Rochester Simon 
      Graduate School of Business; and Dr. Desmond Lachman, 
      resident scholar, the American Enterprise Institute for 
      Public Policy Research.....................................    91
        Biggs, Dr. Andrew........................................    91
        Lachman, Dr. Desmond.....................................   121
        Mix, Mark................................................   103
        Novy-Marx, Dr. Robert....................................   116
    Walker, Scott, Governor, State of Wisconsin; and Peter 
      Shumlin, Governor, State of Vermont........................    15
        Shumlin, Peter...........................................    21
        Walker, Scott............................................    15
Letters, statements, etc., submitted for the record by:
    Biggs, Dr. Andrew, resident scholar, the American Enterprise 
      Institute for Public Policy Research, prepared statement of    94
    Braley, Hon. Bruce L., a Representative in Congress from the 
      State of Iowa, atricle dated April 11, 2011................    44
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............     6
    Lachman, Dr. Desmond, resident scholar, the American 
      Enterprise Institute for Public Policy Research, prepared 
      statement of...............................................   123
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, various articles....................    70
    Mix, Mark, president, National Right to Work Committee, 
      prepared statement of......................................   105
    Novy-Marx, Dr. Robert, professor of finance, University of 
      Rochester Simon Graduate School of Business, prepared 
      statement of...............................................   118
    Quigley, Hon. Mike, a Representative in Congress from the 
      State of Illinois, prepared statement of...................    11
    Shumlin, Peter, Governor, State of Vermont, prepared 
      statement of...............................................    24
    Walker, Scott, Governor, State of Wisconsin, prepared 
      statement of...............................................    18


             STATE AND MUNICIPAL DEBT: TOUGH CHOICES AHEAD

                              ----------                              


                        THURSDAY, APRIL 14, 2011

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room 2154, Rayburn House Office Building, Hon. Darrell E. Issa 
(chairman of the committee) presiding.
    Present: Representatives Issa, Burton, Platts, Turner, 
McHenry, Chaffetz, Walberg, Lankford, Amash, Buerkle, Gosar, 
Labrador, Meehan, DesJarlais, Gowdy, Ross, Guinta, Farenthold, 
Kelly, Cummings, Towns, Maloney, Norton, Kucinich, Tierney, 
Clay, Lynch, Connolly, Quigley, Davis, Braley, Welch, Murphy, 
and Speier.
    Also present: Representatives Sensenbrenner and Moore.
    Staff present: Ali Ahmad, deputy press secretary; Thomas A. 
Alexander, Howard A. Denis, and Peter Haller, senior counsels; 
Robert Borden, general counsel; Molly Boyl, parliamentarian; 
Lawrence J. Brady, staff director; Sharon Casey, senior 
assistant clerk; Katelyn E. Christ, research analyst; Benjamin 
Stroud Cole, policy advisor and investigative analyst; John 
Cuaderes, deputy staff director; Adam P. Fromm, director of 
Member liaison and floor operations; Linda Good, chief clerk; 
Tyler Grimm and Ryan M. Hambleton, professional staff members; 
Frederick Hill, director of communications; Christopher Hixon, 
deputy chief counsel, oversight; Sery E. Kim, counsel; Justin 
LoFranco, press assistant; Mark D. Marin, senior professional 
staff member; Laura L. Rush, deputy chief clerk; Peter Warren, 
policy director; Kevin Corbin, minority staff assistant; Ashley 
Etienne, minority director of communications; Carla Hultberg, 
minority chief clerk; Justin Kim, minority counsel; Lucinda 
Lessley, minority policy director; Amy Miller and Alex Wolf, 
minority professional staff members; Leah Perry, minority chief 
investigative counsel; Jason Powell and Steven Rangel, minority 
senior counsels; Dave Rapallo, minority staff director; Suzanne 
Sachsman Grooms, minority chief counsel; and Mark Stephenson, 
minority senior policy advisor/legislative director.
    Chairman Issa. Thank you. The committee will come to order.
    Before I begin, and I don't think that I have to remind the 
audience broadly, but I will, decorum will be maintained here 
so that our two witnesses, both seated Governors, are heard 
without any unreasonable interruption. If you agree with them, 
smile. If you disagree with them, smile. The fact is that this 
is about America hearing from two Governors who have a high 
responsibility to serve their States, and we have a high 
responsibility to hear them.
    The Chair cannot allow any disruptions. And I appreciate 
that all those who came to get a message out did so before the 
gavel, and I appreciate that if you would like to remain, you 
can remain for the entire hearing; we are open to the public. 
But if there is any disruption, your seats will go to the 
people waiting outside, who also would like to be in 
attendance. This committee has a longstanding history of doing 
that on a bipartisan basis.
    I now recognize the ranking member for unanimous consent.
    Mr. Cummings. Thank you very much, Mr. Chairman. I ask 
unanimous consent that Representative Gwen Moore of the 4th 
District of Wisconsin be permitted to attend in this hearing 
pursuant to Rule 11, Section 2(g)(2)(c), and ask questions of 
the witnesses.
    Chairman Issa. Per our rule, without objection, so ordered.
    The Oversight Committee mission statement is that we exist 
to secure two fundamental principles: first, Americans have a 
right to know that the money Washington takes from them is well 
spent and, second, Americans deserve an efficient, effective 
government that works for them. Our duty on the Committee on 
Oversight and Government Reform is to protect these rights. Our 
solemn responsibility is to hold government accountable to 
taxpayers because taxpayers have a right to know what they get 
from their government. We will work tirelessly in partnership 
with citizen watchdogs to deliver the facts to the American 
people, bring genuine reform to the Federal bureaucracy. This 
is the mission of the Oversight and Government Reform 
Committee.
    Today's hearing continues the committee's effort to examine 
crises brought on by out-of-control spending and mounting debt 
at the State level. Now, let me assure you that is not to say 
every State is out of control, but virtually every State in the 
Union, and many localities, have increased their debt load at a 
time in which debt service is at an all-time low.
    The American people are well aware of the fiscal crisis 
Washington faces on a national level. They are ready for 
Congress to cut spending, and even President Obama has lauded 
recent spending cuts championed by the House Republicans.
    What is less known is the severe fiscal problem that some 
of our States and municipal governments face. Already this year 
our Financial Services Subcommittee, under the leadership of 
Chairman Patrick McHenry, has done a great service by 
highlighting problems created by some irresponsible spending. I 
thank Chairman McHenry for his efforts.
    The facts we have learned from the subcommittee are 
telling. Currently, States face a combined budget shortfall of 
roughly $112 billion for fiscal year 2012, an amount equal to 
approximately one-fifth of their budgets. That, if nothing is 
done, will pile on more debt for the future.
    The evidence why this has occurred is clear: since 1990, 
State and local government spending has increased 70 percent 
faster than inflation. When the recession hit, State and local 
tax revenues simply no longer sustained that growth.
    Looming just around the corner, unfunded or underfunded 
pension liabilities pose a daunting threat to State municipal 
budgets. This burdens taxpayers with an estimated $3 trillion 
in debt. I say estimated because nobody knows the full exposure 
the taxpayers have due to the fact that the bond markets are 
not transparent and the reporting rules do not force adequate 
disclosure.
    Additionally, as we have seen here, when we have talked 
about the correct amounts to be withheld for our postal 
carriers, we find that there is up to $6\1/2\ billion of 
discrepancy between two opposing sides on this issue. Indeed, 
over the past 20 years, State and local governments have 
promised to government workers that they knew they could not 
keep in some cases, hoping that future wealth would continue to 
propel them.
    Today we have two Governors with us and we are pleased to 
welcome Wisconsin Governor Scott Walker and Vermont Governor 
Peter Shumlin. They come from two very different States: one 
larger, one smaller; one in the midst of a tough downturn that 
may in fact continue for a very long time as many of the core 
industries that have created wealth begin to change, and that 
transition may be long and painful. Vermont, on the other hand, 
a wonderful State filled with a great deal of industry that may 
be facing challenges today, but are likely to be slightly less 
systemic than what Wisconsin faces. This doesn't change the 
fact that both Governors are dealing with the issues of 
shortfalls in their own way, and today we look forward to 
hearing how they are going to retain the viability of their 
State long after their terms have ended.
    Unionized Federal workers don't even have collective 
bargaining rights. Governor Walker's bold reforms seem 
reasonable to those of us in Washington who understand that our 
retirement and health care system at the Federal level is not 
subject to collective bargaining, but in fact it is based on a 
single system uniform throughout the Federal work force and not 
debatable as to withholding or as to the benefits. That is not 
to say that Federal workers don't have a good program; they do. 
But their program has been based on a long list of requests 
considered by Congress and funded.
    So as we deal with Federal issues, hopefully we deal with 
State issues who, in many cases, have less room to maneuver, 
are looking for more room to maneuver, and believe that they 
can achieve it through changes in their laws.
    Last, the insolvency of Portugal, Italy, Ireland, Greece, 
and Spain, most often called the PIGS, tells us that States 
within a greater union can in fact be a challenge for the 
union. The independent countries of Europe that belong to the 
European Union are more loosely configured than our own States. 
That means that if we have insolvency in three, four, five of 
our States, we have a greater challenge to our common Nation 
than does the European Union. And yet the European Union has 
been constantly trying to figure out ways to maintain these 
states within the European Union, help them bail themselves 
out, and in fact insist that they change policies that have 
gotten them into this problem.
    We are not here today to intervene in the sovereign States 
that are before us; we are here to understand what they are 
doing in self-help.
    With that, I recognize the ranking member for his opening 
statement.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    I ask unanimous consent that the statement of the National 
Education Association, dated April 14, 2011, be admitted into 
the record.
    Chairman Issa. Without objection, so ordered.
    Mr. Cummings. Thank you very much.
    Mr. Chairman, I strongly support efforts to help States 
continue their economic recovery and eliminate the budget 
shortfalls caused by the most severe financial crisis since the 
Great Depression. Many States have been forced to make 
significant cuts in their budgets; trimming critical programs 
that help our Nation's veterans, assist the developmentally 
disabled, supply health care services to the poor, and provide 
nursing home services to our seniors. These are difficult 
decisions and I have great respect for our Governors who are 
able to work with governmental and nongovernmental entities to 
develop innovative ways to preserve as many services as 
possible for their citizens, while making fiscally responsible 
choices.
    However, I strongly oppose efforts to falsely blame middle-
class American workers for these current economic problems. We 
know better than anybody else in this committee why those 
problems came about. This recession was not caused by them. 
Working America, firefighters, teachers, and nurses, and so 
many others, who are, in the words of Theologian Swindell, so 
often unseen, unnoticed, unappreciated, and unapplauded, are 
not responsible for the reckless actions of Wall Street which 
led to this crisis in the first place.
    I also strongly object to efforts by politicians who try to 
use the current economic downturn to strip American workers of 
their rights. Mr. Chairman, we are a country who has 
consistently increased rights, not taken them away. As a matter 
of fact, if it were not for that principle, I would not be 
sitting here today, and the women in this Congress would not be 
sitting here today; the right to negotiate working conditions 
that are safe, the right to negotiate due process protections 
against being fired arbitrarily, and the right to negotiate 
fair pay for an honest day's work.
    Today's hearing is a study in contrast. We are very 
fortunate to have with us two State Governors, Governor Shumlin 
from Vermont and Governor Walker from Wisconsin, and we are 
glad to have them. Both face budget shortfalls this year. But 
they approached the rights of workers in drastically different 
ways. Governor Shumlin of Vermont faced a budget shortfall, 
ladies and gentlemen, of about $176 million for fiscal year 
2012. He negotiated with State employees, who accepted a 2-year 
3 percent pay cut. Vermont teachers also agreed to work three 
additional years before retiring and to contribute more toward 
their pensions. And the Vermont State Employees Association 
voted to increase their pension contribution by 1.3 percent 
over the next 5 years.
    In addition to obtaining these concessions, Governor 
Shumlin also did something else: he proposed spreading 
additional cuts across various State agencies as well as 
raising additional revenue through select surcharges and 
assessments. In other words, he developed a plan to spread out 
and share sacrifices across the State. And we should note that 
those employees went along with it because they too wanted to 
strengthen their own State's fiscal situation.
    Governor Walker took a very different approach in 
Wisconsin. He faced a projected shortfall of $137 million in 
the current fiscal year. Within days of the Governor's 
announcing a budget proposal to address this shortfall, labor 
leaders in Wisconsin agreed to accept all of his financial 
demands. They agreed to increase their pension contributions 
more than twentyfold and they agreed to double their share of 
the health insurance premiums.
    But Governor Walker did not accept these concessions. 
Instead, he went much further by attempting to strip government 
employees of their collective bargaining rights; he demanded 
numerous provisions that had nothing to do with the State's 
budget and had no fiscal impact. For example, he wanted to 
require unions to hold annual votes to continue representing 
their members and he wanted to prevent employees from paying 
union dues through their paychecks. Governor Walker refused to 
meet with union leaders and he declared publicly that he would 
not negotiate with them.
    One of the big questions we will have of Governor Walker 
today is why did he not say yes to the unions when they agreed 
to meet all of his financial demands. And on a broader level, 
what is motivating this extreme effort to dismantle the unions 
themselves? In my opinion, it is shameful to play politics with 
American workers and their families. These are real people, 
middle-class Americans who are trying to put food on their 
table for their family, keep a roof over their heads, educate 
their children, and plan for retirement that does not burden 
their loved ones. We should be helping these workers, not 
attacking them, because they are the engine and the author of 
the American recovery.
    With that, Mr. Chairman, I yield back.
    [The prepared statement of Hon. Elijah E. Cummings 
follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Issa. I thank the gentleman.
    The Chair now recognizes the distinguished gentleman, 
subcommittee chairman, Patrick McHenry, for an opening 
statement.
    Mr. McHenry. Thank you, Mr. Chairman. Thank you so much for 
holding this hearing today and, Governor, thank you for being 
here.
    Over the past 2 months, Congressman Quigley, who is the 
ranking member of my subcommittee, we have held hearings on 
State budgets and pensions, and their impact on the municipal 
bond market. Two essential questions immediately stood out: 
first, what is the true debt burden facing our States and 
municipalities, and, second, what must be done to mitigate the 
immediate crisis and put all forms of government back on a 
solvent, fiscal trajectory.
    After holding hearings with scholars, State senators, 
rating agencies, and other parties about State budgets and 
pensions, we confirmed what leading economists are predicting 
and what we will hear from the testimony today, that 2012 will 
be one of the most difficult budget years for States and 
municipalities on record. Forty-four States and the District of 
Columbia are now projecting aggregate budget shortfalls 
totaling $112 billion for this year alone, and it only gets 
worse from here on out.
    If that wasn't enough, there are unfunded pension 
liabilities upwards of $3.2 trillion for States and $383 
billion for local governments, some of which is kept off of 
States' accounting books, representing trillions of dollars in 
shadow accounting. Today, some of my colleagues on the other 
side of the aisle will use the words like extreme, tax 
increases, and use those words repeatedly to describe what is 
either happening in terms of cuts or what is necessary to get 
out of this situation.
    We are not facing a revenue problem, it is a spending 
problem. But, as always, the numbers don't lie. Since 1990, 
State and local governments have increased spending by roughly 
70 percent faster than inflation. In addition to this unchecked 
reckless spending, the looming burden of paying out trillions 
of dollars in lucrative public pensions and health care 
benefits leaves State and local governments in dire straits.
    I have stated before that there will be severe consequences 
if we are dishonest about the fiscal obligations before us and 
refuse to change course. The cost of inaction will be borne by 
the young teachers who are told that their cash-strapped school 
districts can no longer afford their retirement benefits 
because it must finance the exorbitant benefits of others.
    Many public servants like firefighters and policemen, faced 
with the possibility that their vital jobs that they hold will 
no longer provide a standard of living for their families will 
simply choose another career. In the end, the people that we 
count on to teach our children and to protect our homes and our 
families will realize that their government has failed them and 
actively hurt their retirement security. We have an opportunity 
to change that.
    Numerous States have seen the writing on the wall and 
decided to take action. In recent years, at least 15 States 
passed legislation reform some aspect of their pension system. 
For example, Governor Mitch Daniels of Indiana successfully 
reformed collective bargaining, leading to more efficient and 
effective government. Governor Walker has boldly set out to 
push through similar initiatives in Wisconsin. We have seen 
this in the national news.
    Even in the face of extremely heated political attacks, 
Governor Walker has shown that he understands and has a genuine 
commitment to reform and to prevent this fiscal calamity. The 
Governor's proposals were recently welcomed by the bond market 
and Moody's said that Governor Walker's plan will have a 
positive effect on the credit rating of his State. In the end, 
that will mean less cost and less expense to his taxpayers in 
order to get lending.
    Change is never easy. But if we wish to ensure an honest 
retirement for those teach our children or protect our 
families, and leave the next generation a country as 
economically vibrant as the one that we inherited, we must be 
serious about the problems we face. It is our responsibility to 
be fair to our current retirees and honor our commitment to 
them, while at the same time not punishing the next generation 
of America for today's free spending ways. It is only possible 
if we take the necessary steps before it is too late. It is not 
too late. We still have the opportunity for change, and that is 
what this discussion here today is about.
    Moreover, in light of the hearings that we have had and the 
discussion we will hear today, I think it is important that 
taxpayers and the market generally have the transparency 
necessary to understand the fiscal situation States are in. 
Taxpayers deserve it, those that are paying into the pensions 
deserve it, and the American people broadly deserve that.
    Thank you, Mr. Chairman, for holding this hearing and thank 
you for your leadership. I yield back.
    Chairman Issa. I thank the gentleman and I thank him for 
what his subcommittee on a bipartisan basis has been doing on 
this matter.
    We now recognize his partner, the ranking member of the 
Subcommittee on TARP, Financial Services, and Bailouts of 
Public and Private Programs, Mr. Quigley, for his opening 
statement.
    Mr. Quigley. Thank you, Mr. Chairman. I would like to thank 
you for convening today's third hearing on State and municipal 
debt. I would like to thank the chairman of the subcommittee 
for his efforts in those first two committee meetings. I would 
also like to thank our six witnesses for contributing their 
time and expertise today.
    Let me begin by saying in the end I do think we have a 
revenue problem, and the revenue problem at the local level was 
because of the economic downturn. It shrunk local governments' 
revenue dramatically, cities and States alike. So it was a 
revenue problem.
    Now, that doesn't mean that you should raise taxes, because 
I understand where you are coming from, but raising taxes 
during a recession is a bad idea. But we have to recognize that 
in the end this was in large part a revenue problem.
    So having addressed that, the other things we will learn in 
these hearings is that many States had these big challenges, 
and you don't have to tell me; I come from Illinois. Illinois 
failed to heed the Old Testament story that advised that one 
should save during the seven good years to survive during the 
seven lean years. While Illinois's current administration 
didn't dig the hole that it got, it has to move forward on 
substantive fiscal reform.
    Illinois and other States in similar situations owe it to 
their taxpayers to fix their budget. If States like Illinois, 
New Jersey, and California don't get serious about reform, they 
will never be able to keep the basic promises they have made. 
Reform should be emphasizing, reinventing, streamlining 
government and adapting to changing times, but reform should 
not demonize public sector workers who have dedicated their 
careers to government service. While States have the right to 
make their own policy, I strongly support collective bargaining 
rights for public sector workers, but recognize that we have to 
work together, collectively, to solve these problems.
    Collective bargaining rights didn't cause the recession, 
and curtailing them won't fix State budget deficits. What will 
fix State budget deficits are common sense reforms that restore 
budgets through a sustainable path. Consider public sector 
collective bargaining facts and figures. A simple calculation 
shows that States that allow public sector collective 
bargaining have an average projected 2012 deficit of 14 percent 
relative to their budget. Fourteen percent is big, but States 
that forbid public sector collective bargaining have projected 
deficits at 16\1/2\ percent. Either way you spin it, ending 
collective bargaining rights won't reduce budget deficits.
    Workers have to play a role to meet these fiscal realities. 
It is obvious we have to reduce deficits and long-term debt, 
but we shouldn't take advantage of the economic downturn to 
achieve longstanding ideological goals. Public sector should 
continue to have collective bargaining rights and we need to 
work together to achieve responsible reform.
    Soon I will be releasing Part 2 of a series of reports on 
reinventing our Federal budget. This reform will recommend over 
a trillion dollars in savings over the next 10 years. This 
report builds on Part 1 I released in November, but also on a 
series of reports I released as a Cook County commissioner. I 
bring this up because I remember how frustrating it was to try 
to achieve substantive reform at the local level. The truth is 
these same frustrations are present here in Washington. But we 
can't let those frustrations get the better of us. States like 
Illinois need fiscal reform. We need to streamline, 
consolidate, and reinvent government not because it is 
unimportant, but because its mission is so important; it is 
where the wheels hit the street. And if we can remember the 
true heroes of 9/11 were civil service workers. That is why we 
should restore these local governments to sustainability rather 
than tear them down.
    Thank you, Mr. Chairman, and I yield back.
    [The prepared statement of Hon. Mike Quigley follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Issa. I thank the gentleman.
    Members may have 7 legislative days in order to submit 
additional statements and extraneous material.
    We would now like to recognize our first panel of 
witnesses. No one on this side of the dais, currently, can 
introduce them as well as their own members, so with that I 
would call on Chairman Jim Sensenbrenner to introduce his 
Governor.
    Mr. Sensenbrenner. Thank you very much, Mr. Chairman. It is 
my pleasure and honor today to introduce my friend and 
constituent, Governor Scott Walker. I first got acquainted with 
Scott about 20 years ago when he was starting to get active in 
Republican politics. He was elected 17 years ago to the State 
Assembly and in 2002 he won a recall election for chief 
executive or county executive of Milwaukee County. He was re-
elected to two full terms as a Republican in one of the most 
Democratic counties in the country, and his political success 
has been based upon the fact that he tells people where he 
stands and, once elected, implements that. He faced some very 
tough times in Milwaukee County as a result of an outrageous 
pension scandal that his predecessor was at the heart of. He 
was able to pass nine county budgets or proposed nine county 
budgets without a tax increase, and this background allowed him 
to be elected as the 45th Governor of Wisconsin last fall.
    Very few people here, I think, knew who Scott Walker was 
until the last 2 months or so. However, those of us who have 
known Scott Walker and his commitment to principle were really 
not surprised that the proposals that he made to close not $137 
million budget deficit, but a $3.6 billion budget deficit 
through the end of the next budget period.
    So, again, I am sure that you will find Governor Walker as 
interesting as we in Wisconsin have. He is a very polarizing 
figure, but those of us who love him in Wisconsin really thank 
him for the job that he has done.
    Chairman Issa. I thank the gentleman.
    With all the people that Governor Shumlin could have had 
introduce him, he chose Peter Welch. The gentleman is 
recognized.
    Mr. Welch. Thank you, Mr. Chairman, Mr. Ranking Member, 
members of the committee that I proudly serve on. It is my 
pleasure to introduce Governor Peter Shumlin of Vermont.
    First of all, a couple things about Peter. He is a private 
sector person. He and his brother established and expanded a 
very successful private business, Putney Student Travel, in 
Southern Vermont. He has been on the front line of creating 
jobs, of having to pay good wages and good benefits, and deal 
with the practical realities of keeping a business going day in 
and day out, expanding it, growing it, and being an employer.
    He also served in our citizen legislature in Vermont for 
many years, first in the House of Representatives and then for 
several terms in the State senate, and Peter, as the president 
pro tem of the State senate, that is our senate leader, served 
more years as senate president than any other Vermonter in 
history, and that is 10 years.
    So he comes to his job with legislative experience, with 
private sector experience, with the obligation to pay bills and 
make the trains run on time. He is now serving as Governor of 
Vermont, after being elected in this past election. Just to 
give you a sense of how Vermont operates, he won a primary with 
four other Democrats, and there were a recount because his 
original margin of victory was about 200 votes. During the 
recount, Peter and the four other candidates, rented a van, and 
while we were awaiting the outcome of who won, went on a unity 
tour around the State of Vermont talking together, rather than 
fighting each other during the recount. Every single member of 
five excellent candidates all said we trust our town clerks; 
just let them do the count and we will accept the result.
    He also comes to the job with the benefit of the tremendous 
history that we in Vermont are proud of, a bipartisan 
tradition, and it embraces really two things: No. 1, we fight 
hard in Vermont, Republicans and Democrats, just like we do 
here, but in Vermont Democrats think that Republicans usually 
have a merit to their argument and Republicans think Democrats 
have something to say, and we actually do our best to listen to 
each other because both sides have enough humility to 
appreciate that, in fact, there is truth on both sides and we 
have to come together for the good of the State.
    Just a little bit of background, we had a Governor 
Snelling, Richard Snelling, very respected and revered. We had 
a downturn in the 1980's. He did something with the Democratic 
Speaker of the House to try to adjust the fiscal situation, 
because we pay our bills in Vermont. We don't have a balance 
budget amendment, but we are cheap and we pay our bills, we are 
frugal. The Democrats agreed to cut programs that were really 
important to them, the Governor agreed to a temporary surtax 
because we needed some revenues. It worked out; we came into 
balance. The taxes went down and we were able to support our 
programs.
    We then had Governor Dean in good times. He cut taxes. He 
is a Democrat. And when he did that, he implemented some tough 
budget reforms to make sure we didn't spend just because we had 
a surplus. We sent money back to the taxpayer and we put into 
place budget controls.
    Peter Shumlin is carrying on that tradition. When we got 
into a fiscal situation, Governor Douglas, his predecessor, 
Republican, worked with the unions and said, hey, we have to 
share the sacrifice here. They negotiated pay cuts; they 
started looking at benefits. They sat down at the table and 
worked it out and there was a sense of common purpose, shared 
sacrifice, and that is the second approach that has been 
embodied in Vermont. If there is pain that has to be sustained, 
we have to share that pain together, and what it has done is 
helped us make progress even in tough times.
    Peter, just to give you an idea, as senate president, when 
we had a large Democratic majority, he did something that you 
would get mentally tested around here if you did it; he 
appointed Republicans to chair major committees. So in Vermont 
the two principles are listen to each other, there is truth on 
both sides, and work together and share sacrifice when 
sacrifice is required.
    So it is my pleasure to introduce Governor Peter Shumlin of 
Vermont.
    Chairman Issa. I thank the gentleman.
    Pursuant to committee rules, all witnesses will be sworn 
in. Would you please rise to take the oath and raise your right 
hands?
    [Witnesses sworn.]
    Chairman Issa. Let the record reflect that all witnesses 
answered in the affirmative.
    Please be seated.
    Gentlemen, we have Congressmen who come before us, Senators 
who come before us, and Governors come before us. Governors are 
always the best witnesses; they understand that the 5-minutes 
allows for the Q&A, that in fact your entire testimony will be 
placed in the record. To help you with this, you will see the 
typical green, yellow, and red lights. As my predecessor on the 
committee said, in all 50 States we know what red means. So, 
with that, I recognize--we didn't do a coin flip, so who wants 
to go first? Governor Walker.

 STATEMENTS OF SCOTT WALKER, GOVERNOR, STATE OF WISCONSIN; AND 
           PETER SHUMLIN, GOVERNOR, STATE OF VERMONT

                   STATEMENT OF SCOTT WALKER

    Governor Walker. Thank you, Mr. Chairman, distinguished 
members of the committee, visiting Members as well. Governor, 
it is good to be with you here as well; we got to know each 
other a little bit after the elections with the new training 
for new Governors. It is an honor to be here today.
    As was mentioned by several in the testimony, we are not 
alone in Wisconsin; there are 44 different States and the 
District of Columbia that are facing deficits. In fact, in 
total, over $111 billion in total deficits ranging from 2 to 45 
percent of their budgets. In our case, in Wisconsin, for the 
next biennial budget, which starts July 1st, we face a $3.6 
billion budget deficit.
    Now, Governors across the country, Democrat and Republican 
alike, are facing that challenge; in many cases, proposals that 
we have seen from one end of the country to the other, 
Governors cutting, in many cases they are cutting billions of 
dollars from aid to local government, school districts and 
others; and in turn what it is forcing in many of those States 
is one of two things, either massive layoffs or massive 
property tax increases, and in many cases, sadly, some of both.
    In Wisconsin we have a different option, a progressive, in 
the best sense of the word, a progressive option. For us, we 
are giving State and local governments the tools they need not 
just to balance this year or for the next 2 years, but for 
generations to come; and that is important. Now, some here and 
other places around the country may say that is a bold 
political move, but I would argue it is a very modest request. 
What we are asking from government employees like myself is a 
5.8 percent contribution for our pension and a 12.6 percent 
contribution for health care. That is protecting the middle 
class. That protects middle-class jobs and middle-class 
taxpayers. And if you ask middle-class workers in my State, 
they will tell you they think what we are offering is pretty 
reasonable.
    I will give you a good example; I don't have to go too far 
for that. My brother David works as a banquet manager, part-
time as a bartender; his wife works for a department store. 
They have two beautiful kids; one just turned 4 the other day. 
They are a typical middle-class family. When this debate first 
started, he said to me, you know, I pay some $800 a month for 
my health insurance premiums and the little bit I can set aside 
for my 401K. I would love to have a deal. I would love to have 
a deal like what you are offering. I hear that all across my 
State. When I go to plants and factories and small businesses 
and farms, they say we would love to have a deal like that 
because, on average, our middle-class taxpayers are paying 
about 20 percent of their health insurance premiums.
    In fact, you all know this with Federal employees. Federal 
employees pay, on average 28 percent of their health insurance 
premiums. As the chairman alluded to, Federal employees, for 
the most part, do not have collective bargaining rights for 
benefits and ultimately for salary. Makes me wonder why the 
protestors are in Madison and Columbia, not right here in 
Washington, DC. You have to look at the facts; it is very clear 
out there. What we are offering is more generous than what you 
offer Federal Government employees, and yet the outrage is not 
here, it is in our State capital.
    More important, though, than just the fiscal impact, 
because what we are talking about here ultimately saves $1.7 
billion in State and local government spending over the next 2 
years in our biennial budget. It is not the only way we are 
balancing our budget, but it is a piece of that. The other 
important element to remember is this makes government work 
better.
    I can think of no better example than a young woman by the 
name of Megan Sampson, who a year ago was named the Outstanding 
Teacher of the Year, a teacher in the Milwaukee public school 
system at the time, and a week later she got a pink slip. She 
was one of the teachers laid off. Why? Because her collective 
bargaining agreement required a contract that protected a 
system that pays more than $100,000 in compensation, total 
compensation per teacher, with no contribution for health care, 
and ultimately has a system based on seniority.
    Our reforms allows schools and other local governments to 
hire and fire based on performance and merit, paying for 
performance so we put our best teachers and our best workers up 
front. That ultimately is going to make things work better. It 
worked in Indiana, when Mitch Daniels did this 6 years ago. We 
have seen the government more efficient, more effective, more 
accountable to the public; and ultimately great workers were 
rewarded in that State and continue to be rewarded today.
    The last thing I would just tell you is this ultimately is 
good for the economy and our State as well because, in the end, 
investors want to look at a State where the State and local 
government is stable. We are showing that Wisconsin is open for 
business. And the thing, I guess, the most important point I 
would bring up to you today is when you think about what we are 
doing, we are really making a commitment to the future. I have 
two high school sons; in fact, some of their classmates are 
here today from Wauwatosa East High School. Our proposals are 
about making a commitment to the future so our children don't 
face even more dire consequences than what we face today.
    For more than 200 years, this country has been based on 
leadership, where leaders cared more about their children and 
their grandchildren than they did about themselves. It is time 
here in Wisconsin and across this country. We have leaders 
again who worry more about the next generation than the next 
election, and that is exactly what we are doing.
    Thank you, Mr. Chairman.
    [The prepared statement of Governor Walker follows:]

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    Chairman Issa. Thank you, Governor.
    Governor Shumlin.

                   STATEMENT OF PETER SHUMLIN

    Governor Shumlin. Thank you so much, Chairman Issa, Ranking 
Member Cummings. Thank you so much for this invitation today, 
to all members of the Oversight and Reform Committee, and 
particular thanks to my friend and Congressman, Peter Welch, 
who does an extraordinary job for us down here in Washington. 
Thanks for that warm welcome.
    It is great to be here also with Governor Walker. As 
Governor Walker mentioned, we met at the baby Governors school 
out in Colorado, and I don't want to give you any ideas, any of 
you Congress people running for Governor, but if you do, you 
get to go to school. We had a wonderful dinner together, 
Governor Walker and myself and his wonderful wife, and we share 
common challenges. We are among the biggest class of new 
Governors in the history of America and we share a very 
challenging job. In fact, I said to Governor Walker earlier, I 
said, if they had told us at baby Governors school the message 
that we were taking over, we might have rethought it, but it 
was too late. But we are dealing with some really tough 
economic times, as you know. And to help make Governor Walker's 
trip to Washington more valuable, I brought a little bit of 
Vermont maple syrup down, Governor. I just want to make clear 
that we are the No. 1 maple producer in the country, Governor 
Walker is No. 4, and our syrup, it doesn't come any better.
    Chairman Issa. Governor, how did you get that through TSA?
    Governor Shumlin. That is one of the advantages of being 
Governor. Governor Walker can tell you about this. No more TSA. 
That is how I brought the syrup down.
    We are both facing the first 100 days, we have similar 
challenges, creating jobs and raising incomes of those that are 
earning less money in Vermont or, on average, the same money as 
they were earning 10 years ago. That is both of our challenges 
in our respective States and the other Governors share it.
    Mr. Chair, I just want to directly address the question of 
what is causing this fiscal crisis that both Governor Walker 
and I find ourselves in. We know it is a result of the greatest 
recession in American history. The result for us is declining 
revenues and expanding expenses as we face higher unemployment 
rates, higher service calls, and the rest, costs and the rests. 
That is the challenge.
    Now, without getting into how we got here, because I know 
that has been debated and we will save that debate for another 
day, I simply want to talk a little bit about what our 
challenge is as Governors to create jobs, economic 
opportunities, and balance our budgets. And when I look at it, 
I don't start with collective bargaining and I don't start with 
my public pensions; I start with the true costs. In Vermont, 
and this is true of most of the States in the country, health 
care is my biggest rising cost. I have watched health care 
costs in Vermont double over the last decade, from $2\1/2\ 
billion to $5 billion a year. In 2015 my banking insurance 
commissioner tells me Vermonters will be spending an additional 
$1.6 billion on health care, and that is the biggest cost in my 
State budget.
    Now, what does that mean in real dollars? It means $2,500 
by 2015, that is $1.6 billion, $2,500 out of every Vermonter's 
pocket, from those that were born yesterday to those at the 
other end of life, in a State where, on average, our people are 
making the same wages they were making 10 years ago. So I am 
going where the money is for both the State and the people of 
my State to grow jobs and economic opportunities. We are trying 
to get health care costs under control.
    The second driver, believe it or not, is corrections. Our 
corrections budget has doubled in the last decade. Other 
Governors are facing similar challenges. So we are trying to go 
where the money is.
    Now, I just want to talk a little about our experience with 
State pension and retiree health care obligations for State 
employees, because I think it really matters in this debate. 
What we have learned in this area is that there are steps that 
you can take to significantly reduce the cost to taxpayers 
without undermining traditional defined benefit plants, which 
most objective parties agree provide better retirement 
security, serve to retain quality employees, and are more 
efficient than a defined contribution plan. That is what we 
have learned.
    How did we get there and how did we work together to get 
the job done? What we did--and I was then president of the 
senate with a Republican Governor and a Republican speaker--is 
we brought the unions together and we understood that it was 
going to be an example of shared sacrifice, and so did our 
State employees, as Congressman Welch suggested.
    What did we get? In those discussions, the lesson we 
learned was that we get more with maple syrup than we do with 
vinegar. We brought them to the table, we talked it out, and 
here is the result: shared sacrifice, a 3 to 5 percent pay cut 
for all State employees, depending upon your range of salary 
over a 2-year period with no step increases; two, we got higher 
retirement contributions from our State employees; three, we 
raised retirement ages for State employees to help us with the 
problem; four, we reduced health care benefits to our State 
employees and some of our teachers; and, five, what this 
resulted in was a 25 percent reduction in our annual payment to 
pension funds and still have them fully funded.
    So the point I am simply trying to make is you can get this 
job done, you can balance your budget, you can create jobs in 
your State without taking on the basic right of collective 
bargaining. Now, the reason I feel so strongly about that is I 
asked the question, Who got us into this mess and how do we 
deal with it? I can tell you, from my perspective as Governor, 
we just came through the toughest winter in about 20 years; 
lots of snow, lots of ice. Our plow trucks were out almost 
every day. We have eaten through our plowing budgets.
    I have to tell you, I went out with a plow truck, as I am 
sure Governor Walker has done. We get out as Governors. And 
when I got behind the windshield of that plow truck in a 
driving snowstorm, with my plow truck driver, who was working 
seven or eight different levers with a 14-foot plow in front of 
that truck and a tractor trailer truck passing him on the right 
and some yahoo on the left, I have to tell you, in a full 
whiteout, working a 12 to 14-hour day for about $14 an hour, 
that plow truck driver didn't get us into this mess. When I go 
and visit schools and I see the challenges our kids are dealing 
with, they didn't get us into this mess. My public employees 
didn't get us here. We have asked them to share the sacrifice 
in getting us out, but it doesn't mean that we take away 
collective bargaining, which is what made the middle class in 
America strong and the folks that are under assault in this 
recession.
    So, in closing, Mr. Chair, I will simply say this: we have 
found, as I mentioned, that you can bring folks together around 
a table, compromise, get the job done, balance your budget, 
create jobs, be fiscally responsible; but you don't have to 
take on the basic principle of collective bargaining. You don't 
take on your firefighters, you don't take on your police 
officers, you don't take on your teachers; and you don't take 
on your hardworking employees; you work together with them with 
maple syrup, not vinegar. It works. Thank you.
    [Applause.]
    [The prepared statement of Governor Shumlin follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Issa. Thank you, Governor.
    I will now recognize myself for the first round of 
questions.
    Governor, the sign behind me, we don't normally point to 
the sign, it is just the title here today, but the last part 
where it says choice or necessity, the cuts you made, in 
cooperation with your various union groups of public workers, 
because probably, like most States, 80 percent of what you 
spend, you spend directly or indirectly on the people who work 
for the government. Was it a choice, was it a necessity to in 
fact find a way to provide essential services for less money 
and not go into deficit spending?
    Governor Shumlin. It was a necessity in the respect that 
while we don't have a balance budget amendment, as Congressman 
Welch suggested, we have to balance our budgets to get the job 
done. So we made the choices that we do in Vermont because we 
really like our AAA bond rating. I am a business person. We 
want to be fiscally responsible, but we understand that we 
can't take care of the most vulnerable unless we balance our 
budget.
    Chairman Issa. Good.
    I would like to ask Governor Walker the same question. We 
are rather in love with the title today, so why don't we get 
that answer out?
    Governor Walker. Well, I think in a rhetorical sense it 
certainly is necessary. But we have seen in the past, in my 
State's history, prior to us making these critical decisions 
right now, for many it was a choice, and the reason they failed 
to make the right choice is why we are here today, and that 
includes Democrats and Republicans before. For many, many years 
lawmakers and Governors in our State have failed to make the 
right choice, deferred tough decisions to the future. They 
raided segregated funds; they delayed payments; they used one-
time Federal stimulus aid 2 years ago to balance their budget, 
and that is, along with the meltdown of the economy, largely 
why we and other States, I think, are facing major budget 
crises.
    Chairman Issa. Thank you, Governor. One of the reasons we 
titled today's hearing that way, knowing you would be here, is 
I happen to be from California, and we too, in our State, under 
Republicans and Democratic Governors, have been increasing debt 
while claiming to have balanced the budget. And I am an old 
businessman like Governor Shumlin. If your assets aren't, per 
se, going up and your liabilities are going up, you don't claim 
you are in balance; and that is a problem that I have seen in 
many States, and particularly my own.
    Governor Shumlin, you mentioned one thing in your opening 
statement that was very interesting. You said a defined 
benefits plan is more efficient. I would be interested to see 
what efficiency do you get by having a plan which promises 
something in the future that no one can be sure of? Actuarials 
try, but obviously they often fail because you see these large 
adjustments. What is efficient about that versus knowing that 
an amount of money is going into a fund and that amount of 
money will be invested fairly and, in fact, will be available 
as it yields? Which one is more efficient from a standpoint of 
predictability?
    And I am not talking about 401Ks or individual, I am 
saying, for example, trade unions in my State, if you are an 
electrical contractor, you can't control a contractor that 
hires you today versus tomorrow. So even though you try to be 
defined benefits, you are a defined contribution plan because 
you only get in the year in which you are employed as an 
electrical contractor from that company that is employing you, 
you only get that much money; and the next year you can't claw 
back the way your employees can claw back.
    So why did you say that it was efficient? The efficiency 
question kind of lost me.
    Governor Shumlin. Well, it is efficient for two reasons. 
The first is it gives the employee a guaranteed retirement 
plan. And I think there has been tremendous misunderstanding of 
that around the country----
    Chairman Issa. OK. And the second?
    Governor Shumlin [continuing]. Which is that in Vermont, as 
an example, our average pension----
    Chairman Issa. No, I understand why it is more desirable 
for the recipient.
    Governor Shumlin. Right.
    Chairman Issa. Here in the Federal Government we have a 
defined benefits plan.
    Governor Shumlin. Right. The efficiency from my 
perspective----
    Chairman Issa. Yes.
    Governor Shumlin [continuing]. As Governor, is simply that 
the returns for our investment, not taking a picture of it 
during the worst recession, but over time--and unlike General 
Motors, you don't go bankrupt, States don't go bankrupt; they 
never have and I believe bankruptcy has been greatly 
exaggerated----
    Chairman Issa. Well, it is not within the Constitution.
    Governor Shumlin. Thank you.
    Chairman Issa. It gives you a choice.
    Governor Shumlin. Therefore, we are held to a slightly 
different standard than a General Motors retirement plan, the 
point being the average return for us has been around 8\1/2\ 
percent, and it gives us the ability to efficiently deliver a 
predictable defined benefit for an employee who is often 
working for less than you would get paid for their lifetime----
    Chairman Issa. OK, I think I have your answer. I would like 
to get Governor Walker, along that line, why is that more 
efficient than knowing the amount that you give in a given year 
under the budget is the amount, and even if you invest it and 
you try to make the same returns, ultimately the State knows 
that the next year they are going to give a similar percentage? 
And like I say, the Federal Government has defined benefits, 
but why is that more efficient versus perhaps making sure that 
you budget without these ups and downs that come when the yield 
doesn't occur?
    Governor Walker. Well, I think when you look at benefits, 
be they in the public or the private sector, defined 
contribution is ultimately more efficient. That is not what I 
am advocating. In our case, just like you mentioned with the 
Federal Government, just like Vermont, we have a defined 
benefit as well, particularly for retirement with a pension. 
Although I think it is important to note what we are asking for 
is not changing the benefit itself; we are asking for people, 
again, myself included, to pay more as a contribution for the 
cost of that.
    Representative Quigley talked in his opening statements 
about the State of Illinois. I think that is an important 
distinction. In Illinois, earlier this year, Governor Quinn and 
the legislature raised taxes on individuals and on businesses 
in a supposed attempt to balance their budget. Yet, today they 
have a pension system that is half funded.
    We went the opposite way; we lowered the tax burden on job 
creators, we made it easier to do business in the State, we 
show that Wisconsin is open for business, and we have a pension 
system that is essentially fully funded. That is important 
because you get to the heart of this, that is why Illinois is 
in that category of California and others, because they failed 
to make the tough decisions to get their finances under 
control, and that is going to affect their economy.
    Chairman Issa. Thank you, Governor. As I recognize the 
ranking member, I just want to make one thing clear for the 
record. The Federal Government currently, for regular Federal 
workers, 28 percent of what goes into our health care benefits 
are paid for by the Federal worker. In the case of the Post 
Office, it has historically been 20 percent, but one of the 
major unions has renegotiated it to 25 percent. That is what is 
happening here centrally in Washington.
    I recognize the ranking member.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    You know, the thing that I think stands out here is the 
fact that, and I say this to both Governors, that sometimes we 
may lose sight of and that is that, just like the postal 
workers, we had them before us a few days ago, they were able 
to shed 100,000 employees out of 700,000 in 3 years, and one of 
the things that they said is that they are Americans too, and 
they don't mind sacrificing.
    And speaking of sacrificing, Governor Walker, when I 
listened to your testimony, you made it sound as if you had 
made very reasonable offers to the unions, but that they have 
been unreasonable by rejecting your offers. For example, you 
asked employees to contribute 5.8 percent for pension and 12.6 
percent for health insurance premiums. You went on to say that 
most workers outside of government would love our proposal. You 
talked about your brothers and, like many other workers in our 
State, he would love a deal like the one I offered the 
government workers.
    The thing that I did not hear, though, was that the unions 
agreed to double their share of the health insurance premiums 
and to increase their contributions to the pension system. That 
is not true? Well, what did they do? I want to hear what you 
have to say because I am reading an article from your local 
paper and I am just wondering what----
    Governor Walker. Sure. I will answer the question, 
Representative. Two of the statewide union leaders made a 
statement a week into the debate about suggesting that they 
thought they could accept that. In the weeks that followed, up 
until the bill was signed into law, nearly every local union 
that settled the contract settled it without a pension or a 
health care contribution. To me, actions speak louder than 
words. Those two statewide leaders could not speak for the 
unions and nearly 1,000 municipalities, 424 school districts 
and 72 counties. They are the ones who decide at the local 
level, and up until the bill was signed into law, they were not 
following the actions of their leaders. To me, actions spoke 
louder than words.
    The other key difference here is we got into this trouble, 
and I acknowledge both parties in our State, Republicans and 
Democrats drove us into this by failing to make tough 
decisions. If we have a short-term fix, we just push the 
problem off to the future. What we give our permanent, long-
term solutions the tools that State and local governments need, 
they can only get it if you make those sorts of changes. And in 
terms of workplace protections, Wisconsin has the strongest 
civil service protections in the country. That was passed more 
than a century ago. Those remain even with this new law in 
place. That protects grievances, that protects civil service 
protections in both hiring and firing decisions. All those 
protections remain even after these changes, Mr. Cummings.
    Mr. Cummings. Well, I am looking at an article from the 
Wisconsin Journal's Sentinel. I guess that is the local paper?
    Governor Walker. One of them.
    Mr. Cummings. In this article, Democrat State Senator Jon 
Erpenbach makes crystal clear that all the State and local 
public employees, including teachers, have agreed to the 
financial aspects of your proposal, and all they were asking 
for is that you not strip them of their collective bargaining 
rights. That is not accurate?
    Governor Walker. Again, that was the statement made by the 
statewide leaders. The actions they took after those 
statements, though, contradict those statements. If they agreed 
to the 5 and the 12, you would have seen in Janesville and La 
Crosse and all the other communities that settled contracts 
that they would have put their money where their mouth is and 
actually did that. That did not happen until after the bill was 
signed into law. So I think you are right about the story 
accurately explains what was proposed at the time, but in terms 
of what they actually did, their actions did not coincide with 
the statements of their statewide union leaders.
    Mr. Cummings. Did you ever consider dropping your 
collective bargaining demands? Did you ever consider that?
    Governor Walker. For us, to me, I was a county elected 
official for 8 years. We talk about shared sacrifice? Because 
my county faced a crisis, I gave, over those 8 years, $370,000 
of my personal salary back. I made a personal sacrifice, just 
like I am going to pay for more for pension and more for health 
care as Governor of the State of Wisconsin. During that time I 
repeatedly met with my unions and asked them to make modest 
changes, modest changes in pension and health care 
contributions. In fact, 1 year I even asked them to consider a 
couple 35-hour work weeks in order to avoid massive layoffs, 
and every time the response I got from AFSCME was go ahead, lay 
four or 500 people off, we don't care. To me, that is why, when 
I talk about protecting the middle class, I am not just talking 
about middle-class taxpayers outside of government. Those 
middle-class workers that would have been laid off are people I 
represent as well, just like I do in the State of Wisconsin.
    If I have to choose between massive layoffs or making these 
sorts of reforms, I would much rather stand on the side of 
protecting those middle-class jobs and protecting middle-class 
taxpayers, because, remember, the vast majority of people in 
the middle class in my State and across the country have been 
paying the bill for the expansive government year after year 
after year, and, to me, those are the people I am standing up 
to protect.
    So you will never hear me speak an ill word throughout this 
entire debate, no matter what others may say out there, I have 
never said an ill word of any of the decent public servants who 
work, the 300,000 decent people in my State who work for both 
State and local government. I have great respect for them. I 
just know that in this together we have to make changes to make 
sure their jobs are protected into the future.
    Mr. Cummings. Thank you.
    Chairman Issa. I thank the gentleman.
    The Chair now recognizes the chairman of the subcommittee, 
Mr. McHenry, for his round of questioning.
    Mr. McHenry. Thank you, Mr. Chairman.
    Governor Walker, I certainly appreciate your testimony. 
Governor Shumlin, thank you so much as well.
    There is this discussion of tough choices. Now, when we are 
looking at what the government does, there are services that 
municipalities and States render to their people as a matter of 
collection of their tax revenue, whether it is local 
governments providing police and protection through the police 
or making sure that if somebody's house is on fire, you have a 
fireman show up. So there are tough choices between the 
services that the government provides and the obligations it 
has.
    So, Governor Walker, can you discuss this challenge for a 
Governor who walks into a very tough budget situation, the 
challenge between do you continue to provide these services 
people expect, taxpayers expect, or do you continue providing a 
benefit for a select few, meaning you have a pension 
obligation, you have health care benefits and these types of 
things that the people that are getting the benefit are largely 
not paying to receive, and then you have the taxpayers who are 
footing the bill for that? Can you discuss that challenge?
    Governor Walker. Sure. Again, I will tell you not only as a 
Governor for the last couple months, for as a county official 
for 8 years prior to that, for us, we saw the distinction. We 
saw the challenge when, under the environment before we passed 
this bill into law, for local governments in particular, we 
were forced with the sacrifice like I faced or the problem we 
faced where, when we had a tough budget time, and we had it 
long before 2008 because of the pension scandal I inherited 
back in 2002, so we were dealing with this ahead of the curve 
even before the economic meltdown. When we tried to make, as I 
mentioned before, I think, some very reasonable changes when it 
came to what us, as government employees, paid for things like 
pension and health care, even some other adjustments 
temporarily as part of the work week, we did that for two 
reasons: one, to try and protect as many jobs as possible and, 
two, in turn, because those jobs provide services, to try and 
protect core services for the people we serve. That is 
essentially the impetus for me when I looked at the budget 
crisis we were facing going into the next 2 year cycle of $3.6 
billion. I knew we had to make a fundamental change if we 
weren't going to go on the path that many other Governors 
across the country are, Democrat and Republican alike, where 
they are cutting billions of dollars from schools, from 
university systems, from local governments and other areas that 
affect all the things you mentioned.
    And instead they are saying, OK, there are the cuts, now 
you either make it up through massive layoffs or you make it up 
through massive property tax increases. I said in my State I 
can't afford to have anybody, either in the public or the 
private sector, any more massive layoffs; I need more people 
working. We are changing the business climate. In fact, many of 
the issues Republican and Democrats alike, we brought together 
to pass legislation that made us one of the most proactive, 
pro-job agendas in the country. We had to do all that if we 
want to protect jobs.
    By the same token, we know one of the other things that 
would cut down that recovery would be a massive tax increase. 
We saw it 2 years ago when my predecessor raised taxes on 
corporations and on individuals; we saw the jobs leave, we saw 
the exodus. We want those people to come back.
    Mr. McHenry. And I understand competitiveness, especially 
in the Midwest, in terms of job creation, so there is 
competition on tax rates, obviously, right?
    Governor Walker. Absolutely. We love the fact that while 
our corporate tax rate is 7.9 percent, the effective tax rate 
in Illinois is now 9\1/2\ percent. We love that distinction 
because we want more people to come up to Wisconsin.
    Mr. McHenry. Well, thank you. The other question I have is 
as opposed to a private sector pension, where those that are 
receiving the pension benefit are the ones that are affected by 
the changes, they are the only ones really affected, the 
difference with that and public sector pensions is that we, as 
taxpayers, have to foot that bill. So it is not simply a lie 
perpetrated to the recipient of the pension, saying perhaps too 
rosy a scenario on return on investment or underfunding these 
pensions, so on and so forth, it is also a lie to those 
taxpayers that have to foot the bill for those underfunded 
pensions or less than funded pensions.
    So my question to you, Governor Walker, is do you believe 
that there is sufficient transparency and disclosure with 
public sector pensions today?
    Governor Walker. Oh, I think at both the State and local 
level, as well, there needs to be more transparency. One of the 
things we are the most proud about this budget is not only that 
we balanced the $3.6 billion deficit, but the fact that 2 years 
ago we had the largest structural deficit in State history. In 
my budget I present at the beginning of March to the State 
legislature, we reduced the structural deficit by more than $2 
billion, a 90 percent reduction. It is where Moody's pointed 
out that they called it credit positive. When is the last time 
you heard anything called credit positive related to a 
government budget? They called it credit positive because we 
finally took control of what we should have been doing for 
years, and weren't from both political parties. That is 
incredibly positive. But the more people know about it, right 
now, actuaries and a lot of others pay attention to pensions 
and retirement systems. All of us should be because that is 
just deferring, in many cases it has been about deferring the 
problem to the next generation. We can't do that anymore.
    Mr. McHenry. Thank you. I know my time has expired, but 
certainly those that are arguing now about public sector 
pensions, you have those that are saying these pensions are 
underfunded and it is bad, those are the optimists. Those that 
look at the pension system and say this is a calamity are the 
other side of the coin. No one is saying that public sector 
pensions are too well funded or even sufficiently funded. So 
thank you for your----
    Governor Walker. Well, and the one thing important to 
remember, I mentioned the Illinois-Wisconsin distinction, not 
only do they half fund it, but you have the speaker of the 
general assembly, a Democrat, a long-time union ally, spoke a 
month ago about the possibility of reducing the pension benefit 
itself. That is what happens when you don't take these issues 
seriously. That is not a Republican or Democrat issue; this is 
someone who has been a stalwart defender of unions who is now 
talking about, in Illinois the prospect of reducing the 
benefit. That, to me, would be unacceptable. We made a promise 
to our public servants about what the retirement benefits were 
going to be. We should protect that no matter what party we are 
in; we just have to fix it in the way in.
    Chairman Issa. Thank you, Governor.
    We now recognize the former chairman of the full committee, 
Mr. Towns, for 5 minutes.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Governor Walker, why do people in general, I have talked to 
people from your State, people just around the Nation, feel 
that your focus is on helping the corporations and basically 
the wealthy at the expense of the middle class and the poor? 
Why would they have that perception of you?
    Governor Walker. It would be erroneous. Maybe it is because 
they are watching some of the TV ads that groups from 
Washington played in the State of Wisconsin, because what we 
have done in the first month, first 2 months almost, Democrats 
voted for many of the measures we pushed through that create a 
better business environment in our State. Even the tax cuts we 
put in place were things like removing the State tax and health 
savings accounts, which isn't about corporations; it is about 
small businesses, it is about family farmers, it is about sole 
proprietorships. The incentives we put in for job creation were 
targeted specifically for jobs. So it is ultimately about the 
workers when a job is created and there is an incentive to do 
that.
    The other things we did in our legislative package were all 
things that were about making it easier to do business in the 
State of Wisconsin. And in our budget the things that we are 
doing are about protecting jobs and protecting the middle 
class.
    Mr. Towns. When you say make it easy, what do you mean by 
that, giving tax breaks to the big businesses?
    Governor Walker. No, we don't give tax breaks to big 
business. What we do is something that is targeted for small 
business and big alike. We have a specific job tax credit that 
if you create a job, there is a tax incentive in there, but it 
is tied specifically to job creation. So the person who 
benefits the most is the recipient of that job. If there is not 
a job there, they don't get a tax break.
    Mr. Towns. What is the unemployment rate in Wisconsin?
    Governor Walker. We have a 7.4 percent unemployment rate. 
Still too high; obviously less than the national average. First 
2 months of this year we have had about 13,000 jobs created in 
the private sector, about 8,200 new jobs in manufacturing, and 
next week we will put out our new job numbers and I think we 
are going to be well on the right path.
    Mr. Towns. Did you have to lay off municipal workers or 
government employees in order to put your budget in place and 
to get the 13,000 that was increased? I am trying to get the 
real balance.
    Governor Walker. No, no, you are right. In our case, in 
putting this budget together, we actually avoided it. For the 
remainder of fiscal year 2011, the deficit of the budget put 
together by my predecessor, Jim Doyle, we had to make up about 
$137 million. We knew, to set the stage for the $3.6 billion 
deficit, we had to balance for the next 2-year budget we had to 
do a series of things. We made some other changes, some other 
reforms. So what we are talking about here today was one part 
of it; it saves about $1.7 billion over the next 2 years for 
both State and local government, but for State government the 
impact through the final couple months, through June 30th, 
which is the end of our fiscal year, was a $30 million savings. 
By getting that savings, we avoid having to lay off 
approximately 1,500 State workers. So we avoided layoffs that 
way.
    Mr. Towns. Did you ever think about using maple syrup?
    Governor Walker. Well, I have some now. It is pretty good. 
It is not as good as the cranberry juice we make in Wisconsin, 
but it is pretty good.
    Mr. Towns. Rather than using the vinegar.
    Governor Walker. Well, I have tried. As a county executive 
I tried for 8 years, and the unions basically told me lay off 
people, and to me that is just unacceptable. If you are truly 
for the workers, to me, in this economy, the last thing I want 
to do is see people laid off. And this was a much, much better 
approach.
    Mr. Towns. Governor Shumlin, how did you get people to have 
a different attitude? I just don't quite understand why people 
in Wisconsin would think that way when Wisconsin is just like a 
lot of other States in this Nation.
    Governor Shumlin. Well, thank you, Congressman Towns. I am 
sitting here listening to Governor Walker and I am sitting here 
realizing we all have similar challenges as Governors. Unlike 
Congress, we all have to balance our budgets. So the real 
question is what are we arguing about? And my point is if you 
want to go after collective bargaining, which I believe helped 
build this country, helped build the middle class that has been 
under assault in this recession, just come out and say it, I am 
going to go after collective bargaining. But if you want to 
balance your budget, you bring people in, you talk to them, you 
have a dialog.
    I can guarantee you this, what Vermonters are looking for 
and what they expect is the same thing that they expect in 
Wisconsin and the same thing they wish for and expect in 
America: they want reasonableness, they want compromise, they 
want bright people working together to solve problems. And when 
you use vinegar, when you refuse to meet with unions, when you 
don't sit down and talk with them, when you take on an outright 
assault on a basic principle in a Democratic society, which is 
collective bargaining, the thing that my grandfather, when he 
got off the boat, and others now rely on and relied on to make 
a decent living, to come from a beet farmer to success in 
America, the thing that built our country, well, that is a 
different debate.
    So I think really what we are talking about, because I sit 
and listen to Governor Walker talk about how he is approaching 
his challenges, all we Governors are doing the same things 
here, folks. The question is are you going to bring people 
together to solve problems or are you going to go after an 
assault on a basic principle in America, which is collective 
bargaining. I think we are trying to do two different things. 
If you want to go after collective bargaining, just come out 
and say, hey, we are taking you on. But don't try and blame the 
worst recession in American history on the need to go after 
public pensions.
    I am listening to the question over here. You know, let's 
be honest about this. Taxpayers have always paid for a part of 
public pension retirement plans. This isn't something new, 
folks. This started with pensions, with asking public employees 
to give up economic opportunities that they might have if they 
did what I did and went into public sector and built a business 
and made a lot of money. In exchange for getting a lower wage, 
in exchange for less economic opportunity, they get a 
guaranteed $25,000, $22,000, on average, retirement once they 
are all done.
    Now, it is not new news that taxpayers pay a portion of 
that and that employees pay the other portion. What is new is 
that in my State and Governor Walker's State we are asking the 
employees to pay more than they did before.
    Chairman Issa. The gentleman's time has expired.
    Mr. Towns. Let me just say this, Mr. Chairman, in closing. 
Governor, keep using maple syrup.
    Governor Shumlin. We are going to try.
    Mr. Towns. Thank you.
    Chairman Issa. The gentleman from Utah, Mr. Chaffetz, for 5 
minutes.
    Mr. Chaffetz. Thank you.
    Governor Shumlin, I would like to talk to you, if I could, 
about the pension plan in your State. I come from Utah. We 
have, I think, two things that have served us well. One is in 
our State constitution we have a balance budget amendment that 
has forced the issue to actually balance budget. No. 2, we have 
a defined contribution plan, as opposed to a defined benefit 
plan, and, consequently, our State has one of the lowest tax 
rates, business is thriving, and we have hundreds of millions 
of dollars in our rainy day fund.
    Now, I went back and looked at the Pew study on Vermont and 
you actually are doing better than most States, funded about 92 
percent. But explain to me. You had made a comment to the 
chairman here about the predictability of the pension program, 
and I want to talk about the health of that program, because I 
can't imagine that a defined contribution plan is not superior 
to a defined benefit plan because how do you account for that?
    Governor Shumlin. Well, all I can tell you is that it 
served my and other States well that have used defined benefit 
plans, and that we have had over time----
    Mr. Chaffetz. But the healthy over the course of time--if 
somebody told me they thought they were going to get an 8 to 
8\1/2\ percent return, I said they are probably smoking those 
maple leaves. I can't imagine that you are getting 8 to 8\1/2\ 
percent return on that investment. Nobody is getting that kind 
of return right now.
    Governor Shumlin. If you look at the averages for State 
pensions across the history of defined benefit plans, you will 
find that we get about an 8 percent return, on average. And 
obviously there are good years and bad years, but unlike 
General Motors, since we are not going bankrupt, you have to 
look at the averages, and that is what we have gotten. That is 
why Wall Street, when you----
    Mr. Chaffetz. But do you think you are going to get that 
going forward?
    Governor Shumlin. May I just finish, Congressman?
    Mr. Chaffetz. Yes, but going forward do you think you are 
going to get that?
    Governor Shumlin. We do. And that is why Moody's and the 
other bonding agencies allow us to assume that rate of return 
on our investments. We are not sort of making this up as 
Governors; that is what Wall Street requires us to do. It is 
based on history.
    The second point that I think is really important, if you 
are a Governor, you have to deal with the real world, and the 
real world is if you were to move from a defined benefit to a 
defined contribution plan, hypothetically, it would cost you a 
ton of money in the first 10 to 15 years for the reason that 
the current employees help to support the pension obligations 
of the States in a defined benefit plan. If you pull the new 
ones out, you immediately have a higher up-front cost than you 
would otherwise because you have to support your existing 
defined benefit as you move to a defined contribution. So there 
are a lot of reasons why we Governors are not thrilled at the 
idea, and you are hearing this from Republicans and Democrats, 
this notion that if you just moved to a defined contribution, 
all our problems are going to be solved isn't in the real world 
for us Governors.
    Chairman Issa. Would the gentleman yield, very quickly?
    Mr. Chaffetz. Yes.
    Chairman Issa. Governor, if you are fully funded, that is 
not true. If you are fully funded, you would be able to stop 
putting money in the moment you make the switch, because if you 
are fully funded, your 8\1/2\ percent would pay out all your 
benefits. So you can't have it both ways.
    Governor Shumlin. We are adequately funded.
    Chairman Issa. Well, OK. As long as we understand that 
adequately is kicking the can down the road so that studies 
show that if you only got the rate of return of the Treasury, 
you would run out in 2023 with the current situation. You 
depend on a high return that you cannot bank on in your own 
statement.
    I yield back.
    Governor Shumlin. Well, if I can just finish. If I can 
answer that, Mr. Chair.
    Chairman Issa. It is the gentleman's time.
    Mr. Chaffetz. Go ahead.
    Governor Shumlin. If I can answer that, we don't make this 
stuff up as Governors. Both Governor Walker and I travel down 
to Wall Street to try and convince them that we are running 
sound economic States, that our bond rating depends on our 
economic future. We manage our retirement funds based upon the 
expectations of Wall Street. Now, Vermont is obviously doing 
that right since we have a AAA bond rating. One reason is that 
we use the actuarial projections that Wall Street gives us, 
which are higher than a Treasury return. And I am just telling 
you that if you really study this issue, you will find that 
Vermont is not doing anything radical here, we are doing what 
Wall Street expects us to do, and it is a higher return than 
the yield you would get on a Treasury yield, much higher.
    Mr. Chaffetz. Governor, Chairman, as I conclude here, I 
don't want to go over my time, I really do think that a 
flashing red light for investors for this country, for the 
Congress, because we fully anticipate that States will try to 
be running back to the Congress to get--we can't even fund 
ourselves. We can't even manage our books here. I don't want 
the States to ever think the can come to the Federal Government 
to get a bailout. I think the States that have not made that 
difficult choice and made the difficult transition to a defined 
contribution plan are putting themselves in peril and at great 
risk. That is our experience in Utah. We made that difficult 
choice. It is on a more sound trajectory, and I think you will 
find that States who did make that effort and made that 
transition will be much more sound financially. That is my 
perspective of it. But I think it is going to be one of the big 
issues moving forward, Mr. Chairman.
    I yield back.
    Chairman Issa. I thank the gentleman.
    We now recognize the former mayor of Cleveland, Ohio, 
Dennis Kucinich, for 5 minutes.
    Mr. Kucinich. Thank you, Mr. Chairman.
    Governor Walker, you said the union leaders agreed to the 
financial cuts, but then you blamed the local unions for not 
following through on these pledges. That is because you refused 
to drop your demand to strip workers of collective bargaining 
rights that had nothing to do with the budget, and refused to 
negotiate and rejected the unions' offer. Now, Governor Walker, 
if the unions in Wisconsin agreed to the financial cuts you 
sought, I don't understand how this can't continue to be 
characterized as a debate about State budget deficits. This is 
supposed to be a hearing about State and municipal debt. I 
don't understand how repealing collective bargaining rights for 
public workers shows us anything about State debt.
    Let me ask you about some of the specific provisions in 
your proposal to strip collective bargaining rights. First, 
your proposal would require unions to hold annual votes to 
continue representing their own members. Can you please explain 
to me and members of this committee how much money this 
provision saves for your State budget?
    Governor Walker. That and a number of other provisions we 
put in, because if you are going to put in place a change like 
that, we wanted to make sure that we protected the workers of 
our State so that they had the right to know what kind of value 
they got out of it. It is the same reason we gave workers the 
right to choose, which is a fundamental American right, right 
to choose whether or not they want to be a part of a union----
    Mr. Kucinich. Could you answer the question?
    Governor Walker [continuing]. And whether or not they went 
up to $1,000----
    Mr. Kucinich. How much money does it save, Governor? Just 
answer the question.
    Governor Walker. It doesn't save any.
    Mr. Kucinich. OK.
    Governor Walker. In the same way that you----
    Mr. Kucinich. That is the point.
    Governor Walker. If you read the Federal budget----
    Mr. Kucinich. It obviously has no effect whatsoever.
    Governor Walker. I will answer your question.
    Mr. Kucinich. I am reclaiming my time. It obviously had no 
effect whatsoever on the State budget.
    I want to ask about another one of your proposals. Under 
your plan you would prohibit employees from paying union member 
dues from their paychecks. How much money would this provision 
save your State budget?
    Governor Walker. It would save employees up to $1,000 per 
year they could use to pay for their pension and their health 
care contributions.
    Mr. Kucinich. Governor, it wouldn't save anything, or a 
minor administrative cost, if any. It is obvious what the real 
intent is here, and I will back it up.
    Governor Walker. It is to give workers a right. It is to 
give workers the right to choose.
    Mr. Kucinich. I will back it up.
    Mr. Chairman, right here from the State of Wisconsin's 
Legislative Fiscal Bureau, this is a nonpartisan State budget 
agency much like the Congressional Budget Office, the Bureau 
was asked to identify provisions in the Governor's bill that 
are nonfiscal, nonfiscal policy items that have no State fiscal 
effect. This letter confirms the obvious, that Governor 
Walker's effort to repeal the rights of State workers is a 
nonfiscal, nonfiscal policy item; no effect on the State budget 
shortfall.
    I ask unanimous consent that this letter be included in the 
record.
    Chairman Issa. Reserving the right, we will inspect it and 
plan to include it in the record.
    Mr. Kucinich. That is unusual you would reserve the right 
to object.
    Chairman Issa. The gentleman----
    Mr. Kucinich. I am claiming my time.
    Chairman Issa. The gentleman will suspend. Hold the time. 
We fully expect to include it in the record. Because it is not 
a publication that is widely distributed, we simply would like 
to receive it, and as soon as it has been quickly vetted during 
this hearing, it will be accepted. That is a consistent policy 
from both sides.
    Mr. Kucinich. I would like to respond.
    Chairman Issa. Yes.
    Mr. Kucinich. In the 14 years that I have been on this 
committee, I have never had a chairman reserve the right to 
object to putting an official document in the record that was 
central to the purpose of this hearing, determining whether or 
not you stripping collective bargaining rights, Governor, is a 
financial issue or not. It is not; it is a political issue. 
That is what I am proving.
    Chairman Issa. The gentleman is incorrect. Chairman Waxman 
did it repeatedly. In most cases, just as here, by the end of 
the hearing, items which were not part of widely distributed 
documents were accepted. I expect to do the same and I would 
work with the gentleman to get it done before the end of the 
hearing.
    The gentleman may continue.
    Mr. Kucinich. Well, I just made it a matter of public 
record anyway.
    The title of this hearing is choice or necessity. I think 
that what we have been able to demonstrate here is that the 
attack on collective bargaining rights is a choice, not a 
budget issue. There are budget issues as well that need to be 
addressed in Wisconsin. For example, according to the National 
Nurses United in U.S. States facing a budget shortfall, 
revenues from corporate taxes have declined $2\1/2\ billion in 
the last year. In Wisconsin, two-thirds of corporations pay no 
taxes and the share of State revenue from corporate taxes has 
fallen by half since 1981. That is published in The Nation by 
John Nichols. I won't ask to submit it by unanimous consent. 
Also, in The Real News Network, they have a report here that 
points out that the budget shortfall of $137 million in 
Wisconsin could have been covered if the State had just kept 
going its State legislated an estate tax, which they let expire 
after 2008. Also points out that if they had gone to collect 
the estate taxes from their wealthiest citizens, they could 
have paid down the debt.
    Now, I just want to say, in conclusion, Mr. Chairman, that 
we really are here at the center of a great debate over the 
purpose of government. Whether there is such a thing as a 
public sphere with public servants who perform duties on behalf 
of the public, using resources that belong to the public, or is 
government going to be auctioned off to the highest bidder, to 
corporations who privatize and, inevitably, drive up the cost 
of government, drive up the cost of services, drive up taxes. 
That is where this debate is headed nationally. I think that 
Governor Walker has inadvertently done a public service by 
exposing the extent to which this mind-set of privatizing what 
is the public sphere, bringing this issue to the forefront.
    So thank you for being here, both Governors.
    Chairman Issa. I guess that is a thank you.
    The Chair now recognizes the gentleman from Oklahoma----
    Mr. Kucinich. Thank you, Mr. Chairman.
    Chairman Issa [continuing]. Mr. Lankford, for 5 minutes.
    Mr. Lankford. Thank you, Mr. Chairman.
    And thank you, both Governors, for taking away your time to 
be able to be here with us.
    Governor Shumlin, I want to be able to do a point of 
clarification. You began your oral statement talking about how 
you didn't want to balance the budget based on the backs of 
those great employees, and I do concur, we have some terrific 
Federal employees as well, but the employees as well by dealing 
with benefits; you wanted to go after the real crucial issues. 
But then you ended your statement by saying but in the previous 
Governor's time, they did deal with payment pensions, 
retirements, all those things. So while you are not starting 
your time, you did say but we have just dealt with that few 
months ago, is that correct?
    Governor Shumlin. It has been an ongoing effort. Both the 
previous Governor, Republican Governor--don't forget, I was 
president of the senate----
    Mr. Lankford. Correct.
    Governor Shumlin [continuing]. So I actually helped 
negotiate the----
    Mr. Lankford. Correct.
    Governor Shumlin [continuing]. With the speaker, the 
agreement with the teachers union.
    Mr. Lankford. I was just trying to provide some 
clarification because you were talking about you didn't want to 
do that on the backs of workers at this point. You sought 
corrections and you saw health care as a major issue, but you 
just dealt with some of the retirement issues recently as well.
    Governor Shumlin. I don't mean to suggest that we did not 
ask our State employees to make sacrifices, we did and they 
did.
    Mr. Lankford. Great.
    Governor Shumlin. All I am suggesting is that we did it by 
bringing them to the table.
    Mr. Lankford. Sure. OK. So it is just the method on that 
side in the cooperation that the others had with all the 
leadership as well. Obviously, it takes two to tango on that 
one, as well people to be able to come together.
    Let me ask you a quick question. Do you think the Federal 
Government should be involved in bailing out States when they 
have debt issues? Is there a point in time that you say this 
State is so far in debt and so far out of balance the Federal 
Government should step in and bail them out?
    Governor Shumlin. That is a question I am going to leave to 
you. That is why I never want to run for Congress.
    Mr. Lankford. Actually, that is a question I am asking you 
because, as a Governor, you obviously represent the intents of 
a State.
    Governor Shumlin. I will answer it this way. I don't think 
you are going to have to. And I think that the case for the 
bankruptcy of States is greatly exaggerated for political 
reasons. When I go to Wall Street and I say, hey, as I did a 
few weeks ago, we are in pretty good shape in Vermont, 
Wisconsin is in pretty good shape, tell us about some of the 
States we are really worried about, California, New York, 
Illinois, and others, and they say, this is Wall Street speak 
and the rating agencies, we think that the case is being 
exploited for political reasons; that there are not States that 
need to go bankrupt.
    Mr. Lankford. Right.
    Governor Shumlin. That we are going to see our way through 
this and that the case for pension crisis is being overstated 
by Washington.
    Mr. Lankford. OK.
    Let me ask the same question to Governor Walker. Do you 
think the Federal Government should bail out individual States?
    Governor Walker. No.
    Mr. Lankford. Let me ask a followup question to both of 
you, as we have time, and that is are there things we are doing 
as a Federal Government that drives up your cost as a State? 
What I am looking for and what my committee has been dealing a 
lot with are unfunded mandates, things that say I would like to 
get my budget under control, these things I can manage, these 
things I cannot because the Federal Government has these set of 
requirements. Are there things we are doing to cause you more 
debt and more problems in spending?
    Governor Walker. I see I have 2 minutes. There is no way I 
can answer that question in 2 minutes----
    Mr. Lankford. I will allow your staff to submit all you can 
for the record on that.
    Governor Walker. No. 1 thing you could give us, block grant 
Medicaid.
    Mr. Lankford. OK.
    Governor Walker. If you give us a block grant for Medicaid, 
that is--I had to put $1.2 billion more of general purpose 
revenue, that is State aid, State funding, into this next 
budget even though I had to cut everywhere else. It is the 
biggest part of my budget growing; it is the biggest challenge 
out there. We have maintenance of efforts that require us to 
maintain things by the Federal Government when we have other 
things that would work better to manage those costs. We need to 
get to a point--we have led the country, places like Gunnerson, 
Luther have been ahead of the curve when it comes to the idea 
and concept of medical homes, paying for performance, paying 
for outcome, not paying for procedure. If we had that option, I 
think any of us----
    Mr. Lankford. Now, you are aware that--I am also on the 
Budget Committee--when we brought up that idea, we have been 
told that the Governors will certainly kick people out of 
nursing homes and they were ruthless to their populations, and 
you can't be trusted with any of these funds.
    Governor Walker. Well, that argument was made back in the 
1990's when my good friend, Tommy Thompson, was Governor and he 
pushed welfare reform. Bill Clinton ultimately embraced that 
welfare reform and, in the end, States were given block grants. 
All those same sorts of charges were made back then and, 
instead, we had some of the most successful welfare reform 
during that generation. We can do the same thing now.
    Mr. Lankford. Governor Shumlin, are there areas that we are 
doing as a Federal Government that is causing you pain as far 
as on the financial side?
    Governor Shumlin. Yes. And just in terms of Governor 
Walker's response, we are all concerned about health care 
costs, Medicaid and Medicare. The only thing I would caveat 
with is just a block grant makes me nervous because as our 
populations grow older, which is happening in all of our 
States, as costs and utilization goes up, I don't want it to be 
an excuse for the Federal Government to get out of its 
obligation on sharing cost and saying, hey, we are giving you a 
block grant, you are on your own, if utilization goes up, it is 
your problem. So how that flexibility gets translated is really 
important to us; the details matter.
    Second, another big driver for us is education costs and No 
Child Left Behind, and there is no question that those mandates 
are driving education expenses in our public schools, requiring 
us to teach to a test, and requiring extraordinary paperwork of 
teachers, when they could be teaching.
    Mr. Lankford. Thank you very much.
    With that, I yield back.
    Chairman Issa. I thank the gentleman.
    We now recognize the gentleman from Iowa, Mr. Braley.
    Mr. Braley. Thank you, Mr. Chairman.
    My name is Bruce Braley, and I am proud to be a public 
employee. In fact, Governor Walker, when you were a 6-year-old 
growing up in my district in Plainfield, Iowa, I got my first 
job as a public employee with the Powesheik County Conservation 
Board, and I learned how to clean toilets and I learned how to 
mop floors and scrape gum off the bottom of school desks, and I 
also worked out in the blazing sun building bridges on farm-to-
market roads, driving an ax into spikes into creosote-treated 
lumber; and 1 day on the job my left hand caught on fire. So I 
know a little bit about what public employees do.
    You mentioned the TV ads that groups from Washington ran 
against you, and yet you, yourself, had a large amount of 
support from secret donor groups like the ones that attacked me 
in my campaign. Are you willing to go on the record here today 
and denounce the influence of outside secret money in political 
campaign ads?
    Governor Walker. I thought the purpose of today was to talk 
about debt and----
    Mr. Braley. Well, let's talk about that. You ran campaign 
ads on the principle of good government, and I thought that is 
what we were here to talk about today. In fact, you ran a 
campaign ad called Real Leadership, and when the campaign ad 
ran, it says your focus was bringing people together to solve 
problems. Do you remember that ad?
    Governor Walker. Yes. And I would argue if you want me to--
you asked me a question and I say I remember it, and that is 
exactly what I did----
    Mr. Braley. OK, you have answered the question.
    Governor Walker. In my first month and a half, when 
Democrats and Republicans came together to push economic 
development----
    Mr. Braley. Excuse me. This is my time, Governor.
    Governor Walker. Well, you asked me a question.
    Mr. Braley. You answered my question. I asked you if you 
remembered it.
    Governor Walker. If you want to do a political stunt, go 
ahead.
    Mr. Braley. I am not doing a political stunt. I think if 
Dr. Phil were here, he would say how is that working for you?
    You also ran an ad called Yes, We Can, and you said working 
together we can put government back on the side of the people 
again. You also ran an ad called Make it Right, talking about 
scandal benefiting politicians. You ran all those campaign ads.
    Well, this is your chance to make it right. Are you ready 
to apologize to the people of Wisconsin for hiring the 27-year-
old son of one of your major campaign donors, who is a 
lobbyist, and that individual had no college education, very 
little managerial experience, and had two drunk driving 
convictions and was hired for an $81,000 a year job, when you 
obviously had better qualified applicants? Are you ready to 
make an apology today to the people of Wisconsin? That doesn't 
sound like good government to me.
    Chairman Issa. The Chair will ask the gentleman to suspend. 
Please turn off the clock.
    The Chair would remind all participants, although Members 
here at the dais have a right to speak for 5 minutes and say 
anything they want and we will consider it germane, our 
witnesses are only asked to respond to items which they came 
here prepared to respond to that are consistent with the 
subject of the hearing. So it is for the witness to decide 
whether a question is germane, while in fact Members here have 
an almost unlimited right to say what they want to say during 
their 5 minutes.
    The gentleman may continue.
    Governor Walker. When I grew up in Plainfield, at least for 
the years I lived there, and Chuck Grassley was our State 
assemblyman back then, there were good, decent people, many of 
whom were farmers, many of whom were deacons at my father's 
church, who recognized when times were tough, you had to make 
tough decisions, particularly when times were tough in the 
finances of the church, and that is exactly what we are doing. 
You may not want to talk about that, you may want to talk about 
anything, and I will answer your question about the 27-year-
old.
    Mr. Braley. I would be interested in your answer because 
that is the question the people of Wisconsin want to hear 
today.
    Governor Walker. Well, I am glad you are interested in the 
people of Wisconsin----
    Mr. Braley. I am.
    Governor Walker [continuing]. Because that person was five 
levels below me. When that hiring was brought to my attention, 
I and my staff go back and have that person taken out of that 
position, and I acknowledged the fact that there were more 
qualified people and I asked someone else to be put into that. 
So that is the answer to your question.
    Mr. Braley. Well----
    Governor Walker. Now, would you look at----
    Mr. Braley. I am reclaiming my time.
    Governor Walker. Well, if you don't want to hear the truth, 
then keep it up.
    Mr. Braley. The Milwaukee Journal, Mr. Chairman, has 
written an article about this and noted that two of the highly 
qualified candidates for that administrative post were Oscar 
Herrera, a former State cabinet secretary under Republican 
Governor Scott McCallum, who had a doctoral degree and 8 years 
of experience overseeing the cleanup of petroleum-contaminated 
sites. The second, Bernice Madison, was a professional engineer 
who served since 2003 in the post to which Mr. Duchenne was 
appointed and had 25 years of experience in State government.
    And since the whole focus of this hearing is on good 
government practices and how that affects the debt that States 
have, I think it is time that we got some straight answers from 
the people who are radically reforming State governments, and 
that is why this is so important. And I would ask the chairman 
to hold a hearing, and I have a letter for the chairman, since 
we have broad jurisdiction, according to the committee's Web 
site, to look into the other factors that are impacting State 
budgets, including cronyism in State government. And I have a 
letter to the chairman to that effect. I ask unanimous consent 
for the article from the Dubuque Telegraph Herald titled, 
Walker Insults Young Worker With Cronyism, published on April 
11, 2011, to be made a part of the record. And I yield back.
    Chairman Issa. Without objection. The gentleman yields 
back.
    [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Issa. The Chair now recognizes the gentleman from 
Florida, Mr. Ross, for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Governors, thank you both for being here. This is very 
insightful for me, especially in my home State of Florida, 
where we are also going through some of the similar exercises 
that you all have gone through. It is interesting because when 
we look back at the history of collective bargaining, 
especially with public sector unions, it was Franklin Delano 
Roosevelt and both President John F. Kennedy who did not feel 
that there should be collective bargaining or there should be 
public sector unions. So being here today on this issue I think 
shows the evolution of this and why it is such a crucial issue, 
especially in light of the debt and deficits that each State in 
this country is facing.
    The Federal Government and the Office of Personnel 
Management has published consecutively for years, up until 
2008, a study of the amount of time that was spent by union 
employees on official time. The last time this was published 
was in 2008, and it shows that Federal Government union 
employees spent 3 million hours of official time to engage in 
union-related activities. This was a cost to the Federal 
taxpayers of about $120 million in 2008. Unfortunately, upon 
repeated requests by several Congressmen and the Competitive 
Enterprises Institute under this President, we have not 
received a response from that.
    In your respective States, and I will start with you, 
Governor Walker, do you keep track of any official or union 
business done on official time?
    Governor Walker. I wouldn't have the numbers off the top of 
my head, but I know both at the State level and we see the same 
thing at the local level. We certainly saw that when I was the 
Milwaukee County executive. And it is an interesting cycle 
because taxpayers in many cases are paying taxpayers' money 
which not only goes to workers, but in many cases then goes to 
government employee unions, who then use that money for 
political purposes, when then elect candidates who then 
advocate for more government and higher taxes on the middle 
class. It is a vicious circle.
    Mr. Ross. So Wisconsin does keep track of official time 
spent on union activities?
    Governor Walker. For example, there is time at both the 
State and the local level that people who are employees of the 
government who are designated as union officials have to 
account for time that is taken as part of their contracts. In 
many cases we saw at the local level, the county, the number of 
individuals who were on the payroll who were working for the 
union.
    Mr. Ross. Governor Shumlin, is it the same situation in 
Vermont?
    Governor Shumlin. It is not an issue in Vermont. Our public 
employees unionized work hard, and they work long days and long 
nights, and we are certain that that is what they are doing and 
that is what they do with their time. You know, we are a small 
State where everybody knows what everyone is doing, and in 
Vermont we work hard and our public employees work just as hard 
as our private sector employees.
    Mr. Ross. In Florida, we are deliberating now in the 
legislature on something that was deliberated back when I was 
in the legislature there, what was known as a paycheck 
protection act, and it would require that the employees make an 
affirmative acknowledgment and confirmation that they will sign 
over a certain part of their paycheck to union dues, instead of 
it just having taken out regularly. Is that something that has 
been entertained in either of your States?
    Governor Walker.
    Governor Walker. That is in the legislation that I signed 
the law approximately a month ago, and the concept of that is, 
in the interest of workers, they should have the right to 
choose. If they want to have that money taken out, if they want 
to be part of a union and if they ultimately want to have the 
choice of the way that they give that money to that union or 
not, they should be the one that chooses it.
    Mr. Ross. Governor Shumlin.
    Governor Shumlin. It hasn't been any significant part of 
the debate. You know, we are really, like Governor Walker, we 
are facing a tough economy and a tough budget challenge trying 
to balance it, and thanks to the largesse of Congress, the last 
budget deficits for all we Governors haven't really had to be 
dealt with because we got so much money from Washington. That 
is over and we have to balance the budgets the old fashioned 
way. So we are making tough cuts, tough choices, and I am doing 
it by focusing on what matters, which is health care costs, 
corrections, and other areas where I have explosive growth, and 
I am not worrying too much about union dues.
    Mr. Ross. In accomplishing these objectives, whether they 
be pro-union or anti-union, whatever they may be requires 
people to come to the bargaining table, it requires people to 
come to consensus or compromise; and one of the issues that we 
saw in Wisconsin was that there were senators on the Democrat 
side who left the State and failed to come to the table to 
address. And as a public official, as one who was elected, I 
take personal offense to somebody who abrogates their 
responsibility by not owning up to their obligations to make 
these decisions, as difficult as they may be.
    So, Governor Shumlin, I would ask you do you condone such 
activities, where elected officials leave the State or abrogate 
their responsibilities to enforce their obligations as an 
elected official?
    Governor Shumlin. Well, I have to tell you I have my hands 
full dealing with the challenges that I am facing in Vermont 
and I don't comment much on what is happening in the other 49 
States. I am just focused on what is happening in Vermont. In 
Vermont, everyone is working together with lots of maple syrup 
to get tough things done.
    Mr. Ross. Thank you.
    Governor Walker.
    Governor Walker. Obviously, I had great concern. When I 
talk to factory workers over the last month or two, if you 
walked off the job for 3 weeks, you wouldn't be working there 
anymore. I think that is pretty clear out there. So I think 
there is a real challenge and obviously the individuals in 
those 14 senate districts are going to decide whether or not 
that makes a difference in the long term.
    But you said something else about working together, and I 
believe in that. But I also believe more important than working 
together is people want results. So in the beginning of this 
year we worked together with Democrats and Republicans and one 
Independent we have in the legislature. We passed the most 
aggressive job-creating legislation in the country. We showed 
that Wisconsin was open for business. But sometimes working 
together is a problem. In the past, Democrats and Republicans 
worked together and they pushed the problem off to the future, 
and at some point leaders, no matter what part, have to stand 
and say we have to do something about it, and that is what we 
are doing here.
    Mr. Ross. Thank you, and I yield back.
    Chairman Issa. The Chair now recognizes the gentleman from 
Vermont, Mr. Welch, for his questions.
    Mr. Welch. Thank you, Mr. Chairman.
    Governor Shumlin, I see that seated behind you is Matt 
Finsey, who is a leader of the Public Employees Union, the 
firefighters; he is sitting next to his brother from Wisconsin. 
You are the Governor, he is a public employee union. Did one of 
you not get the memo that you are not supposed to get along?
    Governor Shumlin. I don't know if I didn't get it, but all 
I can tell you is we get along great, as you know, and there is 
nothing better than our firefighters working hard for us and 
sacrificing their lives for us every single day.
    Mr. Welch. You know, as I have listened to Governor Walker 
describe his problems, it seems to me very similar to what you 
described to me this morning when we had breakfast as to the 
problems you face in Vermont. Governors cannot escape the 
consequences of the greatest recession that we have had since 
the Depression, and that recession is brutal and shows no 
mercy, whether it is a Republican Governor led State or a 
Democratic Governor led State. You have described your 
approach, but clearly there are points of real contention that 
you have to deal with as Governor. You have a legislature that 
is pushing you, and you are resisting, to raise revenues; you 
have public employees who, yes, they did cooperate, but, on the 
other hand, they have to represent their members and stand up 
for wages and benefits. Just maybe give a brief summary of how 
you managed to get from here to there.
    I am going to want to be able to talk to Governor Walker 
too, and I don't have that much time.
    Governor Shumlin. I will try to be very brief. You know, 
really, as you know, my guess is that my approach isn't much 
different than other Governors across the country. We are 
trying to create jobs and economic opportunities, and I 
mentioned the middle class has been kicked in the teeth over 
this recession, harder than I think they have been kicked in 
years, and we are trying to find ways to raise their income. 
And we do that by going after real savings in health care, by 
going after the recidivism in our corrections budget that is 
costing taxpayers $47,000 a year, we have a high recidivism 
rate, and by going where the real money is while we resisting 
raising taxes so that we can actually grow jobs and economic 
opportunities.
    You heard Governor Walker talk about wishing to import jobs 
from Illinois, and we are all doing that. I am hoping to bring 
in a few jobs from New Hampshire and Massachusetts and New York 
as we manage our budget. We are a great place to do business, 
work, raise a family, the best place in the country, in my 
judgment. And we do it by getting along and by using common 
sense and reasonableness.
    Mr. Welch. Let me ask Governor Walker. I just want to make 
an observation. We have a problem here in Congress, and this is 
my own personal observation after serving for 5 years. There is 
too much of a winner-take-all attitude. Because when I hear my 
Republican colleagues say we have to deal with spending, I 
happen to think they are right. But I also think we have to 
look at other things, too, like the tax code and revenues. I 
would say that quite candidly. A lot of disagreement from some 
of my colleagues.
    But one of our problems in Congress is a winner-take-all 
approach, where, even if you ``win,'' and you see this with the 
health care debate, the Democrats ``won'' on health care last 
year, but now the first act of the new Congress is to repeal 
it. If you win in a way where the other side feels they didn't 
have a seat at the table or things were crammed down, and both 
sides can be doing this, there is a price because you end up 
winning on the vote but you don't make progress on the policy. 
And, obviously, your State is the center of the storm with a 
very hard confrontation between two sides, and I am asking if 
you would just observe or comment on your thoughts about 
whether there is a price that may be paid in your State as a 
result of the fact that the approach that was taken did result 
in this enormous confrontation and a lot of controversy and a 
lot of pain, that continues even after your policy, I think, 
prevailed.
    Governor Walker. Yes, and I think the results, obviously, 
were frustrating. One of the things that frustrated me the most 
is I think if you are going to participate in democracy, you 
have to be in the arena. And when 14 of my colleagues in the 
capital decided to leave for 3 weeks, it made it pretty 
difficult to do that. In fact, in particular, one of them, 
someone we worked with before on jobs initiatives, spent a good 
chunk of that time trying to work with us and, as he revealed 
in the Wisconsin State Journal a week ago Sunday, he was closer 
to us than he was to his other colleagues. My hope is that 
people like him and others will continue to come to the table 
and work on our jobs agenda, the things we need to continue to 
do, and I think we will be on the right track.
    But, again, I go back to what I said before. People want us 
to work together, but they want that because they want results. 
When I look at what Mitch Daniels did 6 years ago in Indiana, 
essentially for the State, he did what we are proposing and 
what we propose in this legislation to do. His numbers were far 
below mine in that first year, the first 6 months he was in 
office. He was dealing with some of the same passions, just not 
as big, because he did it through an executive order, not 
through a piece of legislation. But 4 years later he was re-
elected with 58 percent of the vote because, in the end, people 
saw the results. All the fears didn't materialize and the 
results proved that in that State the government got better, 
got more efficient, got more effective, and ultimately good 
public employees in Indiana were rewarded.
    Mr. Welch. I yield back. Thank you, Mr. Chairman.
    Chairman Issa. I thank the gentleman.
    The Chair now recognizes the gentleman, Mr. Kelly, for 5 
minutes.
    Mr. Kelly. Thank you, Mr. Chairman.
    And both Governors, thank you for being here.
    I come from the private sector, so I understand a little 
bit about having your own skin the game and being able to sign 
the front half of the check. I know that sometimes down here we 
lose perspective about whose money it is we are spending. And I 
have to tell you, when somebody else is picking up the tab, it 
is easy to keep saying go ahead and keep on partying.
    Now, I want to ask you this specifically, because the 
chairman started off with a discussion, also Mr. Chaffetz, 
about defined benefits in pensions, and I know in Pennsylvania 
that while all of us took a hit when the stock market went down 
with our pensions and we lost quite a bit of it, at the end of 
the day that was a loss. If you can, in both your States, tell 
me about who makes up the loss for the benefit that is 
calculated. I really think defined benefits is a complete 
illusion; it gives us the belief that somehow the future is 
both predictable and reliable, and we all know it isn't. So 
please tell me the deficiency, the difference between what the 
defined benefit is based on what the actuaries are saying and 
the actuality of it. Who makes up the difference for that?
    Governor Shumlin. You know, I think it is really important 
to stick with the facts, and the fact of the matter is, if you 
look at Vermont, this is what happened: In the worst stock 
market crash in a long time, we watched it go from roughly 
$12,000 to $6,000, the Dow, the average person in a defined 
contribution plan sold their stocks when they got discouraged, 
somewhere between $8 and $6,000. Those who were in defined 
benefit plans had people like Vermont advising them to hold on 
and hold out, and that is what we did. So now our retirement 
plans are higher than they were in the depths of the loss. The 
average small investor now has lost what they saved for 
retirement.
    So, again, it is a great example where a defined benefit 
plan protects workers more ably than a defined contribution 
plan, and Vermont's example is exactly proof of that theory.
    Mr. Kelly. OK, but my question is who makes up the 
difference in the loss.
    Governor Shumlin. My point is there was no loss; we have 
gotten the gains back.
    Mr. Kelly. I understand what you are saying, but there is 
somebody who does provide the safety net, and we both know 
that.
    Governor Walker.
    Governor Walker. Yes. It is the taxpayers. In our case, 
before these reforms, you have talked a lot today about, for 
example, my proposal of the 5.8 percent contribution. One of 
the things I want to make clear, because it is different than 
Vermont and other States., before this reform, other than 
literally a handful of State employees, the taxpayers were 
picking up both the employee contribution and the employer. So 
I am not upping the employee contribution, I am actually having 
the employees of the State, including me, actually pay the 
employee contribution. Again, something that is done in the 
private sector, as you know, the employer pays part, the 
employee pays the other part.
    And what I found out when I was traveling the State in the 
midst of this debate, particularly when I go to manufacturing 
plants and guys would point out they were paying 25 to 50 
percent of their health insurance premiums, most of them having 
a retirement plan, it wasn't a pension, it was a 401K, and many 
of them, to keep people working, were suspending the employer 
match just to be able to keep people from being laid off. That 
is the reality. And then when I would walk them through what I 
was asking, because they would see the ads and they would 
think, hey, wait a minute, you are taking all this money away. 
Just as an example, in the basic family plan that my family 
has, we will go up to pay about $200 a month in premiums, 
versus about $90 a month. Again, most people, in the private 
sector, middle-class taxpayers wonder, wow, that is 
unbelievable.
    Mr. Kelly. And I have to tell you I think that is the 
important thing to understand. If I have a defined benefit, 
then I can go ahead and stick with that plan because, come hell 
or high water, I am still going to get my defined benefit. When 
you are a person whose real money, their money, is in the 
program and you have a choice to opt out now and try to keep 
what you have or lose it, then you are really put in a box; and 
I think most people in this country don't understand. Now, my 
daughter is a teacher, my wife is a teacher. I have a lot of 
friends whose benefits are guaranteed, and they are guaranteed 
by people in the private sector who will see a raise in their 
taxes to cover the loss of these pensions, and I think that is 
where the divides come.
    This is not about union workers versus non-union workers, 
Republicans versus Democrats; this is about Americans. And if 
we are going to share the gains and we are going to also 
participate in the pain, we better understand that when you 
have your own money in the game, it is a vast difference 
between somebody who is guaranteed a benefit, regardless of 
what they put in, and that is the important thing. Taxpayers 
make up the difference in all these losses. That is the model 
and that is what is wrong with it. You don't have the safety 
net in your private plan, but the public sector does, and I 
think that is a vast difference and I think it makes it a lot 
easier to stick with a plan that is upside down and say, you 
know, what, I'll go ahead and ride it out because one way or 
the other I am still made whole.
    Thank you so much for both of you being here. I appreciate 
it.
    And I yield back, Mr. Chairman.
    Chairman Issa. I thank the gentleman.
    We now go to the gentleman from Virginia, Mr. Connolly, for 
5 minutes.
    Mr. Connolly. Thank you, Mr. Chairman, and welcome, 
Governors.
    Governor Shumlin, did I understand in your testimony that 
you said that the pension fund in Vermont has an 8, 8\1/2\ 
percent return, annual return?
    Governor Shumlin. That is correct. That is what we have had 
over time. And I think it is really important to address the 
question of who pays and the statement just made that taxpayers 
do. At least in Vermont--maybe we are unique; I don't think 
so--80 percent of the benefits that we pay out are paid for by 
return on investment.
    Mr. Connolly. Eighty percent?
    Governor Shumlin. That is correct.
    Mr. Connolly. You are a member of the National Governors 
Association?
    Governor Shumlin. Excuse me?
    Mr. Connolly. You are a member of the National Governors 
Association?
    Governor Shumlin. Yes.
    Mr. Connolly. Is it your understanding from your fellow 
Governors that Vermont is unique and that most State pension 
funds are in fact under water or about to go so?
    Governor Shumlin. It is not my understanding that most are 
under water, no.
    Mr. Connolly. Mr. Chairman, I would ask unanimous consent 
to enter into the record correspondence provided by the 
National League of Cities, NACo, NASAC, ICMA, NSA, and a number 
of other organizations pointing out, as a matter of fact, that 
most State pension systems are very solvent and have been quite 
stable for the last half century.
    Chairman Issa. Have they been received by the 
parliamentarian yet?
    Mr. Connolly. We have copies here, Mr. Chairman.
    Chairman Issa. OK. Bring them up. We will reserve and make 
a final decision by the end of the hearing.
    Mr. Connolly. Thank you very much.
    Governor Walker, when you campaigned for Governor, did you 
campaign on the issue of collective bargaining being a problem 
with respect to Wisconsin's budget?
    Governor Walker. I talked about wages and benefits overall, 
even ran campaign ads on it. But I didn't specify exactly what 
form; I talked about the broad spectrum. And, in fact, AST 
Wisconsin, one of the unions that objected to us in campaign 
flyers pointing out some of my statements about collective 
bargaining and mediation arbitration and other issues. So that 
was an issue that was part of the campaign.
    Mr. Connolly. Explicitly?
    Governor Walker. Again, I didn't run an ad saying I am 
going to do exactly this, but I talked about the full range and 
I talked about it in a couple of debates, about the fact of the 
full spectrum of issues.
    Mr. Connolly. Good. I had 43 debates when I ran for re-
election last year. That is a lot of debates.
    Governor Walker. I didn't have that many, I am glad.
    Mr. Connolly. Probably more than most Members of this body.
    Governor Walker. That is impressive.
    Mr. Connolly. And I enjoyed every one of them.
    Chairman Issa. That is also more than most Members.
    Mr. Connolly. Exactly.
    But the collective bargaining, in your debates with your 
opponent, you actually brought up collective bargaining and 
said that is something I am going to address if elected 
Governor?
    Governor Walker. I talked about the whole spectrum. I 
talked specifically about the 5 and 12 percent. They said how 
far are you willing to go? I said I am willing to change the 
law from one end of the spectrum, whether it is a modest change 
or an outright change. I talked about it there; I talked about 
it again in the transition; I talked about it----
    Mr. Connolly. Governor Walker, I am asking a very specific 
question. Did you explicitly single out----
    Governor Walker. No. No. I talked about the whole range.
    Mr. Connolly. So you might concede that some might be 
surprised, then, that you made collective bargaining such a 
centerpiece of your so-called reform efforts after you were 
sworn in.
    Governor Walker. No, I would say no because for 8 years as 
county executive I not only talked about it, I actually brought 
it up. I did what was called the Reality Tour, where we talked 
about the challenges, that we were unsustainable and that 
collective bargaining was driving that.
    Mr. Connolly. So from your point of view nobody should have 
been surprised once you were elected and sworn in.
    Governor Walker. Hundred percent correct.
    Mr. Connolly. Were you, then, surprised at the reaction 
that generated in your State?
    Governor Walker. Not in my State. For 8 years I took on the 
status quo in a county that had never elected a Republican 
before. I was elected with 54, then 57, then 59 percent, 
because I think in times of crisis people aren't so much 
concerned about Republican or Democrat; they want leadership, 
and that is what we took on. That is what we are trying to do 
at the State level.
    What did surprise me, candidly, was the level of national 
attention, the folks that came in from Washington and others to 
be a part of that debate.
    Mr. Connolly. Thank you. Let me ask a quick question. You 
got a famous phone call from somebody pretending to be David 
Koch, and he said, well, I tell you what, Scott, once you crush 
these bastards, I'll fly you out to Cali and really show you a 
good time. You responded to that by saying, all right, that 
would be outstanding. What did you mean by that and what did 
you think he meant?
    Governor Walker. At that point I was down in the call, I 
had two other people waiting for me and I was trying to get off 
the call and get on to the next issue.
    Mr. Connolly. It wasn't that you honestly thought it was 
Mr. Koch and that he was promising to reward you for what you 
were doing?
    Governor Walker. Did not in that regard, no.
    Mr. Connolly. The flying out to Cali thing didn't strike 
you?
    Governor Walker. No. I didn't even know what Cali is.
    Mr. Connolly. Have you ever had a conversation with respect 
to your actions in Wisconsin and using them to punish members 
of the opposite party and their donor base?
    Governor Walker. No.
    Mr. Connolly. You have never had such a conversation?
    Governor Walker. No.
    Mr. Connolly. Thank you. My time is up.
    Governor Walker. I spent 8 years talking about the 
challenges of the county official, the fact that I had a series 
of unions in Milwaukee County who constantly told me to lay 
people off, as opposed to making modest changes.
    Mr. Connolly. Thank you. My time is up.
    Chairman Issa. Thank you.
    Dr. DesJarlais.
    Mr. DesJarlais. Thank you, Mr. Chairman.
    Thank you, Governors, for being here today.
    Governor Walker, I believe your home State and my home 
State of Tennessee has constitutional requirements to balance 
the budget. Obviously, that constitutional requirement does not 
exist in Washington, DC. Do you believe that these 
constitutional requirements give you additional support and 
leverage you need to make the difficult decisions that need to 
be made to get your fiscal spending under control?
    Governor Walker. Yes. And I think both of us as Governors 
talk about the fact that, as Governors, even with either party, 
for us to succeed and to have States grow their economy, we 
have to have a balanced budget. Whether it is a constitutional 
requirement, a legal requirement or otherwise, I think the 
States that are going to succeed, regardless of who are the 
Governors, are the States that take their fiscal challenges 
head on.
    Mr. DesJarlais. Thank you. This last election it was pretty 
clear to me, coming from the private sector, that the American 
people have sent a referendum that they feel government, 
overall, is too large and it is too intrusive, and it is in the 
way of creating jobs. So I take heed to that as we sit in these 
hearings and we justify a lot of the programs within the 
Federal Government and whether they are good or not, and we 
have had discussions whether or not private sector versus 
public sector pay is fair.
    Governor Walker, how would you gage the pay and benefits 
afforded to the public sector workers in Wisconsin? Critics 
have said that your reforms are hurting a group of workers that 
are already worse off than their private sector counterparts. 
Are they wrong?
    Governor Walker. Well, let me just point out two quick 
things in that. One, this debate, to me, has never been about 
the level of pay or compensation, because I think there are 
great people who work at the city, the county, or school 
district State Government. I have said that repeatedly. What 
this is about is balancing the budget and making sure we can do 
it long-term and giving our State and local governments the 
tools. There have been plenty of studies and there are studies 
all over the map. There are studies whether you have a higher 
education degree or not, whether it is higher or lower.
    I think the key is, again, when I have toured the State and 
when I talk to the constituents I have and I talk to the people 
in the middle class working in our factories and farms and 
other locations, they realize they are the ones that foot the 
bill for more and more government, and they think it is 
realistic that if they are paying, on average 20 percent for 
health care, they are paying something for their pension or 
401K, whatever they may have, they think it is realistic that 
the rest of us who work in the government pay something similar 
to that.
    Mr. DesJarlais. Thank you.
    Governor Shumlin, you had mentioned in your testimony 
earlier that you went to where the money was to help get your 
fiscal house in order, and you mentioned health care. I was 
wondering if you had some insight that you could share with us 
to how you went about that and if you have a solution to the 
health care crisis and the cost.
    Governor Shumlin. Wow. Well, how long do we have? The 
answer is yes, we are working very hard to pass a health care 
bill that will be the first in country where health care is a 
right and not a privilege; where it follows the individual; is 
not required by the employer, which we think will be a huge 
jobs creator; but, most importantly, as Governor Walker 
suggested earlier when he was talking about health care, where 
we actually reimburse providers based upon keeping people 
healthy, health care outcomes instead of the fee per service 
model. And we have put together an ambitious plan which is 
passing the senate almost as we speak; it has already passed 
the house, so I am going to sign it into law. Then we are going 
to come down to Congress and beg you for a few waivers. So I am 
so glad that we have this opportunity to start begging now.
    Mr. DesJarlais. OK. We will be interested to see how that 
turns out, as we certainly have our challenges here. Do you 
believe that collective bargaining is really a basic human 
right?
    Governor Shumlin. I believe it is a basic right in 
democratic society. And I say that as a guy who grew up, born 
and raise, in Vermont. My ancestors, like so many probably in 
this room, came to this country with nothing, passed through 
Ellis Island, ended up picking beets, my great, great 
grandfather out in the Midwest somewhere; and, frankly, were it 
not for the right to collectively bargain, I don't believe that 
my relatives or most middle-class Americans would have the 
opportunities for economic progress that they enjoy today.
    Mr. DesJarlais. You had made a comment at the National 
Governors Association meeting that the ability to collectively 
bargain is a basic human right in democracy. This is in direct 
contradiction with Franklin Roosevelt, who was a pro-union 
person, and he said meticulous attention should be paid to the 
special relations and obligations of public servants, to the 
public itself, and to the government. The process of collective 
bargaining as usually understood cannot be transplanted into 
public service, and it goes on to say a strike of public 
employees manifests nothing less than intent on their part to 
obstruct the operations of government until their demands are 
satisfied. Can you comment on that?
    Governor Shumlin. I would just say that even someone as 
great as Roosevelt could be wrong once.
    Mr. DesJarlais. I might disagree on that point, but my time 
is out and I thank you for your comments.
    I yield back.
    Mr. Gosar [presiding]. I thank the gentleman.
    I want to acknowledge my colleague, Mr. Murphy, from 
Connecticut.
    Mr. Murphy. Thank you very much, Mr. Chairman.
    Both Governors, thank you for you attendance today and for 
sticking with us throughout this process.
    I guess I just have a simple statement and question for 
you, Governor Walker. I guess for those of us that have been 
watching this debate play out, and I think this has been 
covered by several of my colleagues, it is hard to square the 
concessions that have been made by the unions, their 
willingness to come to the table and the continued drive to 
strip them of collective bargaining rights, and obviously there 
has been a lot of conversation around the country as to how 
this plays in to a much broader debate that is happening around 
the Nation. When we look at the amounts of outside money that 
has been spent in Wisconsin, both with respect to your 
election, to the fight over the legislation, and then most 
recently, in the last few weeks, with respect to this election 
for the court, it is hard to make the argument that this debate 
only plays out in the context of Wisconsin's budget fight. In 
fact, some of the key players in this drama seem to be pretty 
open about how this is ultimately about trying to kill a pretty 
important constituency for working families, and I think we had 
the quote on the board earlier when Mr. Connolly was asking his 
questions, but let me read it aloud.
    The State senate leader, Scott Fitzgerald, said recently 
during an interview on Fox News, he said, ``If we win this 
battle and the money is not there under the auspices of the 
unions, certainly, what you are going to find is President 
Obama is going to have a much more difficult time getting 
elected and winning the State of Wisconsin.'' And in a fund-
raising letter that he sent out, he was making the pitch that 
Republicans should be supported because they faced down big 
labor's bully tactics in the Democratic walkout on the State 
senate to break the power of unions in Wisconsin once and for 
all.
    This sounds a lot like a much broader political play to try 
to defeat your opponents, to try to defeat the advocates for 
working families, and I guess I am sure you have a good answer 
to this question, but I would like to know if you agree with 
the statements of your State senate leader, Scott Fitzgerald, 
and how you address the concerns of many of ours that the 
reason that you have $2.1 million being spent on behalf of your 
candidate for the court, the reason that you have groups like 
the Koch brothers pouring in thousands and thousands of dollars 
is because this is about a much broader effort and it seems 
that some of the key players in the fight, certainly in the 
State legislative level, are very open about how this is a much 
broader assault on unions and the allies of unions.
    I guess I specifically want to know if you disagree with 
that very specific statement made by the senate leader.
    Governor Walker. Two things. One, I think any outside 
observer of politics in our State would probably jump to that 
conclusion for all the parties involved. They would look at the 
$4 million the unions pumped in during the debate and the TV 
ads that went on; they would look at the money you reference 
and others and say outside of Wisconsin there is a lot of 
people who are viewing this in a larger context.
    Mr. Murphy. Except this fight wasn't started by labor; this 
fight was started by----
    Governor Walker. No, but you just asked about the money and 
I clearly recognize that. I want to put in context that there 
is a lot of money all the way around coming from all sorts of 
sources, and I think a lot of whom are looking at multiple 
reasons for this. I can't answer for Scott Fitzgerald, I can't 
for others; I can answer for Scott Walker, and I can tell you 
for me it is about, certainly in part, about the budget, but it 
is also ultimately about making government work better and, I 
think, protecting--when I talk about the middle class, it is 
not just the paying middle class, it is even middle class 
individuals who work for State and local government because, 
for us, we ultimately believe, and we have seen the 
alternative, we are protecting middle-class jobs by avoiding 
what many other States are doing with massive layoffs at both 
the State and local level, and by ultimately putting in place a 
system where the government is going to work better, 
particularly for schools. I have two kids in a public school. I 
care very deeply about it. I would like to have a system, like 
we do elsewhere in society, where we pay for performance, not 
just reward based on seniority. I would like to have people 
based on merit and performance. This measure, these reforms 
empower us to keep our best teachers in the schools, to keep 
our best city and county and State workers in place, and that 
is part of the package as well.
    Mr. Murphy. My time is almost up. I understand you can't 
speak for him, but you can certainly opine as to whether you 
agree with your State senate leader when he says that this is 
ultimately about trying to defeat President Obama in Wisconsin. 
Do you agree with----
    Governor Walker. I can tell you what it is for me. It is 
not about that, it is ultimately about balancing the budget now 
and in the future; not just in the temporary, because we have 
had too many people temporarily trying to push our problems off 
to the future. This is a long-term answer and it is about long-
term reform in our government so our schools, our local 
governments, and our States operate better. That is what it is 
for me.
    Mr. Murphy. There are millions of dollars being pumped into 
the State who disagree with that vision, but I appreciate your 
answer. Thank you very much.
    Mr. Gosar. I thank my colleague.
    I want to acknowledge my colleague, Mr. Gowdy, from South 
Carolina.
    Mr. Gowdy. Thank you, Mr. Chairman.
    Governor Shumlin, I noted the conciliatory tone in both 
your introduction and your opening statement. I made a couple 
of notes. You mentioned the Unity Tour, which I found 
inspiring. You said come to the table. You mentioned the word 
reasonableness and openness, and on four different occasions 
you said come together. My question to you is how do you do 
that when the side with whom you disagree has absconded from 
the State and is essentially a fugitive from responsibility. 
What table do you sit at when you are not in the same State?
    Governor Shumlin. Well, you know, you don't apply the 
reasonableness plea in the heat of the crisis; you avert the 
crisis. And I will just tell you by way of our experience under 
the Republican Governor, Jim Douglas, we needed to get roughly 
$25 million out of our pensions for teachers to balance our 
budget, and things weren't going so well in those negotiations 
with the Governor. So the Democratic senate president, myself, 
and the Democratic speaker sat down with the union and said, 
listen, we are going to have to get these savings, and we can 
do it with you or we can do it without you, and, really, we 
would like to do it with you, and they turned to us and said we 
want to do it with you. So my point is when you are going to 
work together, when you are going to do what the American 
people want most desperately from their politicians, and God 
knows they want it from Washington right now and so do I, 
reasonableness, compromise, common sense, you have to start 
with that foot; you can't ask for it once you have created a 
crisis.
    Mr. Gowdy. But there is a concept of mutuality that is 
inherent or required for that to happen. I know you would agree 
with me. I also want to say inherent in your comments, to me, 
and in your testimony, frankly, is civility.
    Governor Shumlin. Right.
    Mr. Gowdy. In the last 2 weeks alone, Members of this body 
have been told by a colleague to go to hell. Not purgatory, not 
shule, not haitis, not the river sticks, but hell. We have been 
told that we want to kill women. And my colleague from Virginia 
just made a reference to a surreptitious phone call that was 
placed to an elected official. Will you help me and join me in 
decrying the rhetoric and the tactics that I just laid out?
    Governor Shumlin. You know, I think that civility has to be 
applied to all public officials, and I think that we need to 
raise the bar collectively, and that applies to Washington, it 
applies to State governments across this country. We have----
    Mr. Gowdy. Do you think that making surreptitious phone 
calls, pretending to be someone you are not, enhances civility 
and discourse in this country?
    Governor Shumlin. All I can say is I have no disagreement 
with you that the civility tunnel runs both ways, and we all 
have a responsibility as public servants, and the American 
people expect it, for us to be civil all the time.
    Mr. Gowdy. You, in response to Dr. DesJarlais, I think, 
and, again, I always allow for the possibility that maybe have 
been misquoted, the ability to collectively bargain is a basic 
human right in democracy. What is your authority for that 
statement? What is your constitutional authority for saying 
that?
    Governor Shumlin. Well, free speech.
    Mr. Gowdy. Beyond your ability to say it, where would you 
point me in the Constitution for support for the underlying 
notion?
    Governor Shumlin. You know, it is my belief, as a Governor 
of a State, that collective bargaining is a right and something 
that has served this country with extraordinary progress and 
distinction, and it has allowed, as I mentioned, families like 
mine, who came from nothing, to succeed economically in the 
best democracy, in the best economy, in the best business 
climate that anyone could ever design. So all I can say is I 
see it as a basic right.
    Mr. Gowdy. Are there exceptions?
    Governor Shumlin. We are allowed to organize.
    Mr. Gowdy. Are there exceptions?
    Governor Shumlin. Not that I can think of.
    Mr. Gowdy. Law enforcement?
    Governor Shumlin. I think law enforcement should be able to 
collectively bargain just like anybody else. They have in our 
State and it has had great results.
    Mr. Gowdy. In my State of South Carolina, we laid off 
prosecutors, law enforcement officers, and teachers; we 
furloughed them for 5 days last year because we have a fiscal 
crisis like almost every other State. Is that something that 
you would entertain in your State? Could you ever see 
furloughing the core functions of government, which all three 
of those categories are, could you ever see that happening?
    Governor Shumlin. We actually did move our courts from a 5-
day week to a 4-day week. I would not furlough----
    Mr. Gowdy. Your Federal courts or State? Because the 
Federal judges have always been on a 4-day week.
    Governor Shumlin. We have noticed. Our State judges.
    Mr. Gowdy. I see my time is up. Thank you.
    Mr. Gosar. I thank the Member.
    Acknowledge my colleague, Mr. Tierney, from Massachusetts.
    Mr. Tierney. Thank you, Mr. Chairman.
    Thank you, Governors, for being here today.
    Governor Shumlin, let me just ask you. When you were trying 
to resolve your fiscal problems in the State, did you start off 
with the unions by telling them that you were going to require 
them to hold annual votes to continue representing the 
government employees, that you were going to no longer deduct 
union dues from the employees' paycheck, and then expect them 
to come to the table and start a really good solid conversation 
with you? Is that the way you began your conversation?
    Governor Shumlin. No, Congressman Tierney, that is not what 
I led with.
    Mr. Tierney. OK. I just think that is a point worth making. 
But let me also ask you what percentage of your annual State 
government spending is the contributions to your pension 
accounts?
    Governor Shumlin. It is about 4 percent, and I think it is 
important that we remember that. When I talk about the real 
challenges of Governors having to balance a budget, my health 
care costs are going up by double digits, my corrections budget 
has doubled. My challenge is not pensions. Of course it is a 
consideration, but our pension funds are now performing quite 
well and we are doing OK.
    Mr. Tierney. Governor Walker, what percentage of your State 
spending is related to the pensions account?
    Governor Walker. If you look overall--and I don't have the 
exact percentage off the top of my head, but----
    Mr. Tierney. Well, let me ask you this----
    Governor Walker [continuing]. But I can give you the 
numbers----
    Mr. Tierney. I prefer you give me the percentage, but if 
you don't know that, is it significantly more or less than the 
4 percent----
    Governor Walker. Well, the total budget for the next 
biennial is about $60 billion. The total amount of savings that 
we have from the reforms we put in is 1.4 for the----
    Mr. Tierney. You don't choose to answer the question. Look, 
the National Association of State Retirement Administrators 
says that less than 3 percent of all State and local government 
spending is generally used to fund public pension funds.
    Governor Shumlin, you are at 4 percent, so you think that 
is generally, roughly right?
    Governor Shumlin. That is correct.
    Mr. Tierney. Governor Walker, do you want to make an 
opinion one way or the other or pass on it because you----
    Governor Walker. Again, I can followup and give you the 
percentage based on the numbers.
    Mr. Tierney. I would appreciate it if you would do that. 
Thank you.
    We talked just a second, Governor Shumlin, about the 
defined benefit versus the defined contribution on that. From 
your earlier conversation, my understanding is that you 
recognize that when you switch from defined benefit to defined 
contribution, there is a tremendous shift in the risk to the 
beneficiary, am I right?
    Governor Shumlin. Risk and cost.
    Mr. Tierney. And they both go more heavily onto the 
shoulders of the employees, correct?
    Governor Shumlin. And the taxpayers.
    Mr. Tierney. And basically, generally, in your State and I 
think in others, that when this original situation was set up, 
that was part of the bargaining process, that the employee may 
have taken less in pay or some other area they were negotiating 
on in return for having a little more security in retirement, 
am I right?
    Governor Shumlin. That is the promise that was made.
    Mr. Tierney. OK. So it was the employer making that deal, 
as well as the employee.
    Governor Shumlin. That is correct.
    Mr. Tierney. Seems like a fair deal to you, fair thing to 
negotiate?
    Governor Shumlin. Yes.
    Mr. Tierney. Let me ask both of you, if I could, on that. 
Do either of you ask for the authority for bankruptcy for your 
respective States?
    Governor Walker. No.
    Mr. Tierney. Governor Shumlin.
    Governor Shumlin. No.
    Mr. Tierney. OK. Do either of you believe that a bankruptcy 
court is better able to overcome political differences than the 
political process in your State, Governors and legislature?
    Governor Walker. No.
    Governor Shumlin. No.
    Mr. Tierney. Do either of you think that the bankruptcy 
court is better able to restore fiscal stability in your 
respective States?
    Governor Walker. No.
    Governor Shumlin. No.
    Mr. Tierney. And do either of you think that the bankruptcy 
court would be a better manager of your State's finances?
    Governor Walker. No.
    Governor Shumlin. No.
    Mr. Tierney. OK. So you both agree with the letter that 
Governor McGuire, who is a Democrat from Washington, and 
Governor Heineman, who is a Republican from Nebraska, sent to 
congressional leaders that essentially made that point. Their 
letter said that allowing States to declare bankruptcy is not 
an authority that any State leader has asked for, nor would 
they likely use it. States are sovereign entities in which the 
public trust is granted to its elected leaders. The reported 
bankruptcy proposal suggests that a bankruptcy court is better 
able to overcome political differences, restore fiscal 
stability, and manage the finances of a State. These assertions 
are false and serve only to threaten the fabric of State and 
local finance.
    Would each of you gentlemen be pretty much in agreement 
with that comment?
    Governor Shumlin. That is the NGA's position and I support 
it.
    Mr. Tierney. Governor Walker.
    Governor Walker. I agree.
    Mr. Tierney. Thank you.
    I yield back. Thank you, Mr. Chairman.
    Mr. Cummings. Would the gentleman yield? Would the 
gentleman yield?
    Let's go back to you, Governor Shumlin. You know, you were 
talking about the maple syrup and whatever and your 
methodology. There was one word that you left out, and the 
reason why I think you got the cooperation that you got is 
because of respect. The workers felt that you respected them. I 
heard your story, and I wouldn't be here either if it were not 
for unions. No doubt about it. My parents were former 
sharecroppers in Manning, SC, came up to Baltimore, got a union 
job, and that is why I am here today. So I just wanted you to 
know. And they felt respected.
    Governor Shumlin. I appreciate your comment. Obviously, 
respect for our firefighters, for our police officers, for the 
folks that risk their lives every day, for the folks plowing 
the roads and all of our public employees is incredibly 
important to any chief executive.
    Chairman Issa [presiding]. The gentleman from Arizona, Mr. 
Gowdy. I am sorry, the gentleman from Arizona, Dr. Gosar.
    Mr. Gosar. Thank you.
    I want to get back to our original topic here, about State 
and municipal debt. We are not talking apples to apples in your 
States. Let me get this right. You actually are a tax giver to 
the Federal Government and you are a tax taker from the Federal 
Government, if I am not mistaken, right? For every dollar of 
tax you get only 82 cents back and Vermont gets $1.12 back, 
right?
    Governor Walker. You know, I am an expert on the cheese in 
our States, not the apples.
    Mr. Gosar. OK. Well, apples and cheese go along with wine 
and maple syrup.
    Governor Walker. Yes, that is true.
    Mr. Gosar. But there is a difference. So my link here is 
that I am coming back to the basic core problem with all States 
is the Federal mandate, and things that some of the States 
should be doing, right? Particularly Governor Shumlin, you 
talked about health care and corrections. Isn't that a 10th 
amendment right? Wouldn't you like, don't you like the ability 
to have some flexibility in regards to oversight of those 
funds?
    Governor Shumlin. Well, yes, frankly, but you need to 
define what we mean by flexibility, because my fear is, as we 
have this----
    Mr. Gosar. Well, part of--I think you are going there.
    Governor Shumlin. If I can just finish what we were saying. 
As we get a little bit toward the next budget discussion is 
that flexibility means we are going to leave the requirements 
and take the money on behalf of the Federal Government, and the 
States are going to be in tougher shape than we are in already 
with under-reimbursements for Medicaid and Medicare.
    Mr. Gosar. Well, and I understand, because with the 
unfunded mandate there is this hidden cost that no one wants to 
talk about, and that is for that Federal law to be enacted in a 
State, we hire more workers that are not on the private sector, 
they are on the public sector, and, therefore, these roles 
continually go up. So part of this is based upon, or the 
majority, if I look across the board, coming from Arizona, and, 
holy cow, we will get to those numbers here in a second. But 
the problem is the budget problems in each of the States are 
derived by the unfunded mandate by the Federal Government.
    Governor Shumlin. You know, I think that is an 
oversimplification. I think the budget challenges in the States 
are derived from the worst recession in American history that 
was brought on by a lot of greed on Wall Street and a housing 
bubble that got transferred to Main Street. That was the 
culprit.
    Mr. Gosar. Oh, I have to stop you there, because didn't we 
also have a problem with the Federal Government in that? Didn't 
the Federal Government establish itself in the risk pool and 
all the aspects of risk telling the regulators and telling the 
banks and telling the financiers you will do this? So there is 
equal blame to go around, and that is not where we want to go 
about.
    Governor Shumlin. All right, but I would actually argue 
that if we want to get into that, that it was the lack of 
regulation----
    Mr. Gosar. Thank you.
    Governor Shumlin [continuing]. Of Wall Street that led us 
to the crisis.
    Mr. Gosar. And that is government. Once again, government 
problems, and coming from the Federal Government. But what I am 
trying to get back to is it is not an oversimplification, 
because when we are telling you a rule, if it is intrinsic to 
the Federal Government's mission, do you think they ought to 
pass the buck to you or they should fully fund it?
    Governor Shumlin. I think the Federal Government should 
keep its promises to the States.
    Mr. Gosar. And are you prepared to honor those promises to 
communities?
    Governor Shumlin. Absolutely.
    Mr. Gosar. OK. So when we are talking about health care and 
corrections, I am having a problem here on where this unfunded 
mandate is coming from, because we constantly are kicking the 
can down the road and these are the core principle problems 
that you brought up, health care and corrections.
    Governor Shumlin. Well, you know, it isn't the mandates. We 
don't have Federal mandates standing in our way in the way of 
corrections that are really a budget challenge. On health care 
we----
    Mr. Gosar. Wait a minute. I have a famous sheriff out in my 
neck of the woods and the Federal Government is breathing down 
his neck and telling him, yes, you can do that, no, you can't 
do that. So there is some oversight in regards to the Federal 
Government that dictates exactly how you can incarcerate a 
prisoner or how you have to go through a process, does it not?
    Governor Shumlin. I don't see it as a cost driver in my 
State budget.
    Mr. Gosar. Hmm.
    How about you, how do you feel, Governor Walker?
    Governor Walker. Well, there is no doubt that not only the 
mandates from the Federal Government to the State government, 
but many times the mandates that then go on to the local 
governments are driven largely by the mandates that start here. 
And to the extent that we get more freedom and flexibility, one 
thing the Governor said earlier I would concur is I would love 
to have a block grant. I want to make sure that that doesn't 
mean that that is just say, here, have it, now we are going to 
cut it in half, either. I realize that there is a core group of 
people on things related to Medicaid, but I do believe if you 
put the power back in the hands of the people at the State 
level, the States are better equipped to tackle those 
challenges and in turn can--one State versus another State is 
going to have very different needs and very different outcomes. 
And the more that we can adjust to that and not have a one-
size-fits all, the better off we are going to be.
    Mr. Gosar. Thank you.
    Chairman Issa. I thank the gentleman.
    The gentlelady from New York, Mrs. Maloney.
    Oh, she has returned. The gentlelady from California, Ms. 
Speier.
    Ms. Speier. Thank you, Mrs. Maloney and thank you, Mr. 
Chairman.
    And thank you both for your participation here today. I 
don't know that I would have done this if I were the two of 
you, but I am glad that you have.
    Let me start off with Governor Walker. I have here a Web 
site, www.standwithwalker.com, that is supported by the 
Americans for Prosperity and it is, of course, funded by the 
Koch brothers, and in it they say the following: When public 
sector workers gain sweetheart contracts filled with plush 
benefits unheard of in the private sector, the taxpayer loses 
every time.
    Do you agree with that statement?
    Governor Walker. I haven't seen that statement before, but 
I know one of your colleagues asked me earlier who pays, for 
example, for the pensions and things of that nature, it is the 
taxpayers. So I don't know about that statement in particular, 
but conceptually who pays for the pension and health care 
benefits? It is the taxpayers, including public sector 
employees who are taxpayers as well.
    Ms. Speier. Well, these are quite facts about Wisconsin's 
budget repair legislation.
    The second point is respecting the public trust. When 
teachers choose not to teach purely to pad their already lavish 
contracts. Do you believe that statement, that they have lavish 
contracts?
    Governor Walker. Lavish contracts? No. Again, you weren't 
here earlier, but I was asked about that as well, and I pointed 
out, to me, this is not about--I forgot which of your 
colleagues, one of the doctors asked whether I thought public 
employees were paid too much or too little, and I said that is 
not what this is about. This is about trying to balance the 
budget and provide long-term reforms that make government work 
better.
    One other----
    Ms. Speier. Let me ask you this. Excuse me for reclaiming 
my time. Do you think the teachers in Wisconsin are paid 
adequately?
    Governor Walker. If we could set up a system where we 
rewarded based on performance and merit, I would be even 
willing to pay more.
    Ms. Speier. Well, let me just----
    Governor Walker. But we don't have that system right now; 
we have one solely based on seniority.
    Ms. Speier. Do you know what the starting teacher's salary 
is in Wisconsin?
    Governor Walker. Starting? Depends on the district. I know, 
for example, the Milwaukee public school system, the total 
compensation package for an average employee is about $101,000.
    Ms. Speier. Well, the starting teacher's salary in 
Wisconsin is $25,222, and Wisconsin ranks 49th in the Nation in 
terms of starting salaries for teachers.
    Governor Walker. And the reason for that is because that 
talks about starting salaries, not total benefit packages. So, 
for example, if you are in a school district like many where 
they don't pay anything for health care, that is an added 
benefit in terms of what the costs are.
    Ms. Speier. You are 49th in the Nation in what you pay your 
school teachers.
    Now, let's talk about contributions. How much have you 
received in contributions from the Koch brothers?
    Governor Walker. From the Koch brothers? None directly that 
I know of. There are probably other groups that supported us, 
but I don't know what the total is.
    Ms. Speier. Well, I am under the impression you received 
$43,000 from the Koch brothers during your gubernatorial 
campaign.
    Governor Walker. Could be. I had 50,000 contributors. I 
couldn't tell you who they were.
    Ms. Speier. Did you take the phone calls of all those 
50,000 contributors when you were in the middle of that crisis?
    Governor Walker. I talked to a whole lot of people every 
day.
    Ms. Speier. All right.
    Let's move on to Governor Shumlin. I was really impressed 
by one of the statements, many of the statements you made, but 
one in particular, in which you said that Wall Street really 
believes that this crisis creation is really relative to the 
States and their potential bankruptcy is really a figment of 
the imaginations of some who are politically motivated to 
create that kind of angst. Could you expound on that a little 
bit?
    Governor Shumlin. Sure. And I want to be careful, because 
if I misspoke, I want to be careful here. I hope I didn't say 
it was a figment of the imagination.
    Ms. Speier. No, it was my term.
    Governor Shumlin. OK. What they said was, and in meeting 
with rating agencies that I just went through, and Governors do 
that, we go down and make sure that our bond ratings are strong 
and that they know how we are managing our budgets, and what 
they said in two of the three rating agencies is, when I asked 
about this question, that they feel like the doom and gloom 
about pensions of the States is greatly exaggerated for 
political reasons; that they don't think any States are going 
bankrupt; that they don't think it is the States' biggest 
challenges; and that they are puzzled by the current perceived 
crisis.
    Ms. Speier. Now, in much of our discussion today about 
defined contribution, what is missing is the fact that the 
taxpayers have to pay 50 percent of that pension benefit every 
single month, regardless. And in a defined benefit plan, as you 
pointed out, 80 percent of the cost is actually borne by the 
growth that the investments receive. The taxpayers then end up 
only paying about 20 percent. Is that not correct?
    Governor Shumlin. That is correct. And another point that 
is important to remember is, which I mentioned earlier, but I 
want to make sure it is emphasized, that in this financial 
crisis we have asked our public employees, our unionized 
employees to pay more. Both our teachers and State employees 
have agreed to pay more, to increase the share that they are 
paying. Somehow that is getting lost between the trees here. 
The fact of the matter is, yes, you are correct, 80 percent of 
payments come from investments in the fund; and, second, we 
have asked our employees and they have agreed to pay more than 
they were paying pre-crisis. So we are balancing this crisis, 
to some degree, on their backs.
    Ms. Speier. Thank you.
    I yield back.
    Chairman Issa. I thank the gentlelady and I thank Governor 
Walker and Governor Shumlin for being here.
    Mrs. Maloney. [Remarks made off mic.]
    Mr. Walberg [presiding]. I am up next.
    Mrs. Maloney. [Remarks made off mic.]
    Mr. Walberg. I accept that. No, we are not closing. I am 
just allowing the chairman a vote opportunity in Judiciary 
Committee, as I was voting and chairing a subcommittee. I was 
dealing with a noncontroversial issue and I apologize for not 
being here. Davis-Bacon is what we were talking about, so I had 
to be there. But I did read your testimonies and appreciate you 
being here, so I did want to ask some questions.
    Governor Walker, I also appreciate the fact of what you 
build in Milwaukee and enjoy riding my Road King. I understand 
you ride as well. And I have enjoyed both in Wisconsin and in 
the beautiful State of Vermont. There are days I wish I were 
there right now.
    As a former State official in the State legislature, I am 
very familiar with your situation, Governor Walker. When I 
started my tenure back in 1982 there, we had a $1.8 billion 
budget deficit. A process of a number of years we enacted 26 
tax cuts, regulatory reform, a number of things that went to 
ultimately, when I left in 1999, we had a budget surplus, a 
rainy day fund of $1 billion. Hasn't history repeatedly proven 
that lowering taxes encourages economic growth and ultimately 
increases revenue for the States?
    Governor Walker. Yes, we have seen that in the past, and we 
saw the opposite of that 2 years ago when my predecessor and 
the legislature moved to pass a budget repair bill in 24 hours 
that raised taxes by about $1 billion, and we saw, obviously, 
higher unemployment and job loss after that. So clearly raising 
taxes in an economic crisis is not the right answer. The more 
you put money back in the hands of job creators, I believe the 
better off you are going to be.
    Mr. Walberg. Build the economy.
    Governor Walker. Absolutely.
    Mr. Walberg. Well, right now Michigan, as you know, in 
talking with our new Governor, we are at a $5.7 billion budget 
shortfall. Governor Snyder is taking some aggressive steps and 
being pushed back as well, as you have experienced, including 
dealing with an emergency manager authority over 
municipalities. That leads to my question. What do you think of 
that type of authority and what are some other reforms that may 
need to be pursued in order to strengthen the fiscal standing 
of States like your own?
    Governor Walker. I would have to look specifically at what 
Rick is proposing there in terms of oversight of the local 
government. I will tell you, though, this goes to the heart, as 
a former county official, of what I am talking about and why we 
pushed reforms that weren't just about the momentary. They 
weren't just about fixing things together, or even over the 
next 2 years, but about providing long-term relief. Let me be 
clear, because I think sometimes people confuse this into 
thinking this has an impact on private sector unions. It 
doesn't; collective bargaining is fully intact for any of the 
private sector unions out there. This legislation that we 
signed into law doesn't have an impact on that for the public 
sector. To be able to make changes that ensure stability, 
financial stability in governments at the State and the local 
level, we had to make these changes, and even more so to make 
sure that government can continue to be reformed, and where we 
can improve the system and ultimately reward good employees. 
That also was a part of this package as well.
    So, in totality, I believe we give local governments the 
kind of long-term tools they need not only to balance their 
budgets, but to make prudent decisions so they can protect core 
services.
    Mr. WAlberg. I appreciate that. Well, I was going to ask 
both Governors, but let me continue my questioning here at this 
point. What steps can, Governor Walker, or should not, I guess 
the positive and the negative, what steps can or should not 
Congress do to help you in your budget situation? And I guess 
following up with that, do you agree that another State bailout 
is not the solution?
    Governor Walker. Well, to me, asking the taxpayers, and me 
as a Federal taxpayer, which obviously we are reminded of this 
week, asking me to bail out another State isn't something I am 
particularly interested in as a taxpayer. To me, I think each 
of us in each of the 50 States have to make, in many cases, the 
tough decisions to ensure that we not only balance our current 
budgets, but we make long-term decisions. And if we look to 
other people at the Federal level or other entities to do that, 
I think that puts us in a very precarious position.
    One other thing, if I might digress for just 1 second from 
your question. The gentleman from Massachusetts, and I 
apologize, I think his nameplate is turned, asked me a question 
about process, and one thing is just important to put in the 
record. We didn't start the debate the way that it has been 
characterized. In December, after the elections but before I 
was sworn into office, the public sector unions in the State 
rushed to the lame duck session in the legislature and to the 
Governor and tried to pass through contracts that would have 
locked us in to a more dire financial situation with costs that 
I believe we couldn't account for with a $3.6 billion deficit 
on the horizon. So that was the initial act.
    Now, we were successful in appealing even to some of the 
Democrats in the legislature to stop that from happening and 
giving us a chance to do that, but when people ask why didn't 
we begin by negotiating, it was really the tone was set early 
on by the process that was taken after the election but before 
we were sworn in, and that is why it became clear to us that we 
needed to empower both our State and local government to make 
those sorts of long-term changes.
    Mr. Walberg. I thank the Governor and now turn to Ms. 
Maloney. And I thank you for putting up with the confusion that 
went on there.
    Mrs. Maloney. Well, thank you and thank you for your very 
thoughtful questions.
    Welcome, Governor. I thank you for your testimony and for 
being with us here today.
    Governor Walker, many unions and some elected officials, 
including some Republican Governors, have criticized your 
actions as extreme, referring to them as some sort of fringe 
effort to attack workers' rights and dismantle unions. How do 
you respond to these criticisms? Do you feel your actions were 
extreme or out of the mainstream in any way?
    Governor Walker. No, because I believe fundamentally if 
what we have heard said over and over again was a fundamental 
right, you all in Congress would be acting on it right now. You 
do not have collective bargaining, other than Postal Service 
workers, for the vast majority of public employees who work for 
the Federal Government for wages and for benefits. If it is a 
fundamental right, why aren't you debating it right here now? 
It is not; it is a government entitlement. Collective 
bargaining is important for the private sector, for the 
examples we have heard about the impact it has had on families 
and legacies. Private sector unions are my partner in economic 
development, I work with them, and I hope to work with our 
public employees.
    Mrs. Maloney. OK.
    Governor Walker. But collective bargaining itself is not a 
fundamental right. Rights come from the Constitution, and 
nowhere in the Constitution does that clearly define that.
    Mrs. Maloney. Well, many of the criticism does come from 
unions, but I have a stack of editorials here from major papers 
across the country, and I would like to go through some of the 
headlines. We have the Chicago Sun Times, and its editorial 
says, Cut Pensions But Don't Bust Unions. We have the 
Philadelphia Enquirer, and it says, A Bridge Too Far. The Los 
Angeles Times says, ``Wrong in Wisconsin.'' And the Boston 
Globe, its headline says, By Overreaching, Wisconsin Governor 
Hinders Reforms in All States. I even have some editorials from 
your own State's papers, the Milwaukee Wisconsin Journal, the 
Centennial, and the Green Bay Press Gazette. I would like to 
read from a few of these and get your response.
    The Philadelphia Enquirer calls your actions ``a partisan 
plot masquerading as fiscal prudence.'' The New York Times 
says, ``Even when unions have made concessions, Republican 
officials have kept up the attack. The Republicans claim to be 
acting on behalf of taxpayers, and this is not believable.'' 
The LA Times says your claim ``that public employee unions must 
be crushed in order to balance the State's budget is deeply 
disingenuous.'' And the Milwaukee Wisconsin Journal Centennial 
writes that ``unions have conceded on benefits, but parts of 
Walker's budget repair bill unfairly targets collective 
bargaining for public employees.'' Even the Green Bay Press 
Gazette, a newspaper that I believe endorsed you when you ran 
for Governor, says your approach ``casts the debate as an anti-
union campaign and not a tough but fair shared sacrifice.''
    So what is your reaction to these statements by respected 
papers across our country?
    Governor Walker. Sure. Thank you for your question. I would 
point out two things. One, just a factual error that a couple 
of those papers alluded to and I mentioned before. The unions 
did not reach settlements. Two public employee unions made a 
statement, neither of which was codified in any agreement and 
none of which----
    Mrs. Maloney. But, Governor, this was not referring to 
those specifics----
    Governor Walker. No, I will answer your other point----
    Mrs. Maloney. But may I finish? Because my time is 
expiring. I believe the point that they made in these 
editorials is the same point that many of us on this panel have 
been trying to make today, and we are trying to make the point 
that it is one thing to ask for shared sacrifice for financial 
reasons, but it is very unfair, and you appear to be trying to 
strip American workers of their rights, and there does not seem 
to be any financial rationale at all. That is what these 
editorials are making.
    Governor Walker. Sure.
    Mrs. Maloney. Instead, it appears very much to me and to 
others to be ideologically and politically motivated.
    Governor Walker. Per your original question, I would say 
many of those same voices said the same thing about Mitch 
Daniels in 2005. After his time in office, after people saw the 
benefits of the collective bargaining reforms he put in place, 
where government got more efficient, more effective, more 
accountable, and where ultimately public employees who were 
doing a great job got rewarded, the people in his State re-
elected him with 58 percent of the vote. I think it is because 
they recognized results. They wanted results, and that is what 
they got.
    Chairman Issa [presiding]. I thank the gentlelady.
    We now recognize the former chairman of the full committee, 
the gentleman from Indiana, Mr. Burton, for 5 minutes.
    Mrs. Maloney. Mr. Chairman, may I put these editorials in 
the record?
    Chairman Issa. Without objection, so ordered.
    Additionally, the earlier unanimous consent for Mr. 
Connolly is accepted, so his will also be placed in the record.
    [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Burton. Governor, you can't run out on me now; I was 
going to say something nice about you.
    Unidentified Speaker. Congressman Burton, he is going to be 
right back, and we just----
    Chairman Issa. Ladies and gentlemen, we are going to take a 
2-minute recess.
    [Recess.]
    Mr. Burton [presiding]. Governor Walker, I really 
appreciate you mentioning Mitch Daniels. He is my Governor and 
we think he has done one hell of a job, and we are proud that 
you think so as well. And he did a lot of the things that you 
have tried to do in Wisconsin by executive order, and, as you 
said very clearly, the State is in good fiscal condition. He 
has done an outstanding job and we are very proud of him, and 
that is why he got re-elected by such a large majority. And he 
won re-election at a time that, for the first time since 1964, 
we lost a State to the Democratic candidate, Mr. Obama, for 
President. So it shows you against the tide he did very well.
    I would like to ask you, Governor Shumlin, you don't have a 
balanced budget requirement in your State.
    Governor Shumlin. No, we do not.
    Mr. Burton. And you are going to adopt a single payer 
system for health care?
    Governor Shumlin. We are trying, yes.
    Mr. Burton. And how are you going to pay for that?
    Governor Shumlin. Well, our challenge in health care reform 
across the country in both Federal and State, in my judgment, 
has been that no one has gotten cost containment right. So our 
first challenge is to design a system where we are using our 
dollars more efficiently and ensuring that we are spending less 
on health care. Once we figure out how to get cost containment 
right, and that is a real challenge, as you know, we are then 
going to figure out the best publicly financed method to pay 
for it, and that decision will be made in 2013.
    Mr. Burton. Are you familiar with the situation in 
Tennessee with their plan or the situation in Massachusetts 
with their plan?
    Governor Shumlin. I am not clear what you are alluding to.
    Mr. Burton. Well, I mean, they went to a program that is 
not exactly like yours, but similar; the government was going 
to control the health care and the expenditures and that sort 
of thing.
    Governor Shumlin. Well, I can tell you that I don't study 
Massachusetts and other States as much as I study Vermont and, 
frankly, we have already done that. We have Dr. Dynasaur, which 
covers all our children. The Republican Governor, Jim Douglas, 
passed Catamount, which covers you up to 300 percent of poverty 
with a great benefits package. We have VHAP, Vermont Health 
Access. So no one has better access, I don't believe, with the 
exception of maybe Massachusetts, than the State of Vermont. So 
my challenge is that we have done access; we now have a cost 
problem. They are doubling every 10 years; it is driving 
businesses and middle-class Americans who are paying more and 
more money for less and less insurance. We think we can get it 
right in Vermont.
    Mr. Burton. Without raising taxes?
    Governor Shumlin. Well, the point is we are raising taxes 
right now because health care premiums are going up so quickly, 
the tax being money coming out of Vermonters' pockets at a 
higher rate than they can earn for rising health care costs. I 
pay it as a business person when I give my employees health 
insurance; it is a health care tax. Rising cost for a tax on 
business and a huge hindrance to job creation.
    Mr. Burton. So you probably will have a tax increase.
    Governor Shumlin. No, we won't have a tax increase. What we 
will do is design a system where we spend less on health care 
than we are spending now and find a way to pay for it where it 
follows the individual and isn't required by the employer. The 
tax increase now is coming from the rate at which health care 
costs are growing, about twice of our income. That is what we 
are trying to fix.
    Mr. Burton. I understand there is going to be an offset 
there, but how do you make the offset? I mean, you have to have 
the money to offset the rising cost of health care. How are you 
going to get it?
    Governor Shumlin. We are going to reduce the rising cost of 
health care. We are getting the money right now----
    Mr. Burton. No, no, I understand that. But if you can't 
reduce the rising cost. Let's say it doesn't work----
    Governor Shumlin. If we can't reduce the cost, we won't 
pass the bill.
    Mr. Burton. You won't pass the bill.
    Governor Shumlin. That is right.
    Mr. Burton. So you won't have a tax increase.
    Governor Shumlin. Our goal is to pay less for health care 
and ensure that we are delivering quality health care to all 
Vermonters without the waste.
    Mr. Burton. Well, I understand, and you are a very good 
politician; you are skating the issue. You are not saying you 
will not raise taxes, but, if necessary, you probably would 
have to.
    Governor Shumlin. What I am saying is that we are paying 
the tax right now. It is on my business; it is on every 
business in Vermont; it is every Vermonter's----
    Mr. Burton. I understand, Governor.
    Governor Shumlin [continuing]. Paying for premium.
    Mr. Burton. I can see how you got elected, Governor; you 
are sharp.
    Let me just say, Governor Walker, I don't see how the local 
municipalities in your State who are facing rising costs could 
possibly have survived without huge property tax increases or 
other tax increases unless you did what you did, so I was very 
happy that you had the perspicacity to hang in there when you 
had those problems. I would just like to ask you now--I know 
this is before the court, your supreme court. Do you have any 
idea when they are going to make a ruling on your case?
    Governor Walker. Well, an appeal has been made to the 
supreme court right now. Very well, maybe likely today, the 
circuit court mentioned yesterday they may even, by today or 
tomorrow, put forth a ruling on the original issue on the open 
meetings law. But one way or the other it will probably end up 
in the supreme court, but it could be as early as this week.
    Mr. Burton. And that will probably be a close vote, I would 
imagine, on the supreme court.
    Governor Walker. It is hard to tell. I am not a lawyer, but 
when I was in the legislature I had the audacity to actually 
read the legislation I voted on, so sometimes I was accused of 
being a lawyer. But I read the statutes, and in this case the 
law is pretty clear, and I think in the end, whether it is the 
circuit court, the court of appeals, or the supreme court, 
ultimately they will rule in favor of the legislature. I have 
said all along it is not if this will be the law, it is when.
    Mr. Burton. They are providing a speed reading course for 
Members of Congress so they can read 2,500 pages in one 24-hour 
period, so I am happy that you in Wisconsin were reading the 
bills.
    As I understand it, the State and local governments, you 
asked the employees to contribute 5.8 percent to their pensions 
and 12.6 percent to their health care premiums, and the current 
private sector employees are paying about 20 percent. So what 
you were talking about was substantially less, even though you 
were having an increase, substantially less than what the 
private sector was paying.
    Governor Walker. That is correct. Middle-class taxpayers in 
our State are paying more and they are also, on top of that, 
paying for the government that they will have to pay for.
    Mr. Burton. Now, do you have a merit pay system in 
Wisconsin?
    Governor Walker. We have a civil service protection system 
where we have some benefits for those non-represented 
employees, but we don't have the same things under those 
individuals who are represented employees. This would allow us 
to do that not only at the State level, but ultimately at the 
local level, which is particularly important in schools, 
cities, towns, counties, so forth. We could pay for performance 
and that would be exceptional.
    Mr. Burton. Very good.
    Well, I see the boss is back, so I will turn the chair back 
to him and I yield back.
    Chairman Issa [presiding]. The Chair now recognizes the 
gentlelady from the District of Columbia.
    Mr. Cummings. Mr. Chairman? Mr. Chairman.
    Chairman Issa. The ranking member is recognized.
    Mr. Cummings. I would just ask unanimous consent that Ms. 
Norton be given 7 minutes, as was Mr. Burton. He just took 7 
minutes. I just want to make sure we got equal time, that is 
all.
    Chairman Issa. Absolutely. We have run over on almost every 
person, but certainly I expect that the next speaker may run 
over a similar period of time.
    The gentlelady from the District of Columbia.
    Ms. Norton. Thank you. Thank you both.
    I am very grateful for both of you to come this morning 
because you present us with a contrast in approaches running a 
State government in hard times, and I certainly want you to 
know that I recognize that there would be great differences 
between your two States. Both of you, though, come from States 
with a history of strong unions and collective bargaining, so 
in an important way you are comparable. But, of course, there 
has been quite different results with those unions. You are 
facing something of a backlash, Governor Walker, court cases 
and all the rest of it. I do want you to know that I believe 
you faced a terribly serious situation. For a new Governor to 
come in and be faced with what you and, for that matter, 
Governor Shumlin were faced with is nothing to do anything but 
take seriously. There are certainly no more funds from the 
Federal Government, as your predecessor had. We are not 
mitigating anything for you out there. And cuts are proceeding 
here. Now there are warnings that we could face a double dip. I 
am telling you that is what happened in 1937. The history books 
tell us that President Roosevelt experienced something of a 
backlash to his spending to get out of the Great Recession, and 
then in 1937 they called the results the Roosevelt Depression. 
So I think the States don't even have what we have.
    I would like to ask you, Governor Walker, have you yet met 
with your top union leaders?
    Governor Walker. As has been the practice in the past, the 
head of the Office of State Employee Relations, Greg Gracz, has 
talked to them about how we move forward from this point.
    Ms. Norton. Wouldn't it be good, now that you have come out 
of the worst of the fight, to seek a meeting with them so as to 
mend as much of the breach as you could?
    Governor Walker. Again, on not only this issue, but on 
where the employee contracts go forward from this point, that 
is why Mr. Gracz set up that meeting. And on other issues 
beyond just the public employee contracts, but with the head of 
the AFL-CIO, for example, on issues related to unemployment 
compensation and changes that need to be made in the future or 
may need to be made, we have an Unemployment Compensation 
Council, and both he and----
    Ms. Norton. You are the head of the government. You had the 
press conferences; you called the shots. These people are not 
going away. You would not have to be engaged in negotiation 
with them or in the details, but a simple meeting, would that 
not send a signal to the State that you at least had reached 
out in hope of better relations in the future?
    Governor Walker. Well, my better relations at this point 
have been with the workers of the State. I have reached out and 
talked----
    Ms. Norton. Many of the workers are in fact represented, 
and unless they believe that their unions have a better 
relationship, I don't know why in the world they would figure 
that somehow you could jump over them and have a better 
relationship, given what has already happened to them, Governor 
Walker.
    Governor Walker. Again, the common practice in the past is 
to work through the position that Mr. Gracz has right now----
    Ms. Norton. All right, Governor Walker, I see that you are 
just where you were. It is what happened in the past that led 
to the most serious breach Governors had with his workers in 
memory.
    Let me ask Governor Shumlin. You have also had hard times 
in your State, and let me see if the figures I have been given 
are correct: that the State employees voted to accept the 2-
year 3 percent cut; that the teachers are agreeing to three 
additional years of work before retiring and to contribute a 
greater percentage of their pay toward their pensions, and 
pensions are at the root of much of the trouble of the States; 
that your State Employees Association voted to increase the 
pension contribution by 1.3 percent over the next 5 years. How 
have you been able to get unions to give up so much and 
apparently to maintain some kind of relationship with 
collective bargaining in your State?
    Governor Shumlin. Well, Congresswoman Norton, you know, I 
think you got to the heart of it right in the beginning of your 
comments. The first thing that I did as Governor, after getting 
sworn in, that every day, was call the Vermont State Employees 
Association, our State employee union, into the office and tell 
them that I needed to make $12 million worth of additional 
cuts, and I wanted their cooperation, through hiring freezes 
and other methods, which are not part of the list of 
concessions----
    Ms. Norton. Did you threaten them if they didn't----
    Governor Shumlin. I absolutely didn't threaten them. I said 
we have to work together to solve this problem. And guess what? 
They stood with us and we have made the cuts. In fact, we have 
exceeded the $12 million target that we needed to get for this 
fiscal year.
    My point is I have seen both examples. In the last 8 years 
we had a Republican Governor who never invited the teachers 
union up to his office and, therefore, turned to the speaker 
and myself to get the concessions on the $25 million from them. 
My point is that reasonableness, compromise, common sense, that 
is what the American people are looking for. But what they are 
looking for more than anything is for us to all sit around the 
table together to solve real problems. We have done that in 
Vermont. I know that other Governors are doing it. I think we 
all would be well served by that approach.
    Ms. Norton. Governor Walker, I wouldn't be so presumptuous 
as to give you any advice. You know your situation better than 
any of us. But if I may, Mr. Chairman, use an analogy based on 
relationships here in the Congress, you are aware that the 
Congress is considered to be very polarized. Now, the chairman 
and I are on very different sides when it comes to matters 
affecting national policy and affecting even the District of 
Columbia. But when I have had a disagreement with him, while I 
have not recruited him to my position, I have always felt that 
this was somebody I could talk with and that we would have a 
civil conversation. I am known to be combative, sir. I 
represent people who have a vote in this committee but don't 
have any vote on the House floor, second per capita in Federal 
income taxes. But I don't say I never want to speak to these 
Republicans who are going to vote for this congressional 
resolution coming up. So I am not going to tell you what to do, 
but I do want you to know I am in the minority here, and 
whether I was in the minority or the majority, and even though 
we vote often party line, we maintain good relationships.
    Analogizing that to your situation, after you have had a 
tough fight with a bunch of unions, I would want to take the 
high road and say I am the big guy here; I am calling you in, 
this is why I did it, I hope things go better in the future, 
and be done with it.
    Thank you, Mr. Chairman.
    Chairman Issa. I thank the gentlelady.
    We have a vote. I do not want to hold the Governors over, 
so we have two people left present who have not spoken. I am 
going to ask you to be at or below 5 minutes so that you both 
can get in, and then we will recess this panel and thank the 
Governors.
    Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman.
    I want to thank both you gentlemen for not only your 
patience, but your very thoughtful responses. I am concerned 
that there appears to be a systematic attack on American 
workers, and part of that attack seems to be designed to blame 
them for fiscal challenges facing the States.
    Governor Shumlin, in your testimony you attribute State 
budget shortfalls not to American workers, but to ``the 
greatest economic recession since the Great Depression.'' As 
you stated, our revenues are down and the need for government 
services is up. Is that an accurate depiction?
    Governor Shumlin. Absolutely.
    Mr. Davis. The Washington Post columnist Ezra Klein 
explained the same point with respect to Wisconsin; indicated 
whatever fiscal problems Wisconsin is or is not facing at the 
moment, they are not caused by labor unions. That is also true 
for New Jersey, for Ohio, and for the other States. There was 
no sharp rise in collective bargaining in 2006 and 2007, no 
major reforms of the country's labor laws, no dramatic change 
in how unions organize. And yet the State budgets collapsed; 
revenues plummeted, taxes had to go up, and spending had to go 
down all across the country. Blame the banks, blame global 
capital flows, blame lax regulation of Wall Street, blame home 
buyers or home sellers, but don't blame the unions, not for 
this recession.
    Governor Walker, how do you respond to that view?
    Governor Walker. Thank you, Representative, for your 
question. As I mentioned earlier in my testimony, I think there 
are a number of reasons that brought at least Wisconsin to a 
$3.6 billion deficit. One, like Vermont and other States, is 
the economy, no doubt about it. You mentioned a bunch of 
different reasons that people acknowledge were a part of the 
recession. I won't get into the details of that, but tell you 
that one significant part, without a doubt, is the economy. And 
that is why we are working so hard to improve that and show 
that Wisconsin indeed is open for business so future budgets 
are easier to tackle.
    In our State, though, beyond that, and something I have 
acknowledged is not a partisan issue, it has been Democrats and 
Republicans alike in the past, have deferred tough decisions. 
For 16 years, the last 8 biennial budgets--and it goes back 
before that, probably, but for at least 16 years since the 
State started measuring the structural deficit, State lawmakers 
and past Governors have deferred tough decisions by raiding 
things like the transportation fund or the patient compensation 
fund in our State, by pushing off school aid payments to the 
next biennial, by----
    Mr. Davis. Well, let me ask you----
    Governor Walker. And then the last point I just mentioned 
was 2 years ago the last budget was balanced with several 
billion dollars of one-time Federal stimulus aid. All those 
things, which I believe my colleague mentioned as well, all 
those things collectively added to our problems. What we have 
tried to identify are possible solutions, and my reforms that 
we are talking about here today represent a portion of that. 
About $1.7 billion with the savings in the next 2 years will 
come from those, but I have a $3.6 billion deficit, so----
    Mr. Davis. Well, let me ask you. There are those who 
suggest that you have balanced your budget on the backs of 
middle-class working families; you have cut funding for public 
education, low cost prescription drugs, and in-home health 
care; and at the same time gave tax breaks to wealthy 
corporations. How do you justify that position?
    Governor Walker. I would say that is just not true. If you 
look down the line at the budget we proposed, the biggest 
beneficiaries of our budget are middle-class taxpayers in the 
State of Wisconsin. The biggest tax relief we provide is an 
absolute freeze on the property tax levy in the State of 
Wisconsin in our budget. That affects middle-class taxpayers as 
much as anybody else out there.
    In terms of the middle class, I would contend, in our 
State, the middle class are the very people who have been 
paying the largest share of taxes to pay for the expanse of 
government in the past. If you look at just the numbers, $3.6 
billion. Our reforms save $1.7 billion. That means the rest of 
that, nearly $2 billion that has to be balanced, come from a 
variety of other areas. Some of that has to come from a 
reduction of State aid to local governments, but that is 
because, in turn, unlike other States that are cutting aids to 
local governments, we are actually giving them the tools to 
balance their budget without massive cuts in service, without 
massive layoffs.
    Mr. Davis. Thank you very much, Mr. Chairman. My time is 
up.
    Chairman Issa. I thank the gentleman.
    The gentlelady from Wisconsin.
    Ms. Moore. Thank you so much, Mr. Chairman. The Governor 
and I have a really long history; we are friends. I am crazy 
about his kids and his wife, but I am not going to spend my 5 
minutes pretending that we agree on anything.
    I am going to start by suggesting to you, Governor, that I 
just believe your $3.6 billion structural deficit. I think that 
I served on the finance committee for many years, and the 
chairman has asked the right question. State and local 
government spending cuts, choice or necessity. That $3.6 
billion deficit--I am not going to call it a structural 
deficit--is simply the difference between what the agencies 
request and your austere budget. So in between there there is a 
lot of debate about whether or not there is a $3.6 billion 
structural deficit.
    You know, even when you consider stuff like the Medicaid 
payment, which was one-time only, $169 million, $200 million in 
that patient compensation fund that the courts say you have to 
pay back--but, of course, that wasn't even in your budget 
repair bill--or the $58 million for the Minnesota Reciprocity 
Fund, which also was not in your budget reconciliation bill, 
the Fiscal Bureau for current year fiscal 2011, you had $121 
million in cash, which is not a lot of money. So you started 
out by giving $117 million worth of tax breaks, which reduces 
revenue for the next fiscal year. And, in contrast to giving 
these wealthy people tax breaks, you cut the earned income tax 
credit, doubling the taxes on the poorest parents by cutting 
their earned income tax credit.
    With respect to collective bargaining, you know, you said 
in your testimony that folks were running and having a fit to 
settle contracts that they had been working on for a year. All 
11 examples that you have given, members were already making 
concessions around health care, every single 1 of the 11 people 
that you raised. You said yourself that the pension fund is 
99.67 percent funded. So the question is choice or necessity. 
And in terms of public workers making more money than the 
private sector, that is not true; they make 8.2 percent less 
considering their education and training, and that is what 
pension funds are, deferred compensations. They have bargained 
for years for less money in order to have a pension, which is 
deferred compensation.
    Now, let me ask you, choice or necessity. Did you really 
have to end Medicaid benefits for dialysis patients or put 
waiting lists for disabled people who need home health care? 
What in the world does balancing a budget have to do with your 
program in Milwaukee to expand education vouchers so that the 
richest person in Milwaukee County can take $6,500 away from 
the poorest kids in the State for education? What in the world 
does that have to do with balancing a budget?
    You reinstate the 30-hour work week on welfare recipients 
and you tax welfare recipients $20 a month to balance the 
budget. Transportation. I know, if there is time, if the 
chairman gives us time, because I am using my 5 minutes to make 
my statement. You know, you are going to say you gave $410 
million to your favorite fund and your favorite folk you love 
to the highway people, $410 million, Governors in the past have 
raided it for education. You took a billion dollars out of 
education, which most Governors don't do. But you didn't do it 
for transit. There are 12 communities in Wisconsin that give 24 
million rides a year that are going to suffer because of what 
you have done. And you know, you are going to lose $46 million 
in Federal funding because you have taken collective bargaining 
away, and that is against Federal law.
    So, you know, Governor, I asked the question, if you have 
time to answer, State and local government spending cuts, 
choice or necessity? And I yield back the balance of my time.
    Chairman Issa. Would the gentlelady yield for a question?
    Ms. Moore. Yes. I have 10 seconds left.
    Chairman Issa. Well, in that 10 seconds, what Federal law 
requires collective bargaining and you would lose money over 
it?
    Ms. Moore. Transportation. There is a transportation 
prohibition against--we have communities in Wisconsin that 
provide public transportation, and you have to have public 
workers collective bargaining agreements in place in order to 
get the transit reimbursement.
    Chairman Issa. Would the gentlelady be willing to put that 
in the record, the data supporting it?
    Ms. Moore. Yes.
    Chairman Issa. Thank you.
    Ms. Moore. Thank you.
    Chairman Issa. I thank the gentlelady and I thank our two 
Governors. Members, left and right, have a lot of unanswered 
questions, but only because many of us spent too much time not 
asking the questions, and in some cases we simply ran out of 
time. So I would ask both the Governors if you, with the aid of 
your staff, would mind answering some supplemental questions 
from the committee.
    [Witnesses answer in the affirmative.]
    Chairman Issa. Let the record show you have answered in the 
affirmative, which I appreciate. Additionally, at the beginning 
we received general leave for you to add additional information 
that you choose to, perhaps expanding on any answers you gave 
or providing supplemental information.
    I thank you again. This has been great for the committee 
and I am sure good for those who took the time to watch or to 
attend.
    With that, we stand recessed until about 10 minutes after 
the last vote.
    [Recess.]
    Chairman Issa. It is now my pleasure to recognize the 
second panel of witnesses. Dr. Andrew Biggs is a resident 
scholar at the American Enterprise Institute for Policy 
Research; Mr. Mark Mix is the president of the National Right 
to Work Committee; Dr. Robert Novy-Marx is a professor of 
finance at the University of Rochester Simon Graduate School of 
Business; and Dr. Desmond Lachman is a resident scholar at the 
American Enterprise Institute for Public Policy Research and an 
adjunct professor at Georgetown University.
    Pursuant to the House rules, all witnesses will be sworn 
in. Would you please rise to take the oath?
    [Witnesses sworn.]
    Chairman Issa. Let the record indicate all witnesses 
answered in the affirmative. Please be seated.
    We will suspend opening remarks. I simply want to thank you 
for your patience. I know that we had an audience that included 
your presence, and your testimony is every bit as important 
because ultimately the facts will determine a great deal of 
what the committee does going forward.
    With that, Dr. Biggs.

STATEMENTS OF DR. ANDREW BIGGS, RESIDENT SCHOLAR, THE AMERICAN 
  ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH; MARK MIX, 
 PRESIDENT, NATIONAL RIGHT TO WORK COMMITTEE; DR. ROBERT NOVY-
   MARX, PROFESSOR OF FINANCE, UNIVERSITY OF ROCHESTER SIMON 
GRADUATE SCHOOL OF BUSINESS; AND DR. DESMOND LACHMAN, RESIDENT 
 SCHOLAR, THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY 
                            RESEARCH

                 STATEMENT OF DR. ANDREW BIGGS

    Mr. Biggs. Thank you very much. Chairman Issa, Ranking 
Member Cummings, and members of the committee, thank you for 
the opportunity to testify with regard to the financial and 
budgetary challenges facing State governments. I will touch on 
three topics related to State government finances: public 
sector pensions, public employee compensation, and State 
investment practices.
    Financing for public employee pensions poses significant 
challenges. But as bad as the current pension funding situation 
may appear, the reality is likely far worse. The GAO reports 
that funding for public sector pensions currently equals around 
12 percent of public sector wages. But these figures are based 
on current accounting rules which allows plans to discount 
guaranteed benefit liabilities using expected interest rate on 
a portfolio of risky assets. Economists are nearly unanimous in 
believing this approach to be both technically wrong, as it 
understands the true value of plan liabilities, and from a 
policy perspective dangerous, as it encourages State and local 
pensions to take excessive investment risk.
    If public sector pensions were required to use economically 
sound accounting rules, the cost of pension funding would rise 
from around 12 percent of employee wages to an astronomical 46 
percent. This latter figure represents the true value of the 
pension benefits being promised and the true burden being 
placed on the public. The difference between the 12 percent and 
46 percent figures represents the value of the risk that State 
pension funds are taking. States reduce the apparent pension 
cost burden by investing in risky assets. But this merely 
increases the contingent liabilities borne by taxpayers should 
investment returns falter.
    Whether States resolve rising employee health and pension 
costs by increased taxes or reduced benefits depends in part 
upon how they judge the overall compensation of public sector 
employees. A number of recent studies have concluded that 
public employees in Wisconsin and other States are 
significantly underpaid relative to what similar individuals 
would receive in the private sector. These studies have been 
cited in arguing against changes to public sector compensation. 
But existing analyses of State and local pay significantly 
undercount future pension benefits, omit entirely retiree 
health coverage, and ignore the value of higher public sector 
job security. Correcting for these errors generates very 
different conclusions.
    In certain large States, such as California, average public 
employee compensation is around 30 percent above what similar 
private sector workers would receive. In Wisconsin we found a 
public sector pay premium of around 10 percent.
    While compensation varies from State to State, the broad 
view that State and local employees are significantly underpaid 
is almost certainly false.
    Finally, I wish to touch on the investment practices of 
State and local pensions. Public pension accounting literally 
says that a plan that takes more investment risk immediately 
becomes better funded, to the tune of tens or even hundreds of 
billions of dollars. For policymakers seeking to avoid 
difficult choices, riskier investment portfolios are an 
attractive alternative. Since the mid-1980's, the typical 
public sector pension portfolio has nearly doubled the share of 
equities that it holds. Today the shift is toward so-called 
alternative investments, which include private equity, hedge 
funds, and the like.
    In forthcoming research, I calculate that public sector 
pensions have actually increased the risk of their target 
portfolio allocations since the financial crisis of 2007. There 
is the danger that rather than learning from experience, 
pensions will seek to double-down in an effort to avoid the 
inevitable. A number of States have also issued billions of 
dollars of pension obligation bonds, meaning, in effect, they 
are making risky investments with borrowed money.
    But increased risk in pension investments make State and 
local finances as a whole more subject to the shifting winds of 
financial markets. Moreover, it is not clear that lawmakers 
fully understand the investments they are making. The solution 
to this problem is better pension accounting that removes the 
dangerous incentives toward ever-increasing levels of 
investment risk. Better information is the key to better 
policy.
    Lawmakers around the country can turn State and municipal 
finances around, just as lawmakers here in Washington can turn 
around Federal finances. But time is a luxury that is growing 
short. While still mired in a recession, it is difficult to 
contemplate painful long-term reforms. But there is reason to 
believe that such reforms, if properly enacted, can generate 
new confidence among citizens, businesses, and financial 
markets that American government at all levels has the capacity 
to get on top of its budgetary problems. And during an economic 
slowdown, renewed confidence is essential to a recovery.
    Thank you very much.
    [The prepared statement of Mr. Biggs follows:]

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    Chairman Issa. Thank you.
    Mr. Mix.

                     STATEMENT OF MARK MIX

    Mr. Mix. Mr. Chairman, thank you for the opportunity to 
participate.
    May we live in interesting times. That was allegedly an old 
Chinese blessing; more accurately a curse that seems to be 
pronouncement appropriate for the topic of today's hearing.
    Clearly there are tough choices ahead as States and 
municipalities deal with the clear and present danger of fiscal 
crisis. There is growing evidence that the fiscal house of many 
States and municipalities are in desperate states. Several 
questions arise as a takeoff point for this discussion, but an 
obvious one is what municipalities and States must do to fix 
it. But that question can't be answered until we understand the 
cause of the condition. This is where I will comment.
    I believe that the primary cause of the current condition 
is the inability to implement reform as a result of actions 
taken decades ago that empowered government union officials 
with privileges that are inappropriate to the functions of 
government. Specifically, I am talking about granting private 
sector labor organizations the privilege of a monopoly 
bargaining over government workers. Let's be clear here. This 
does not mean that government workers don't have the right to 
join a union and they can't associate; it means about 
recognition. That right shouldn't be taken away for the right 
to join and associate.
    But it does mean that the model we ascribe to the private 
sector is completely inappropriate for government, and that is 
now becoming clear. And I am in good company with that premise. 
As we have heard already the testimony of Members of Congress 
citing President Roosevelt's opposition to government 
bargaining. But he also agrees with George Meany, the new 
President of the AFL-CIO in 1955, who said it is impossible to 
bargain collectively with the government.
    At the February 1959 meeting of the AFL-CIO executive 
council, a statement prepared by representatives of the 
Government Employee Council was endorsed which included the 
following. It said, in terms of accepted collective bargaining 
procedures, government workers have no right beyond the 
authority to petition Congress, a right available to every 
citizen.
    In New York City, the petri dish of government union power, 
Democrat Mayor Robert Wagner was advised to break a campaign 
pledge made to government union officials because granting 
union monopoly bargaining would grant too much power to union 
officials and wet their appetites for even more. His advisors 
told him it would give unions too much sway over elected 
officials. And Wagner's advisors were right. After the New York 
City model had been in place for several years, former New York 
AFSCME Union President Victor Gotbaum boasted, we have the 
ability to elect our own boss.
    A New York State court spelled it out more precisely in the 
years earlier, in a case called Railway Mail Associates versus 
Murphy, in which they opined to tolerate or recognize any 
combination of civil service employees of the government as a 
labor organization or union is not only incompatible with the 
spirit of democracy, but inconsistent with every principle upon 
which our government is founded. To admit as true that 
government employees have the power to halt the functions of 
government unless their demands are satisfied is to transfer to 
them all legislative, executive, and judicial power. Nothing 
could be more ridiculous.
    Fast forward to today. We see dramatic impact of the 
process which is inconsistent with every principle upon which 
our government is founded. In May 2010, the Business Insider 
Web site published a list of the nine States most likely to 
default. The news and analysis oriented site ranked heavily 
unionized California, Illinois, Massachusetts, Michigan, 
Nevada, New Jersey, New York, Ohio, and Wisconsin as the worst 
default risks. An average of 61 percent of public sector 
employees in those nine States with the worst default risk are 
under union monopoly bargaining power in 2009. That is overall 
public unionization of 20 percent higher than the typical 
State.
    In the nine States with the worst default risk from 1999 to 
2009, aggregate private sector jobs fell 4.2 percent, but State 
and local government jobs increased by 9 percent. Not one of 
the 22 States with the 2009 public sector unionization rate of 
under 30 percent was found to be on the Business Insider's most 
likely to default list.
    Further, Washington Examiner editor Dave Freddoso recently 
analyzed the relationship between public sector unionization 
and State per capita debt. Freddoso found that among the States 
with fewer than 40 percent of State and local government 
workers unionized, the median per capita State debt in 2007 was 
$2,238. Among the States between 40 and 60, the median debt was 
$3,609. But among the States with more than 60 percent of the 
State and local government workers unionized with monopoly 
bargaining laws, the median per capita debt was $6,380. And 
these are 2007 numbers, before we even got to the economic 
crisis.
    Excessive spending, taxation, and debt are endemic to 
governments everywhere, but there are large measurable 
differences between the States that have handed monopoly 
privileges to public safety union officials and States that 
have resisted the pressure. In any discussion of State 
municipal debt and the tough choices ahead, they must include 
the issues of growing government union monopoly power and the 
impact on the States, municipalities, and, most important, 
taxpayers.
    [The prepared statement of Mr. Mix follows:]

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    Chairman Issa. Thank you.
    Professor Novy-Marx.

               STATEMENT OF DR. ROBERT NOVY-MARX

    Mr. Novy-Marx. Contrary several of the statements made here 
this morning, State and local pension systems are significantly 
underfunded. The shortfalls faced by these systems represent 
massive debts that public employees and retirees expect State 
and local taxpayers to repay. The amounts that are owed are 
large enough to threaten the continuing viability of many State 
and local government systems and impose considerable risk for 
Federal taxpayers.
    The exact magnitude of the problem has been concealed by 
the flawed accounting methodology prescribed by the Government 
Accounting Standards Board [GASB]. I can illustrate these flaws 
with a simple example. If I take a dollar out of my right 
pocket and put it into my left pocket, I presume that you will 
all agree that doing so has made me neither richer nor poorer. 
The idea that moving money from one pocket to another could 
somehow makes you richer insults common sense.
    Yet, this is the idea upon which the States' current claims 
that pension funds are only a trillion underfunded is based. 
Under GASB rules, a plan's reported financial status improves 
when it takes on more investment risk. When a plan moves a 
dollar from its right pocket bonds into its left pocket stocks, 
it magically gets richer, less underfunded.
    This logic is clearly flawed. A dollar of stocks is not 
worth more than a dollar of bonds. When you, as an individual, 
move money from your money market fund into the stock market, 
you are not suddenly richer. You do not get to pretend that you 
owe less on your home mortgage. The payments that you are 
obligated to make on your house are completely unchanged. How 
you invest your assets has no impact on the current value of 
your liabilities. This is just as true for the States as it is 
for individuals, despite GASB's claims to the contrary.
    Properly accounted for, the unfunded portion of pension 
promises already made to State and local workers is roughly $3 
trillion, or three times as large as that recognized under 
GASB. This exceeds all recognized State and local debt combined 
and represents a debt owed to State and local government 
workers of roughly $25,000 for each U.S. household.
    These large unfunded liabilities are a serious concern, but 
perhaps even more troubling is how the current methodology 
accounts for new benefit accruals; that is, how governments 
value the retirement benefits as a part of workers' total 
annual compensation. Under current accounting, the annual 
recognized cost of newly earned pension benefits averages 
roughly 12 to 15 percent of total wages, with plan members 
contributing, on average, slightly less than half that amount. 
The true cost of these service accruals is roughly twice as 
large, 25 to 30 percent of total wages, meaning that each year 
most State and local workers earn employee financed pension 
benefits worth more than 20 percent of their salaries.
    This is not to say that public employees are 
overcompensated. I personally value services provided by 
government workers and am certain that many public sector 
workers are underpaid. This does not, however, provide an 
excuse for misvaluing the benefits they receive. Undervaluing 
the deferred compensation these pension benefits represent has 
serious negative consequences for the way government is 
operated. It encourages excessive growth in the public sector; 
it also encourages States to finance current operations with 
off balance sheet debt, leaving even larger bills for future 
taxpayers.
    In negotiations between States and their workers, 
undervalued retirement benefits give both sides at the 
bargaining table incentives to trade current wages for future 
pension benefits. Workers will happily give up a dollar today 
for two dollars worth of benefits, but the government 
accounting methodology values it less than a dollar. Current 
administrations may happily agree to this arrangement if it 
frees up money in current budgets. As a result, State, city, 
and county pension plans have become a pervasive tool for 
circumventing balanced budget requirements.
    Because the current contributions fall short of the cost of 
new benefit accruals, the State and local pension problem is 
getting worse, not better, and this represents a concern for 
the Federal Government. If the Federal Government cannot 
credibly commit to allowing States to fail, then the States 
have little incentive to fix their problems. In the event of a 
Federal bailout, taxpayers in fiscally more responsible States 
will subsidize those in more profligate States. So any State 
that undertakes the unpalatable combination of tax increases 
and service cuts required to address this pension problem now 
risks losing its share of any Federal funds used in the future 
to rescue the system.
    The Federal Government, consequently, has an urgent need to 
establish incentives for States to deal with their pension 
problems. The Public Employee Pension Transparency Act, H.R. 
567, is a useful first step. Congress should consider even 
stronger measures, however, to ensure that Federal taxpayers 
are not the ultimate underwriter of State debts. These should 
include incentives for States to close current plans to new 
workers and, instead, enroll new hires in transparent defined 
contribution plans and Social Security. They should also 
encourage States to fully recognize the true magnitude of their 
legacy pension liabilities.
    Thank you.
    [The prepared statement of Mr. Novy-Marx follows:]

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    Chairman Issa. Thank you.
    Dr. Lachman.

                STATEMENT OF DR. DESMOND LACHMAN

    Mr. Lachman. Thank you, Mr. Chairman, and thank you for 
inviting me to testify before this committee.
    The European sovereign debt crisis offers a cautionary tale 
to the United States about the very high costs that could be 
associated with continuous delays in fashioning a credible 
medium-term plan to address its budget problems.
    In 1999, when the Euro was first launched, the European 
Stability and Growth Pact required that member countries 
contain their budget deficits to no more than 3 percent of GDP 
and that they maintain their public debt levels at below 60 
percent of GDP. Despite those strictures, by 2009 Greece and 
Ireland registered budget deficits around 15 percent of GDP, 
while Portugal and Spain registered budget deficits in the 
region of 10 percent of GDP. It is now expected that Greece and 
Ireland's public debt to GDP will reach over 160 percent and 
120 percent, respectively, by 2012, even under optimistic 
assumptions.
    A notable feature of the European debt crisis is that until 
very recently markets failed to discipline profligate 
governments in the European periphery, and those governments 
were able to borrow at interest rates only marginally higher 
than those required of the German government. Markets also 
provided the financing that made possible massive housing 
market bubbles in Ireland and Spain, and they failed to 
exercise the desired disciplinary function in the mistaken 
belief that this time was different and that eurozone 
membership would automatically make countries in the European 
periphery converge to the strong economic performance of German 
economy.
    The important lesson for the United States is that when 
markets did finally turn on the European periphery, they did so 
in an abrupt and dramatic fashion. Greek and Irish governments 
were effectively shut out of the capital markets, they were 
forced to seek bailout packages from the IMF and the EU, and, 
more recently, last week, the caretaker Portugese government 
was also forced to seek an EU bailout as external funding for 
the Portugese government totally dried up. Despite these 
massive bailout packages, markets are still demanding very high 
interest rates now of these countries, and these high interest 
rates imply that the market is attaching a very high 
probability to the likelihood that these countries will 
actually default on their sovereign debt within the next 3 to 5 
years.
    As a condition for the bailout lending, the IMF and EU are 
requiring of Greece and Ireland massive budget adjustment of 
the order of 10 percent of GDP over the next 3 years. Countries 
in the European periphery are now finding that attempting to 
dramatically tighten their budgets without being in a position 
to weaken their currencies to boost export growth is a recipe 
for steep economic recession in these countries. Sadly, Greece 
and Ireland are already finding this out. Over the past 2 
years, GDP has declined in Greece and Ireland by 8 and 12 
percent, respectively, and the unemployment rates have both 
climbed beyond 14 percent.
    To sum up, Europe's recent difficult experiences with the 
public finances would seem to offer the United States the 
following four cautionary lessons. First, U.S. policymakers 
should not take comfort from the fact that despite its very 
poor public finances, the U.S. Government can still finance 
itself at very low interest rates. Up until early 2010, the 
Greek, Irish, Portuguese governments all were able to fund 
themselves at relatively low interest rates, only to find 
themselves subsequently virtually shut out of the capital 
market.
    The second point is that when markets finally do lose 
confidence in the sustainability of a government's public 
finances, they tend to do so in an abrupt and disruptive 
manner. This tends to be highly disruptive to financial markets 
and it tends to be associated with prolonged and deep economic 
recessions. One also finds that once a government loses the 
market's confidence, it proves difficult to regain the market's 
trust.
    Third, dependence on foreign sources of financing exposes a 
government to the vicissitudes of foreign credit markets. It 
also places a government in a position where foreigners can 
dictate the terms of future lending that can be harmful to a 
country's economic prospects.
    Finally, disruption in a government's bond market can have 
important implications for the financial system, which tends to 
be a primary holder of government bonds. Experience shows that 
a weakened financial system is generally associated with lower 
long-term growth.
    Thank you.
    [The prepared statement of Mr. Lachman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Issa. Thank you. I will yield myself 5 minutes at 
this time.
    Professor Novy-Marx, in some of your published studies you 
seem to take issue with Vermont's Governor's theory that he is, 
first, fully funded and then adequately funded. If we make 
reasonable assumptions that today, for some reason, they chose 
to go to a defined contribution, how much underfunding would 
there be in the legacy of Vermont's system?
    Mr. Novy-Marx. So I don't know if you are talking about a 
soft freeze or a hard freeze. Are we talking about moving 
forward to DC plans or just new hires?
    Chairman Issa. Well, if you assume that it is all workers, 
that whatever they have accrued they keep, and obviously there 
is some middle ground of those who are 3 or 4 or 5 years, but 
assuming you phased it out very quickly----
    Mr. Novy-Marx. It would improve the position of their 
financial status in the pension plan.
    Chairman Issa. It would improve that, but what would be the 
shortfall in their pension? In other words, if they achieve the 
8\1/2\ percent starting the day that you shut it off, they 
would be able to make all of their payments forever, is that 
correct?
    Mr. Novy-Marx. They would have a small shortfall, but not a 
huge shortfall, if they made 8 percent on the assets.
    Chairman Issa. What is the reasonable belief that 8\1/2\ 
percent can be made, particularly considering that they have 
credit default swaps----
    Mr. Novy-Marx. It is less than 50 percent that they would 
make that sort of return. Essentially, they borrowed a lot of 
money to speculate in the stock market. And if the stock market 
does better than the cost of their borrowing, they will be in a 
better position. If it does worse, they will be in a much worse 
position. But I view this idea that you can achieve 8\1/2\ 
percent by investing in the stock market as essentially 
borrowing public money to speculate in the stock market.
    Chairman Issa. And if we assume for a moment that there is 
some discount for inflation in the 8\1/2\ percent, let's call 
it 2\1/2\ percent, they are really saying they want to say 6 
percent over inflation, would that be correct, roughly?
    Mr. Novy-Marx. So----
    Chairman Issa. So they are looking at making----
    Mr. Novy-Marx. In the terms of their own plans, they assume 
inflation rates that are higher than the market or consensus 
estimates.
    Chairman Issa. If we were to use a baseline--and this may 
delve into others--if we were to use a baseline, let's say, of 
from any given time until 1980, in other words, not the last 30 
years, is there any ability to achieve broadly 6 percent over 
inflation in America's 20th century? Is there any 20-year 
period in which you can earn that kind of money?
    Mr. Novy-Marx. The two decades after World War II, the U.S. 
market did very well and your returns would have exceeded that.
    Chairman Issa. Are there any 20 years in which you can't?
    Mr. Novy-Marx. There certainly are, yes.
    Chairman Issa. So what we are really doing is we are saying 
we think we are going to make it, but if we don't--and I want 
to get to the next point--if we don't make it, then what 
happens? And I am a Californian, so I live this every day. 
During good times, good economic times, times in which the 
market is performing and so is America, the need for the social 
safety network generally goes down, so the government spending, 
State government spending, Medicaid and so on, typically goes 
down. If that is the case, then when you have lower spending 
you have higher earnings within those 10 or 20 years.
    Turn it around. When the market goes to heck in a hand 
basket, typically you have people laid off and greater public 
need. Is that sort of universally agreed to by all the panel?
    [No audible response.]
    Chairman Issa. So no matter what we are dealing with, we 
are assuming that the present system is one in which you must 
pay in more over a three, 5-year period--all of these plans 
have a certain waiting period; typically they are trailing 3 
years or something, some of them go five--but in any really 
long bad time of 10 years, for example, you are going to have 
to pay in more at a time in which you are paying out more. Is 
that generally true?
    Mr. Novy-Marx. That is true.
    Chairman Issa. So for any of you on the panel, even 
forgetting about ideological reasons that we may want to choose 
other systems, the Governor of Vermont said this was more 
efficient. Let's assume efficiency is as he defines. Is it 
better for the reliability to the taxpayer, the people who will 
count on services in bad times and who, in fact, don't want to 
be misled in good times, is there any basis to say that that 
system of needing more money paid into pensions at a time when 
there is less to pay and more needed, and then needing less so 
you look good exactly at a time when it is only because people 
need less from the government?
    Mr. Biggs. I think you have put your finger on the 
fundamental error in the Governor's reasoning. The bad times 
for the pension, the bad rates of return on its investments 
will correlate with bad times in the rest of the economy, which 
means more people out of work, lower tax revenues, higher 
expenditures or unemployment benefits, things like that. So you 
are asking taxpayers or contributors to the plan to pay extra 
into the plan to make up for losses at exactly the time they 
are least able to do that. So that is the problem. When you get 
this correlation between the poor market outcomes and poor 
outcomes in other parts of the economy, it makes it more 
painful to do those things. A market valuation approach to 
looking at pension financing implicitly takes that into 
account; whereas, the current GASB rules ignore that fact.
    Chairman Issa. Anyone else have a brief--yes, doctor.
    Mr. Lachman. I would just add to the point that you are 
making that we don't live in ordinary times, that we are living 
in a period where we have had an acid price bust, where we have 
had real strains in the banking system. There is plenty of 
economic research that shows that those periods are followed by 
unusually low growth, where you would expect to get very poor 
returns on equities. All you have to do is look at the Japanese 
experience right now. In 1989, the NIKKEI was at 39,000; today, 
23 years later, it is at 10,000. So we are living in a 
different time. To expect to get an 8 percent return after an 
economic crisis like this would seem to me to be heroic.
    Chairman Issa. Thank you.
    The gentleman from Maryland.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    You know, you all heard the testimony of the two Governors, 
did you not? And you heard Governor Walker, numerous times, 
saying that he liked what Mitch Daniels did in Indiana. Did you 
all hear that? It sounds like he may be his mentor. But let me 
ask about the legislation recently introduced in Indiana. This 
legislation would make it a misdemeanor for an employer to 
require an individual to become or remain a member of a labor 
organization, pay dues, fees, or other charges to a labor 
organization, or pay charity to another third party that 
represents dues, fees, or other charges required of members of 
a labor organization. Governor Mitch Daniels originally favored 
this legislation and prior bills that opposed unions. In 2005, 
he signed an executive order limiting collective bargaining for 
State workers. As a result, according to an April 13th National 
Review article, the number of State union workers shrunk from 
over 16,000 in 2005 to now nearly 1500.
    Mr. Mix, your organization supports Indiana's legislation, 
is that right?
    Mr. Mix. [Remarks made off mic.]
    Mr. Cummings. I can't hear you, I am sorry.
    Mr. Mix. Sorry. We oppose the statutory imposing of 
bargaining rights in Indiana going back to the middle of 1990. 
It was imposed by executive order by Governor Evan Bayh and 
then there was executive order signed by Governor Frank 
O'Bannon to force Indiana employees to pay dues or fees to the 
union to keep their job. What Governor Daniels did was simply 
repeal that executive order that authorized bargaining in the 
State. There was never a statute there.
    Mr. Cummings. So you----
    Mr. Mix. We support what Governor Daniels did, yes.
    Mr. Cummings. You support what he did. And despite your 
organization's support, Governor Daniels has now withdrawn 
support from this legislation. Have you heard that?
    Mr. Mix. He has indicated that he opposes consideration of 
a right to work bill, which was the reason the 39 Democrats 
left the State for 33 days and shut down the Indiana 
legislature. He opposes that right to work bill that is pending 
in the Indiana house right now.
    Mr. Cummings. And on February 22nd, an article featured in 
Politico indicated that the Governor thought there was a better 
time and place to have a debate. Is that right?
    Mr. Mix. I think that is right. That is accurate.
    Mr. Cummings. He also stated that even the smallest 
minority has ``every right to express the strength of its views 
and I salute those who did.'' Do you agree with that?
    Mr. Mix. Well, if Governor Daniels is talking about the 
fact that 39 Democrats left the State to stop this legislation, 
I disagree with him.
    Mr. Cummings. All right. I only have a limited amount of 
time. I heard you. You disagree with him. OK.
    Mr. Mix. I disagree with him praising 39 members leaving 
their jobs to stop the bill, yes.
    Mr. Cummings. You disagree with him.
    Mr. Mix. Yes, sir.
    Mr. Cummings. Your organization does not just support the 
concept of this legislation, you have financially pushed it, 
have you not, your organization?
    Mr. Mix. What legislation are you talking about?
    Mr. Cummings. I am talking about the subject matter that we 
are talking about right now, that is----
    Mr. Mix. The right to work bill is different than what 
Governor Daniels did. We have been involved in Indiana for a 
while now, yes.
    Mr. Cummings. So you put some money in this. And according 
to an article on March 23rd in the Fort Wayne Journal Gazette, 
your organization began a ``$100,000 statewide media campaign 
to try to get the issue back on the table.'' Does that sound 
accurate?
    Mr. Mix. Absolutely.
    Mr. Cummings. ``And one newspaper tries to shame Daniels 
and Bosma for bending to the unions.'' Mr. Bosma is the 
Republican speaker of the Indiana house, is that right?
    Mr. Mix. Yes, sir.
    Mr. Cummings. And, Mr. Mix, did you organization place 
those advertisements?
    Mr. Mix. We did.
    Mr. Cummings. And staff have identified at least 10 
Republican Governors, including Governor Daniels, who have 
distanced themselves from Governor Walker and, in particular, 
his assault on collective bargaining rights for workers. But 
your organization continues to agree with Governor Walker's 
actions, is that correct?
    Mr. Mix. Yes.
    Mr. Cummings. I think this hearing has demonstrated that 
Governor Walker wildly overreached by insisting on stripping 
the rights of American workers, even when such measures would 
have had absolutely no impact on the State budget.
    Mr. Biggs, I wanted to followup on a point that I think is 
extremely important. As Governor Shumlin made very clear in his 
testimony earlier, the budget shortfalls that are affecting 
States today were not caused by middle-class American workers, 
they were not caused by these teachers and nurses, policemen, 
firefighters. Shumlin testified that ``I would like to start by 
directly addressing the question of what is causing the current 
fiscal crisis that most of our States are experiencing. Put 
simply, these crises are the result of the greatest economic 
recession since the Great Depression.''
    Dr. Biggs, do you agree with that?
    Mr. Biggs. I think that is generally correct, yes.
    Mr. Cummings. And, Dr. Biggs, on March 15, 2011, you 
testified before this committee and you seemed to agree with 
Governor Shumlin's point. In your testimony you said this, you 
said the fiscal crisis at the State and local level has many 
causes. The proximate cause is the significant economic 
recession, from which the U.S. economy still struggles to 
recover. Did you say that?
    Mr. Biggs. That's correct.
    Mr. Cummings. And in your testimony today, Mr. Biggs, you 
explained that different States may have different challenges 
based on how the economic crisis affected them. You stated that 
when looking at the financial challenges faced by States, the 
differences arise from how hard the States were hit by the 
recession. Is that right?
    Mr. Biggs. That is also correct, yes.
    Mr. Cummings. And so you are not alone, as I close, in your 
views that these budget shortfalls are a result of the 
recession, and let me read Ezra Klein, what he wrote in The 
Washington Post. He says, ``There was no sharp rise in 
collective bargaining in 2006 and 2007, no major reforms of the 
country's labor laws, no dramatic change in how unions 
organize, and yet State budgets collapsed.''
    So I say this to all of the witnesses. If you want to talk 
about balancing the State budgets, then let's talk about the 
budget, let's talk about the real reasons for shortfall, and 
let's talk about the real solutions.
    I see my time has expired. Thank you.
    Mr. McHenry [presiding]. I thank the ranking member.
    Ms. Buerkle is recognized for 5 minutes.
    Ms. Buerkle. Thank you, Mr. Chairman, and thank you to our 
panelists for being here today and for answering our questions.
    My first question is sort of a followup to my colleague, 
Mr. Cummings's, question. Mr. Mix, in your written remarks you 
note that there is a close correlation between high State debt 
and the existence of public sector monopoly bargaining. Can you 
explain that for me and just expound on that a little bit?
    Mr. Mix. Yes, ma'am. I think the correlation between the 
cost of government and the proposition that union density is 
something that is becoming clear, and if you look at the 
numbers that I cited from the study regarding per capita median 
State debt per person, I think you see that coming clearly. I 
think it is important also to understand that the idea of 
bargaining and the ability for a private third party to engage 
themselves in the relationships between taxpayers and their 
elected officials is something we need to address, and I think 
if you look at the States, the nine States that are running the 
risk of default, all those States had a union density over 60 
percent in the government sector.
    Ms. Buerkle. I represent an area of New York State and 
actually, Professor Novy-Marx, it is close to Rochester, so we 
are one of those 44 States that was spoken of this morning, 
that we teeter on this delicate balance here, so I would like 
to just followup, again, with my colleague, Mr. Cummings' 
comment with regards to Governor Walker. Do you feel that he 
overreached, Mr. Mix?
    Mr. Mix. I don't. I think the idea that allowing workers 
the choice to join or financially support a labor union is a 
basic right. Part of the legislation that Governor Walker 
talked about and was in question here today was a provision 
granting Wisconsin public employees the right to work free of 
union compulsion. Any member that believes the union represents 
them well and wants them to speak for them can voluntarily join 
that organization and have their voices heard, just like any 
other citizen can. But we should not presume that every worker 
out there supports what organized labor is doing for them and 
that there is a benefit conferred on those people. What we 
ought to do is give them the choice. And what union officials 
ought to do is represent only those workers that want their 
representation, because we know that any organization that is 
brought together through voluntary means is inherently stronger 
than any organization that is cobbled together by compulsion.
    Ms. Buerkle. Thank you.
    My next question is for Dr. Lachman. You note in your 
written remarks that the U.S. budget deficit has swollen, as we 
know, to close to $1\1/2\ trillion, about 10 percent the GDP. 
It is on a path to reach, within a year or two, the levels of 
funding crisis that we have seen in other countries. What 
common sense practical steps can we take as a Nation to just 
avoid what we have seen from some of those countries?
    Mr. Lachman. Well, you are absolutely right that the United 
States is on a path that is clearly unsustainable and that will 
lead to a debt crisis going down the road. The sensible thing 
for the United States to do would be to have a medium term 
budget program that seriously and credibly addressed those 
problems that brought down the deficit progressively over time. 
You are seeing that, for instance, in the United Kingdom right 
now, where they have a medium term budget plan that is going to 
be reducing the budget deficit by something like 1.8 percentage 
points of GDP a year, bringing it down from something like 10 
to 3 within a period of time, but they are doing it in a 
credible way, with actual measures passed through the 
Parliament. It would seem that that is what is needed if you 
are going to be assuring markets that you are seriously dealing 
with the problem, rather than just running up huge deficits and 
then have the markets fear that the Federal Reserve is going to 
monetize it and we are going to be off to the races on 
inflation.
    Ms. Buerkle. And just in the few seconds that I have left, 
can you just define or expand on that credible way that you are 
talking about?
    Mr. Lachman. Well, I think that it is important to do 
things in a variety of ways. To back-load a fiscal plan isn't 
really credible; there are a lot of changes that might occur 
down the road, that what one is wanting is wanting up-front 
concrete measures where there is a clear congressional 
commitment that measures are going to be actually implemented. 
It is no good just talking about we intend to do things; you 
have to back it up by action that markets are going to believe 
that you are actually going to be delivering. Having 
benchmarks, having a path on which you are going, having 
concrete measures that you are going to be taking, actually 
passing those measures would give those markets a lot more 
confidence right now. And I think that the only point that I 
was really trying to get across is not to be fooled by the fact 
that the U.S. Government, with its huge deficit, is able to 
borrow in the treasury market at, say, 3 percent on 10-year 
bonds. That can move in a heartbeat.
    Ms. Buerkle. Thank you very much.
    Thank you to all our panelists. I yield back.
    Mr. McHenry. I thank my colleague. I now recognize myself 
for 5 minutes.
    Dr. Biggs, I had this discussion before in the series of 
hearings we have had about the State and municipal debt crisis. 
There is a choice government has to make with the revenues it 
gets from its people. So when we have pension funds, a 
discussion about pension funds, if it is a private sector 
pension fund, if it is underfunded, those that should receive 
the pension are the ones that are getting harmed. If it is 
underfunded in the private sector, there is another group, sort 
of the forgotten man, if you will, that are the taxpayers, that 
are either going to pay higher taxes because these pensions 
were underfunded, whether it is through union contracts or 
whatever it may be. Then you have not only the taxpayers, but 
those people that desire a benefit out of their government. For 
instance, you live in a city and they lay off half the fire 
department or some of the police, or they don't have frequent 
trash service. There are services you would diminish in order 
to meet certain events.
    Can you talk about this in terms of what that actually 
means, those choices?
    Mr. Biggs. Well, I think this plays very well into the 
issue of how we measure the pension liabilities. One of the 
arguments for the way current accounting rules for pensions, 
government is different than the private sector; government is 
infinity lived, it is very big, it will go on forever, so we 
can ignore this risk. But when you look at how the risk is 
actually allocated, government is a pass-through entity; it 
doesn't bear the risk, it distributes it to different 
stakeholders. So when we look around the country today, we see 
individuals who are having to pay higher taxes to support 
pensions; we see layoffs in government work forces; we see cuts 
in other programs so they can make room for their pension 
contributions. So it is not the government that is bearing the 
risk of those market downturns, it is effectively individuals 
who are bearing it. So that is why we should value these 
pension liabilities the way that individuals do it.
    I think one sort of troubling aspect of the way defined 
benefit pensions in the private sector have worked in practice 
is often the market risk is one-sided. In very good economic 
times part of the money goes to help fund the pension, but 
there is also the temptation to raise benefits. We saw this in 
California, we have seen it in New Jersey, we have seen it in 
Washington State. But in the down times it is the taxpayer who 
takes that risk. So any time you have one-sided bets, you are 
setting yourself up for some problems. But the key issue is it 
is not government that is bearing the risk, it is people in all 
aspects of our lives. So we want to catch that issue there in 
terms of how we value these liabilities.
    Mr. McHenry. Can you also discuss in terms of asset sales, 
whether at the State or municipal level, that you have an asset 
that local governments have sold in order to meet immediate 
expenses. These assets sales is a form of indirect bankruptcy, 
if you will.
    Mr. Biggs. In a sense, I guess selling off an asset is like 
borrowing, because the asset, in theory, would give you value 
down the road. But if you are selling it off, you are saying we 
are going to get some cash today but we are giving up all the 
stream of payments that we otherwise could have had. But I 
think the point you make is correct. If you are having to sell 
off assets that you would otherwise want to keep in order to 
make payments, it is a form of partial bankruptcy; it is, in 
effect, eating your seek corn, because those are assets you are 
going to need down the road.
    Mr. McHenry. You mentioned the importance of getting the 
accounting right and, Dr. Novy-Marx, you did as well, even more 
specific. But, Dr. Biggs, can you talk about this in terms of 
accounting and----
    Mr. Biggs. The funny thing is my father was a certified 
public accountant, and I remember growing up thinking all these 
accounting things are so boring and why would you want to do 
that. What I have discovered working in public policy is what 
you do about a problem really depends on how you measure the 
problem. The way we currently measure public pension financing, 
we learn two things from that. The current measures tell us the 
problem is small and can be solved by taking more investment 
risk. Using proper accounting measures we realize the opposite; 
the problem is large and taking more investment risk isn't 
going to solve it. So talking about accounting sounds boring, 
but I think if you really measure things correctly you get an 
idea how big your problem is and what will and what won't fix 
it.
    Mr. McHenry. Dr. Novy-Marx.
    Mr. Novy-Marx. Thank you. I am not an expert on unions and 
don't have a lot to say about them, per se, but I think there 
is a real danger in bargaining over things which are improperly 
valued. So I think that the valuation of the pension 
liabilities very much interacts with the bargaining, because if 
we way undervalue these benefits, it makes it extremely hard 
for the government side to bargain from a fair position.
    Mr. McHenry. So, Dr. Biggs, in terms of this, there is the 
GASB versus FASB. You have the government accounting--and to 
you, Dr. Novy-Marx, because I think you both can shed some 
light on this. There are different accounting standards for the 
public sector, as opposed to the private sector. I am 
interested in this difference. And I also have a very specific 
question. So, if you will answer the specific question and get 
to the larger point, because my time is running short. 
Actually, I am over time, but with the graciousness of my 
colleagues.
    The SEC has designated FASB as the accounting for publicly 
held companies. What about designating GASB in terms of being 
able to capture--the SEC basically captures stale data at the 
broker-dealer level. What about capturing that data more 
upstream, from the issuer? Would that be better? Would that 
give more transparency and more disclosure, and can you touch 
on that?
    So if you will answer that, then get to the larger point, I 
would appreciate it.
    Mr. Biggs. Pension disclosure in the public sector I think 
is not as strong as it is in the private sector, where often in 
the public sector the actuarial reports come out a year or more 
after the events that they are trying to date. I have written 
about private sector pension accounting and I have been 
critical of it in ways, but it much more closely approximates 
how you should measure the liabilities. A private sector 
pension benefit is very secure, but it is not guaranteed. If 
the sponsor goes bankrupt, the retirees can lose some of their 
benefits. So those liabilities are discounted at a rate of 
return derived from corporate bonds. That means it is very 
safe, but it is not totally safe.
    With public sector pensions, the benefits are effectively 
guaranteed, often by State constitutions. That means they 
should be discounted at a lower interest rate. Instead, they 
are discounted at a higher discount rate. The GASB rules have 
things just precisely opposite of the way they should be.
    Mr. McHenry. Dr. Novy-Marx.
    Mr. Novy-Marx. I have nothing to add; I agree with him 
completely.
    Mr. McHenry. OK.
    Finally, and then we will go to my colleague, Mrs. Maloney, 
Devin Nunes has introduced a piece of legislation in terms of 
transparency, perhaps strikes at the heart of making sure you 
have accurate disclosures for public sector pensions. Dr. 
Biggs, can you touch on that? Are you favorable to this 
perspective? What are your thoughts on it?
    Mr. Biggs. I think the disclosure bill sponsored by 
Congressman Nunes would be very helpful in that it would 
require every State to disclose the market value of their 
pension liabilities, which means, A, you would get the numbers 
that would be much more accurate but, B, they would also be 
uniform between States.
    I testified several weeks ago alongside several individuals 
from the ratings agencies, and I got the impression they simply 
took the data from the public sector pensions as they published 
it. But I think it is important if you have a better measure of 
the liabilities and also a measure that is truly apples to 
apples from State to State. So I think that would be a very, 
very helpful step.
    Mr. McHenry. Anyone have anything to add there?
    Mr. Novy-Marx. I think it would be a very helpful step as 
well. I think that there is actually a lot more information 
they can disclose. They actually forecast expected cash-flows 
every year into the future in calculating the liability, and 
there is no reason that they don't disclose that; it should be 
public information, they are public entities.
    Mr. McHenry. Thank you. Thank you.
    Mrs. Maloney for 5 minutes.
    Mrs. Maloney. Thank you, and I thank all of you for your 
testimony. I regret I had a conflict with another meeting, but 
I did read your testimony and it contributes to the debate, so 
thank you.
    I would like to begin with Dr. Biggs, and I am going back 
to a lot of the debate that we had in the panel before you. 
Many people blame the poor financial condition of States on 
public pension systems, as if pension underfunding is the 
primary cause of a State's financial problems. In fact, the 
Republican staff on this committee issued two briefing memos 
that made this exact argument: ``The largest threat to State 
and municipal fiscal security is the government-sponsored 
pension plans.''
    Yet, in the prior panel there were a series of editorials 
that I put together for this hearing from clear across the 
country, and they were saying that it wasn't a financial 
problem in those particular editorials. So my question, Dr. 
Biggs, is given what we heard from the Governors and from the 
editorial boards, do you agree with this assertion that the 
largest threat to State municipal fiscal financial security is 
government-sponsored pension plans?
    Mr. Biggs. Well, as I stated in my testimony, the drivers 
and the cause of the deficits that State and local governments 
are suffering from now were distinct from public pension plans, 
were distinct from public employee compensation. The question 
you are asking, though, is slightly different: What is the 
largest threat to State and local finances? And that raises 
some different questions because the pensions have shifted so 
heavily toward risky investments that even a small change in 
the rate of return they would receive would have significant 
impact on planned financing and on State budgets. For example, 
recently in California the Board of CalPERS, the public plan 
there, rejected their actuary's recommendation they shift from 
an assumed rate of return of 7.75 percent down to 7\1/2\ 
percent, and the argument the people made was we can't afford 
the extra payments that would be required by assuming a 
reduction of one quarter percentage point in our assumed rate 
of return.
    The problem is if you are investing in the sorts of assets 
they are, which are heavy on equities, foreign investments, 
hedge funds, if you can't afford to lose 25 basis points on 
your rate of return, you are in very big trouble.
    Mrs. Maloney. Well, actually, there is another hearing 
going on in Financial Services I need to get to on a regulatory 
reform bill. We tried to really bring some controls and safety 
to some of these investments, but I would like to ask about an 
analysis by the National Association of State Retirement 
Administrators, and according to this analysis, less than 3 
percent of all State and local government spending was used to 
fund public pension benefits. Do you agree with this or do you 
dispute this data?
    Mr. Biggs. No, I agree that that figure is correct. The 
problem is, first, that a lot of States, with the amount they 
are paying today, are not meeting the obligations they are 
supposed to pay under the more lax accounting rules from GASB 
and, B, if they use more honest accounting, they would have to 
pay significantly more than that. One example I looked at was 
Illinois, which was not even meeting its sort of actuarially 
required payments. If they had to pay the market value of their 
payments, it would be something like 14 percent of their State 
budget. That gets very, very difficult.
    Mrs. Maloney. Well, I would like to cite another study from 
the Center for Economic and Policy Research, and according to 
this study, the primary cause of pension shortfalls in our 
country was the economic collapse that we suffered in 2008, 
rather than inadequate contributions to government retirement 
programs.
    Mr. Biggs. I think the argument made in that paper was that 
the shortfalls we are looking at now were a result of the 
downturn in the assets that they held. One reason they were 
holding so much risky assets was because it allows them to 
discount their liabilities at a high interest rate. So, in 
effect, the poor state of funding we are seeing now is a 
function of the investment choices they made, and those 
investment choices they made were driven by the accounting.
    Mrs. Maloney. We are trying to bring more accountability in 
those investment choices, but I would like to ask Dr. Biggs 
isn't it true that while pension plan underfunding is a problem 
for some States, there are more than a dozen States rated by 
The Pew Center as solid performers?
    Mr. Biggs. Let me put it to you this way: The Department of 
Labor has standards for the health of private sector pension 
plans. I believe a private sector pension plan that is under 80 
percent funded is considered endangered, and a plan that is 
under 60 percent funded is considered critical. If public 
sector plans were required to use private sector accounting 
methods, I don't believe there would be a public sector plan in 
the country that would be more than 60 percent funded. They 
would all be considered critical. The account is very, very 
important here.
    Mrs. Maloney. Well, I agree you need accurate and uniform 
accounting systems. We just came out of a national recession, 
and it was certainly the greatest recession in my lifetime, and 
probably yours. To me, it seems inaccurate and very unfair to 
tie the current financial problems that some States face with 
public retirement systems underfunding to a long-term pension 
crisis. Most economists, even from the Bureau of Labor 
Statistics, Dr. Hall, states that this was the first recession 
that was caused by the financial markets; it caused this deep 
pain and this recession. And to say that because some States 
have some problems, that this is the cause of the problem----
    Mr. Biggs. I don't believe I have said that public pensions 
are the cause of the problems. I am not really aware of anybody 
else who has said that. What I would say is that the public 
pensions, because they were investing so aggressively, are 
particularly vulnerable to the financial downturn that we had 
and, second, even if the recession was caused by other factors, 
we can't go back to Wall Street or we can't go back to the 
housing market and say fix our problems. We have the problems 
that we have and we have to make some decisions on how to fix 
our budgets going forward and how to fix these programs so that 
they are more robust in future years.
    Mrs. Maloney. If I am hearing you correctly, you said many 
of the problems came from investing so aggressively. So if the 
managers of the pension funds are the ones that are putting 
them in jeopardy, maybe we need stricter standards there and 
capital requirements and so forth.
    Mr. Biggs. It is not the managers. What happens in most 
States is the legislature will set the discount rate that they 
want to use for the pension; they will say we want to use a 8 
percent discount rate. And they tend to choose a high discount 
rate because that makes the liabilities look small; that makes 
the annual payments small. Then the fund itself has to go out 
and say, well how are we going to get 8 percent? You can't get 
8 percent without taking a lot of risk. So now they are 
shifting more and more into alternative investments. An example 
I had, Wisconsin school districts were investing their pension 
funds in synthetic collateralized debt obligations. It is the 
chasing of returns that is driven by the fact that a high 
return is imposed on them by legislatures who want to minimize 
the payments they want to make today.
    Mr. McHenry. Thank you.
    If you have any final questions?
    Mrs. Maloney. No. Thank you very much. Really, thank you 
very much.
    Mr. McHenry. Thank you. I appreciate the gentlelady's 
comments and questions and I appreciate the panel's testimony 
here today. This is certainly a critical issue, as we have 
heard from the Governors and as we have heard from previous 
hearings on municipal and State debt crisis that they are 
facing, budget crisis.
    Dr. Lachman, I have heard you speak before. I wanted to ask 
a final question, if I might. Does the Euro survive?
    Mr. Lachman. It depends what you mean by that. If you mean 
are countries going to leave the Euro, my strong conviction is 
they certainly are going to leave the Euro. If we look where 
the Euro is going to be in 5 years' time, I would be highly 
surprised if Ireland, Greece, Portugal, Spain, maybe Italy, 
whether they are part of the Euro. But that doesn't mean that 
the Euro disappears as a currency. What you could get is you 
could get the Euro which is going to have as its members the 
original strong countries of the north; the Germanies, the 
Frances, the Finlands, the Belgiums, and so on.
    Mr. McHenry. Thank you, Dr. Lachman. I appreciate you 
indulging me on that question.
    I do appreciate your testimony, and if you have further 
things for the record we would certainly welcome that.
    Members will have 7 legislative days to submit questions or 
comments for the record.
    Thank you for your testimony and thank you for your hard 
work.
    [Whereupon, at 2:22 p.m., the committee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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