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

                          TRANSPARENCY AND FUNDING OF

                         STATE AND LOCAL PENSION PLANS

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

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON OVERSIGHT

                                     of the

                          COMMITTEE ON WAYS AND MEANS

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 5, 2011

                                   __________

                               Serial No. 112-OS3

                                   __________

             Printed for the use of the Committee on Ways and Means

                           SUBCOMMITTEE ON OVERSIGHT

                 CHARLES W. BOUSTANY, JR., Louisiana, Chairman

    DIANE BLACK, Tennessee               JOHN LEWIS, Georgia
    JIM GERLACH, Pennsylvania            XAVIER BECERRA, California
    VERN BUCHANAN, Florida               RON KIND, Wisconsin
    AARON SCHOCK, Illinois               JIM MCDERMOTT, Washington
    LYNN JENKINS, Kansas
    KENNY MARCHANT, Texas

    Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
    hearing records of the Committee on Ways and Means are also published
    in electronic form. The printed hearing record remains the official
    version. Because electronic submissions are used to prepare both
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                                C O N T E N T S

                                   __________

                                                                       Page

    Advisory of April 28, 2011, announcing the hearing...............     2

                                   WITNESSES

    Honorable Walker Stapleton, Colorado State Treasury..............     6
    Josh Barro, Walter B. Wriston Fellow, Manhattan Institute for
      Policy Research................................................    11
    Jeremy Gold, FSA, CERA, MAAA, Ph.D., Jeremy Gold Pensions........    16
    Robert Kurtter, Managing Director, U.S. Public Finance, Moody's
      Investors Service..............................................    26
    Iris J. Lav, Senior Advisor, Center on Budget and Policy
      Priorities.....................................................    37

                           SUBMISSIONS FOR THE RECORD

    American Federation of State, County And Municipal Employees,
      statement......................................................    81
    International Association of Fire Fighters, statement............    83
    Joint Group, statement...........................................    89
    Labor Coalition, statement.......................................    95
    Municipal Employees Retirement System, statement.................    96
    National Education Association, statement........................   101
    National Conference on Public Employee Retirement Systems,
      statement......................................................   104
    Public Plans Community, statement................................   113
    Service Employees International Union, statement.................   118
    Securities Industry and Financial Markets Association, statement.   122

                          TRANSPARENCY AND FUNDING OF

                         STATE AND LOCAL PENSION PLANS

                                  ----------

                             THURSDAY, MAY 5, 2011

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                     Subcommittee on Oversight,
                                                        Washington, DC.

        The Subcommittee met, pursuant to call, at 9:30 a.m., in
    Room 1100, Longworth House Office Building, Hon. Charles
    Boustany [Chairman of the Subcommittee] presiding.
        [The advisory announcing the hearing follows:]

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                           SUBCOMMITTEE ON OVERSIGHT

                                                    CONTACT: (202) 225-1721
    FOR IMMEDIATE RELEASE
    Thursday, April 28, 2011
    OS-3

                      Boustany Announces a Hearing on the

                          Transparency and Funding of

                         State and Local Pension Plans

        Congressman Charles W. Boustany, Jr., MD, (R-LA), Chairman of the
    Subcommittee on Oversight of the Committee on Ways and Means, today
    announced that the Subcommittee will hold a hearing on the transparency
    and funding of State and local defined benefit pension plans. The
    hearing will take place on Thursday, May 5, 2011, in Room 1100 of the
    Longworth House Office Building, beginning at 9:30 a.m.

        In view of the limited time available to hear witnesses, oral
    testimony at this hearing will be from invited witnesses only. However,
    any individual or organization not scheduled for an oral appearance may
    submit a written statement for consideration by the Committee and for
    inclusion in the printed record of the hearing. A list of invited
    witnesses will follow.

    BACKGROUND:

        Many have expressed increasing concern that State and local defined
    benefit pension plans (i.e., ``public plans'') have become dangerously
    underfunded. Based on the plans' own accounting measures, estimates
    suggest that as of 2009 they faced an aggregate shortfall of between
    $700 billion and $1.3 trillion. Many economists, however, have argued
    that these plans are improperly measuring their assets and liabilities
    in a way that significantly understates the true scope of the problem.
    Indeed, several recent studies have concluded that the plans may
    actually be underfunded by more than $3 trillion.

        Growing concerns about the financial health of these public plans
    have led some public officials to suggest that a Federal bailout of
    these plans may be appropriate. The proposed FY 2012 State budget by
    Illinois Governor Pat Quinn (D-IL), for example, explicitly suggests
    that Illinois may seek a Federal guarantee of a new debt issuance to
    cover its unfunded pension plan liabilities.

        In response to concerns about the financial health of these public
    plans--and about possible efforts by State and local governments to
    secure a Federal taxpayer bailout of such plans--Rep. Devin Nunes (R-
    CA), a Member of the Committee on Ways and Means, has introduced the
    ``Public Employee Pension Transparency Act'' (H.R. 567). This
    legislation is intended to enhance transparency in this area by
    encouraging public plans to disclose: (1) various plan funding data
    using their own actuarial assumptions, including a statement of those
    assumptions, and (2) the fair market value of plan assets and the value
    of plan liabilities using Treasury yields as the discount rate. While
    H.R. 567 would not impose any new standards on public plans with
    respect to actual funding requirements, State and local governments
    failing to make the disclosures proposed under the bill would lose
    their ability to issue debt that is tax-preferred under Federal income
    tax law. Additionally, H.R. 567 provides that the United States would
    not be liable for any obligation relating to funding shortfalls in
    State or local pension plans.

        In announcing the hearing, Chairman Boustany said, ``Whether the
    underfunding of State and local pension plans is $700 billion or over
    $3 trillion, it is a serious concern for workers and retirees, for
    State and local governments, and for taxpayers in general. The
    Subcommittee needs to understand how public plans are currently
    calculating their assets and liabilities, not just so we can get a
    clearer picture of how underfunded those plans really are, but also to
    determine whether there is adequate transparency in how these plans are
    reporting their shortfalls. Given that some have raised the specter of
    a Federal taxpayer bailout to cover the unfunded liabilities of these
    State and local plans, it is important for the Subcommittee to review
    this issue and to consider possible approaches to ensure that no such
    Federal taxpayer bailout is ever needed.''

    FOCUS OF THE HEARING:

        The hearing will focus on the measurement and transparency of
    funding levels of State and local pension plans and will explore
    whether improvements to those plans' actuarial assumptions--and
    enhanced transparency in the reporting of the financial health of those
    plans--are warranted. Among the approaches to these issues that the
    Subcommittee will review is H.R. 567.

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

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        Note: All Committee advisories and news releases are available on
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        Chairman BOUSTANY. Welcome to this morning's Oversight
    Subcommittee hearing on the Transparency and Funding Levels of
    State and Local Pension Plans. According to the Federal, State
    and local levels of government, our country faces a growing
    burden of public debt. Too often, governments have deferred
    difficult choices by pushing obligations off into the future
    without responsibly saving for the day when those obligations
    are due.
        At the State and local levels, public employees are often
    promised defined benefit pension plans subsidized through the
    Tax Code that guarantee payments down the road. But the numbers
    suggest public employee pensions may be dangerously
    underfunded. This raises critical questions about the promises
    public employers make, how pension liabilities are calculated,
    and whether greater transparency is needed to protect the lives
    and livelihoods of the men and women to depend on these
    pensions as they plan for their futures. Millions of State and
    local government employees participate in defined benefit
    plans. These include many of our most valued public servants,
    firefighters, police officers, emergency personnel, nurses and
    teachers. But too often, State and local governments have not
    kept their end of the bargain and are failing to adequately
    fund employee pensions.
        Though there is argument about how best to calculate
    pension assets and liabilities, it is clear that there is not
    enough money set aside to meet future obligations. Economists
    estimate the plans were underfunded by as much as $3.8 trillion
    in 2009. The corresponding increases in State and local pension
    contributions threaten to affect all Americans through higher
    State and local taxes and reduce services.
        This hearing will consider how accounting standards differ
    for public and private pensions. There is growing consensus
    that accounting standards for public sector pensions encourage
    State and local governments to overpromise, underfund by taking
    on risky investments by discounting guaranteed future benefits
    against unrealistic rates of return. Unlike private pensions,
    which are required by law to use more realistic accounting
    standards, public plans are held to a lesser standard and
    suffer from lax accounting methods that can hide the magnitude
    of the problem. Public plans can discount future liabilities by
    making risky investments, a practice that imposes added risk on
    the taxpayers according to a new Congressional Budget Office
    report just released.
        Of course, some argue that State and local affairs are
    generally not in the business of the Federal Government. But
    these plans are of increasing Federal concern because of our
    Tax Code which subsidizes retirement savings and gives
    preferential tax treatment to State and local debt.
    Furthermore, in our age of public and private bailouts, there
    can be little question to where State and local governments
    will turn when trillions in pension payments come due. And as
    if to underscore this threat, the recent proposed budget of the
    State of Illinois indicates that the Governor might seek
    Federal guarantees of future debt to cover pension liabilities.
        Finally, we also will discuss H.R. 567, the Public Employee
    Pension Transparency Act, which was introduced by Congressman
    Devin Nunes, a Member of the full Committee. As a condition
    to receiving preferred treatment under Federal income tax law,
    H.R. 567 requires public plans to disclose funding data and
    honest valuations of plan assets and liabilities. Respecting
    the rights of States and local governments, the bill does not
    try to tell States how to fund or pay pensions, it merely
    promotes transparency in their funding.
        Whether the underfunding of State and local pension plans
    is hundreds of billions or several trillion dollars, it is a
    serious concern. With more retirees drawing pensions by the
    day, and some in government already raising the threat of a
    Federal bailout of these public plans, it is critical that the
    Subcommittee take this opportunity to review the issue and
    consider how better to protect workers and retirees as well as
    the Federal taxpayer.
        Before I yield to the Ranking Member, Mr. Lewis, I ask
    unanimous consent that all Members' written statements be
    included in the record and the recently released CBO-issued
    brief entitled underfunding of State and local pension plans.
    Without objection, so ordered.
        Now I will turn to Mr. Lewis for his opening statement.
        Mr. LEWIS. Thank you, Chairman Boustany, for holding this
    hearing. Last month, this Subcommittee held a hearing to attack
    an organization that represents millions of seniors. At that
    hearing, I asked the chairman, ``who is next? Who else is on
    your list?'' Now, I have an answer.
        This week is Teacher Appreciation Week 2011. Today,
    Republicans have set their sights on the teachers who educate
    our children, police officers who keep our communities safe,
    and first responders in moments of crisis. They paint teachers,
    firefighters, librarians and nurses as villains in their quest
    to widen the gap between the rich and the poor.
        Our neighbors are not the villains. They are not the cause
    of the current economic situation. They are simple, hardworking
    Americans trying to retire with dignity and escape poverty as
    they age.
        The Republicans have made many arguments to support today's
    attack. Republicans blame pension plans for State budget
    shortfalls. This is not true. States spend less than 4 percent
    of their budget on pension contributions. The Republicans claim
    that pension benefits are too high. This is not true. The
    average State pension benefit is modest; about $20,000 a year.
        The Republicans also claim a Federal bailout may be needed.
    This is not true. The losses in the plan are related to the
    market and the recent recession. The Republicans claim that
    their solution would create transparency. It would not. It
    would create confusion and lead to unnecessary cuts in vital
    State services. Given the facts, I ask myself why are we here
    today? We both know that there is no immediate need for the
    Federal Government to take action. The committee has been
    looking at this issue since the 1970s.
        I am also mindful that under the Committee rules of this
    Congress, this Subcommittee's jurisdiction is limited to
    oversight of existing laws. Our jurisdiction does not extend to
    select revenue measures. The subcommittee does report out
    legislation. Therefore, any consideration of House bill 567
    would need to take place elsewhere under the regular order of
    the Committee.
        Based on all of this, I believe today's hearing is simply a
    distraction from the Republican failure to create jobs. While
    the American people continue to wait for jobs, the Republicans
    are playing a dangerous game with the welfare of women,
    seniors, and now teachers. It is time for the American people
    to take notice, stand up, and speak out. Today, I stand for
    America's middle class and State and local workers across the
    Nation. I thank the teachers for all that they do. And with
    that, Mr. Chairman, I yield back my time.
        Chairman BOUSTANY. I thank the Ranking Member for his
    opening statement.
        We will now turn to our panel of witnesses. I want to
    welcome the Honorable Walker Stapleton, Treasurer of the State
    of Colorado, welcome sir; Mr. Josh Barro, who is a fellow with
    the Manhattan Institute for Policy Research; Mr. Jeremy Gold,
    who provides pension finance consulting with Jeremy Gold
    Pensions; Mr. Robert Kurtter, managing director of the U.S.
    State and regional ratings of Moody's Investors Services; and
    Ms. Iris Lav, senior adviser for the Center on Budget and
    Policy Priorities.
        I want to thank you all for being here today with us. You
    will each have 5 minutes to present your testimony here before
    the Subcommittee with your full written statement submitted for
    the record.
        Mr. Stapleton, you can now begin.

                  STATEMENT OF HON. WALKER STAPLETON,
                         TREASURER OF COLORADO

        Mr. STAPLETON. Thank you, Mr. Chairman.
        Chairman Boustany, Ranking Member Lewis and Members of the
    Subcommittee on Oversight, thank you for the opportunity to
    testify this morning in support of the Public Employee Pension
    Transparency Act. My name is Walker Stapleton, and I am the
    treasurer of Colorado.
        Before being elected treasurer last November, I spent my
    entire career in the private sector. I am fortunate to have
    both an MBA and a graduate degree in business economics. One of
    the most important duties I have as treasurer of Colorado is to
    serve as the only elected official on the board of our State's
    Public Employee Retirement Association or PERA. PERA has nearly
    500,000 members including State workers, members of the State
    judicial branch, teachers in our public K-12 and higher
    education systems, local government workers and members of our
    State Patrol, among others.
        Last year the Colorado legislature passed pension reform
    legislation which accomplished two main objectives: It lowered
    the cost of living adjustment from 3.5 percent to 2 percent,
    and it raised the eligible retirement age of members from 55 to
    58 for educators and from 55 to 60 for everyone else. These are
    worthwhile reforms, but they unfortunately fell far short of
    the systematic improvements needed in Colorado's pension system
    to protect current and future retirees as well as Colorado's
    taxpayers.
        Let me discuss the lingering and growing challenges facing
    PERA and the key factor that Colorado's pension reform
    legislation did not address. The system is operating with an
    unrealistic and unachievable rate of return which is now set at
    8 percent. In Colorado's case, PERA currently maintains an
    unfunded liability of more than 21 billion based on this 8
    percent expectation. Of course, if this rate of return is
    lowered, the unfunded liability becomes far greater, and in my
    view, more realistic and transparent for PERA members and
    Colorado taxpayers alike. The question is whether States like
    Colorado should be in the business of guaranteeing market
    returns. If the answer to this question is no, as I believe it
    should be, then public pension plans like PERA need to start
    adopting rates of return in line with Treasury yields and stop
    the pervasive underfunding of plans. Overestimating a pension
    system's expected return is essentially gambling with the
    financial welfare of the next generation of Americans.
        As you may know, Wilshire Associates, a nationally
    recognized financial consulting firm, recently completed a
    study of 126 public pension plans, including Colorado's.
    Wilshire found that not a single plan would meet an 8 percent
    return expectation over the next 10 years. In PERA's case, they
    have used an 8 percent rate of return to claim solvency over 30
    years, meaning the only way they will achieve an average of 8
    percent over the next two decades will either be to raise the
    rate of return even higher, which is fiscal fantasy, or to
    require members to contribute more for the benefits that they
    receive.
        It is also worth noting that approximately 25 percent of
    PERA's portfolio of investments is currently invested in fixed
    income products, yielding in the neighborhood of 4 percent,
    which requires the rest of the portfolio to return closer to 10
    percent in order to average an overall return of 8 percent. The
    only way to achieve this unrealistic return is to take outsized
    market risk, further exposing our public pension plans to more
    volatility.
        If a default occurs, States, unlike private businesses,
    cannot declare bankruptcy and restructure, and taxpayers will
    be obligated to backfill resulting pension liabilities.
        The Public Employee Pension Transparency Act makes a lot of
    sense. While it is not mandatory for States to adopt, it
    categorically states that the Federal Government will not bail
    out a State's public pension system.
        This Act increases transparency standards for public
    pension systems. Unfortunately, the Government Accounting
    Standards Board, or GASB, refuses to require this minimum level
    of transparency from public pension plans in its accounting
    standards. The GASB currently does not and will not in the
    future require plans to disclose the sensitivity analysis of
    discount rates so that plan members, local government leaders
    and the public can assess for themselves what the underlying
    liabilities in these plans may be.
        Greater transparency and better information is important
    for everyone, for the fiscal health of our States, for elected
    leaders to make decisions and for our taxpayers to use when it
    comes to evaluating the significant liabilities associated with
    public pension systems in this country.
        I strongly support this legislation and am here today to
    urge every Member of this Committee to support the Public
    Employee Pension Transparency Act. Thank you.
        [The prepared statement of Mr. Stapleton follows:]
        [GRAPHIC] [TIFF OMITTED] 70881A.001

        [GRAPHIC] [TIFF OMITTED] 70881A.002

        [GRAPHIC] [TIFF OMITTED] 70881A.003

        Chairman BOUSTANY. Mr. Barro, you may proceed with your
    testimony.

     STATEMENT OF JOSH BARRO, WALTER B. WRISTON FELLOW, MANHATTAN
                     INSTITUTE FOR POLICY RESEARCH

        Mr. BARRO. Good morning. Thank you, Chairman Boustany and
    Ranking Member Lewis for having me here today to talk about
    this important issue.
        If you are trying to evaluate the pension plan serving a
    State and local government, there are some simple questions you
    might want to ask about it, such as how much do the pensions we
    provide cost? How much do we owe to active workers and
    retirees? And over the next few years, how much more cash are
    we going to have to come up with to make our required
    contributions into the pension fund?
        But if you pick up the comprehensive annual financial
    report of most State and local pension funds in the United
    States, you will either find no answers to these questions or
    you will find incorrect answers to them.
        The recession has been driving pension contributions
    skyward in States and localities all around the country. And
    many State and local governments are currently feeling the need
    to reform their pension systems. Indeed, 18 States enacted some
    sort of pension reform law in 2010. But because of this lack of
    useful financial information, many States have made
    underwhelming pension reforms, and a lot of them are even
    coming back to do a second round of reform having just done
    reform within the last 18 months.
        As a couple of examples of the pressure that localities are
    feeling, Newark, New Jersey, made $37 million in pension
    payments in 2009. They had to make $62 million for 2010. San
    Francisco will make $357 million in payments this year, and
    their city treasurer expects that that will rise to $800
    million within 2 years.
        So how can the financial disclosures around pension funds
    be improved so that State and local law makers have better
    ability to make good choices about pensions? H.R. 567 would
    make several improvements to the way that pension funds make
    their disclosures, and there are some additional disclosures
    that these funds should also be encouraged to make.
        The most important change relates to the valuation of
    pension liabilities using a practice called fair valuation of
    liabilities, or market valuation, as would be encouraged by
    H.R. 567. As the CBO said in a report just yesterday, fair
    valuation provides a more complete and transparent measure of
    the costs of pension obligations. Using a fair valuation method
    will help States and municipalities and their taxpayers and
    bondholders better understand where they stand with regard to
    pension liabilities.
        States and cities also don't know what their future outlook
    looks like for the year-to-year cost of pension obligations.
    Even though pension funds the way they smooth their asset
    returns means that we can expect pension contribution rates to
    keep rising through about 2014, because of stock market losses
    in 2008 and 2009, most pension funds are not releasing
    projections of how those costs will move, so municipalities and
    States can't do effective budget planning because they don't
    know how big those cost explosions are going to be.
        H.R. 567 will require a 20-year projection of cash flows
    which will give States and localities better clarity about what
    their future costs will look like.
        There are some additional transparency measures that States
    and localities would be wise to adopt. One, again, relates to
    asset smoothing, that process of gradually recognizing unusual
    gains and losses. Over the last decade, many States and
    localities, their pension funds have made opportunistic changes
    in the way they perform smoothing, either increasing or
    decreasing the length of the smoothing period to artificially
    inflate the appearance of financial solvency in their funds.
        In one case, New Jersey, such a shift was actually used to
    justify a 9 percent increase across the board in pension
    benefits that appeared affordable just because of this
    accounting trick. States should be encouraged to adopt a
    standardized smoothing practice so they do not have the option
    to game that system.
        Finally, public pension plans do not disclose what is
    called a normal cost of the pension benefits that they are
    awarding in a given year. That is to say, what is the present
    cost of all the promises we made to active workers this year in
    exchange for their labor? This is a standard feature of private
    sector pension disclosures. But you can't figure out when you
    look at a public employee pension, and it is not the same
    amount as the cash contribution that is being made into a
    pension fund. For this reason, it is extremely difficult to do
    comparisons of the value of public and private sector
    compensation packages. We don't really have a good sense now of
    what the pension benefits that public employees are getting are
    worth.
        So why should Congress involve itself in this which is a
    State and local issue? States don't understand how big a hole
    they have dug for themselves. And in certain States such as
    Illinois where the funding ratio of public plans has fallen to
    38 percent, even under the current GASB standards which are too
    aggressive in terms of valuing the liabilities, the risk is
    that eventually you will have clamor for a Federal bailout of
    insolvent State and local pension funds that appear to be on
    the brink of being unable to make payments to the State and
    local employees. It is better to avoid that situation now by
    giving State and local leaders the clarity they need to fix
    their own pension problems so that Washington does not have to
    later.
        Chairman BOUSTANY. Thank you, Mr. Barro.
        [The prepared statement of Mr. Barro follows:]
        [GRAPHIC] [TIFF OMITTED] 70881A.004

        [GRAPHIC] [TIFF OMITTED] 70881A.005

        [GRAPHIC] [TIFF OMITTED] 70881A.006

        Chairman BOUSTANY. Mr. Gold, you may proceed.

     STATEMENT OF JEREMY GOLD, FSA, CERA, MAAA, PH.D., JEREMY GOLD
                                PENSIONS

        Mr. GOLD. Good morning, Chairman Boustany, Ranking Member
    Lewis and Members of the Subcommittee. Thank you for this
    opportunity to present my views with respect to transparency
    and funding of State and local pension plans. My views are my
    own and do not represent any other persons or organizations. I
    am an independent consulting actuary specializing in the
    financial aspects of pension plans. I will address the
    disclosure of the assets, liabilities and costs of public
    pension plans in the context of H.R. 567.
        The disclosures at the heart of H.R. 567 are long overdue,
    and I welcome this bill. H.R. 567 is conceptually right.
        I will suggest three changes that will keep it right in
    concept and make it more useful and efficient in practice.
        The bill calls for two financial measures that are so
    fundamental that they must be made available to every
    decisionmaker and every interested party, the market value of
    plan assets and the current liabilities.
        H.R. 567 requires that the current liability be determined
    by discounting future cash flows using rates of interest
    derived from U.S. Treasury securities. In my written testimony,
    I quote former Federal Reserve vice chair Donald Kohn, who has
    explained why bulletproof promises should be discounted at
    rates derived from bulletproof securities.
        My first recommendation--H.R. 567 calls for averaging
    Treasury rates over 24 months and for segmenting rates for
    three different future periods. These ideas have been borrowed
    from private pension funding law where they are used to reduce
    contribution volatility. H.R. 567, however, is not a funding
    bill. It is a disclosure bill. Good disclosure should use the
    Treasury spot rates at one point in time. We cannot spend
    averaged dollars, nor can we make good decisions based on
    liabilities that have been averaged. H.R. 567 calls for the
    fair value of assets at one point in time. The proper
    comparison liability must be based on spot rates at one point
    in time.
        The comparison of assets at market and liabilities at spot
    rates answers two questions that cannot be answered accurately
    in the pre-H.R. 567 world. First question--will future
    generation of taxpayers be paying for services provided to
    earlier generations? Second question--how does this plan's
    funding compare to plans in other jurisdictions?
        My second recommendation: H.R. 567 calls for extensive
    projections of future statistics that would be expensive and
    potentially uninformative. The subsections calling for these
    projections should be stricken. Eliminating the projection
    along with the rate averaging and segmenting should reduce
    compliance costs to a level that I would call modest in the
    first year and nearly negligible in subsequent years.
        My third recommendation: The bill should add a new item
    which will be very valuable and easy to calculate. Mr. Barro
    just referred to it. I call it the current cost. It is the
    portion of the current liability that has been accrued in the
    latest fiscal year. Current cost asks a third question that
    cannot be answered in the pre-H.R. 567 world: What is the
    market value of benefits earned by public employees this year?
    Current costs will make it possible to fairly compare
    compensation from jurisdiction to jurisdiction and between
    private and public sector employees.
        In summary, I recommend that we use spot Treasury rates,
    not averaged, not segmented. I suggest the elimination of the
    20-year projection requirement, and I suggest the inclusion of
    a defined current cost computed on the same basis as the
    current liability. I thank you.
        Chairman BOUSTANY. Thank you, Mr. Gold.
        [The prepared statement of Mr. Gold follows:]
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        Chairman BOUSTANY. Mr. Kurtter, you may proceed.

      STATEMENT OF ROBERT KURTTER, MANAGING DIRECTOR, U.S. PUBLIC
                   FINANCE, MOODY'S INVESTORS SERVICE

        Mr. KURTTER. Thank you. Good morning.
        Mr. Chairman, Congressman Lewis, Members of the
    Subcommittee, my name is Robert Kurtter. I am a managing
    director in U.S. Public Financial Group at Moody's Investors
    Service. Thank you for inviting Moody's to participate in
    today's hearing.
        My comments will focus on our views of the potential credit
    impact of transparency initiatives like H.R. 567 and the
    Governmental Accounting Standards Board project on pension
    disclosure. While Moody's does not rate pension plans
    themselves, we monitor proposals like these and the related
    developments because our assessment of government pension plans
    is one of the many factors in our credit analysis of
    government-issued bonds. Moody's comments on policy
    initiatives, however, should not be taken as an endorsement or
    criticism of any such initiative or the conduct of any
    particular issuer.
        In recent years, we have observed increases in the unfunded
    pension liabilities of State and local governments. This growth
    has occurred for several reasons. First, during peaks of the
    stock market in 2001 and 2007, some State and local governments
    enhanced benefits and/or reduced employer contributions.
    Second, the recent economic downturn significantly diminished
    the value of pension plan assets. Third, adoption of early
    retirement incentive programs shifted costs from payroll to
    retirement systems. And fourth, demographic factors, including
    an aging work force and the increasing life expectancy of
    beneficiaries are adding to liabilities.
        State and local governments have needed to increase their
    pension contributions at a time when declining revenues are
    also requiring them to impose budget cuts. These developments
    have prompted a discussion about whether the existing
    disclosure standards of our government pension plans remain
    appropriate and also about whether and to what extent
    government pension plans are underfunded.
        In addition to the proposed legislation, the GASB is
    considering changes to its financial reporting rules for public
    sector pension plans. As I described in my written testimony,
    if the GASB changes were adopted, as proposed, employers
    subject to its disclosure requirements could calculate their
    funding requirements as they do now, but they would have to use
    different methods to calculate certain elements of the pension
    expense they disclose in their financial reports.
        Moody's believes H.R. 567 would increase public access to
    State and local government pension plan data. Additionally,
    both the bill and the GASB proposal would increase
    comparability of that data. At the same time, they could also
    increase the amount and complexity of the information
    disclosed. If these or other initiatives help investors and
    government issuers have more informed discussions about the
    credit risks associated with these obligations, we believe
    these proposals could create incentives for issuers to address
    their unfunded pension liabilities.
        Governments have many options to improve the funded status
    of public plans. These include increasing government or
    employee contributions or adjusting benefits. Depending on the
    specific measures taken, these actions could be positive,
    neutral or negative for bond holders. Though as noted earlier,
    any changes in the funded status of the pension plan would be
    one of the many factors that we would consider in our credit
    analysis.
        Of course, the decisions that governments make about their
    pension plans affect much more than their credit profile as
    bond issuers.
        Our opinions do not speak to the wider implications for an
    issuer or its stakeholders of any actions it takes. Also, as a
    credit rating agency, Moody's does not take a position on
    whether or how a State or local government should address a
    pension funding shortfall. Our role is limited to providing
    opinions and research about issuers' likely ability and
    willingness to pay their bonds in full and on a timely basis.
        Thank you again for inviting me to testify on this
    important matter. I look forward to answering your questions.
        Chairman BOUSTANY. Thank you, Mr. Kurtter.
        [The prepared statement of Mr. Kurtter follows:]
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        Chairman BOUSTANY. Ms. Lav, you may now proceed.

               STATEMENT OF IRIS J. LAV, SENIOR ADVISOR,
                 CENTER ON BUDGET AND POLICY PRIORITIES

        Ms. LAV. Thank you. Mr. Chairman, Congressman Lewis and
    Members of the Subcommittee, I appreciate the invitation to
    appear before you today. I will make six related points and I
    will then elaborate on the problems that I see with H.R. 567.
        First, as was mentioned, most State and local employees
    receive modest pension benefits, averaging less than $23,000 a
    year. Second, most States can address underfunding in their
    pension plans with relatively modest measures, such as
    increases in contributions from employers and employees and
    some sensible and moderate changes in benefits. Only a few
    States, those with pensions that are grossly underfunded and a
    history of failing to make required contributions, would have
    to make more extensive changes.
        Third, pension funds, according to the Federal Reserve
    data, have already recouped two-thirds of their recession
    market losses. But smoothing and data lags have led recent
    studies to portray the situation as worse than it is.
        Fourth, the use of a so-called riskless rate, as we are
    discussing, to discount liabilities makes underfunding appear
    much greater than what pension funds report. But, the somewhat
    academic debate over whether or not to discount liabilities
    using a riskless rate is quite distinct from the actuarial
    finding of how much States and localities have to deposit in
    their pension funds to meet their future obligations. States
    and localities should use a realistic measure of future
    investment returns to set their deposit levels.
        Fifth, H.R. 567 I view in many ways as a solution in search
    of a problem, one that would override the careful process that
    the Governmental Accounting Standards Board has nearly
    completed. The Board's proposed new rules would standardize
    State pension fund reporting and make it more transparent.
        Sixth, and finally, moving State and local employees from
    defined benefit to defined contribution plans, which some
    sponsors of H.R. 567 have said they would like to see, would
    not address the funding problem that public pension systems now
    face. On the contrary, it would raise annual costs in many
    instances. Some States that were considering such a conversion
    have backed away after concluding that they would face higher
    costs.
        I will now elaborate on the problems with H.R. 567. For the
    past 4 years, GASB has been conducting extensive research and
    consultation and holding hearings with well over 100
    stakeholders in order to develop new pension financial
    reporting standards.
        The draft GASB standard makes clear that the liability
    amount that results from the riskless rate does not properly
    reflect State and local government pension liabilities.
    Instead, GASB has carefully crafted rules that reflect market
    expectations and applies a lower discount rate only to the
    least well-funded plans in order to reflect the greater risk to
    their solvency.
        Congress should not replace GASB standards and the
    financial market discipline that induces State and local
    governments to comply with those standards with H.R. 567's
    unnecessary Federal intrusion into the issue. Unlike the GASB
    process, H.R. 567 would likely increase public confusion
    between liabilities based on a riskless rate and actual
    liabilities. That could spook bond markets and lead States and
    localities to cut spending for education and other key areas or
    raise taxes more than necessary. It also would create an entire
    new Federal bureaucratic structure to regulate something that
    market forces should manage.
        Most States with significant pension underfunding are
    moving to address it. And they are doing so in a variety of
    ways. They are increasing employee contributions. Eleven States
    did that last year, and 16 States made changes that will reduce
    benefits for future employees. Some 12 States have raised their
    retirement ages. Other States have made changes that will
    require consistent employer contributions. States should be
    able to gradually solve their underfunding problems with the
    steps they are already taking, with modest increases in
    employer and employee contributions, with a greater recovery in
    the markets, and by adhering to the new rules that GASB will
    promulgate. The Federal Government does not need to intervene
    in this issue. In fact, that would do more harm than good.
    Thank you.
        Chairman BOUSTANY. Thank you, Ms. Lav.
        [The prepared statement of Ms. Lav follows:]
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        Chairman BOUSTANY. We will now begin questioning, and I
    will begin here with Mr. Barro.
        Some States and local governments have actually borrowed
    money in order to make contributions to their pension funds.
    And in these cases, the government borrows money in hopes that
    the pension fund earns investment returns greater than the
    interest rates so that they can remain solvent and meet their
    liabilities. This might work well if the investments actually
    earn a great deal on returns. But what happens if the
    investment actually loses money? Is this really constituting
    buying stocks on margin in effect?
        Mr. BARRO. That is really exactly what it is. One of the
    great champions of this was Governor Rod Blagojevich of
    Illinois who pushed forward a $10 billion pension obligation
    bond issuance in, it was either 2003 or 2004. And yes, this
    practice is purely a creature of the use of discount rates
    roughly in the range of 8 percent; the idea is the government
    can borrow around 5 percent, invest, earn an 8 percent return
    and they are just getting free arbitrage there. Now, of course,
    the problem with is that the equity investments are risky and
    the payments that you have to make to the bondholders are
    fixed.
        And so, yes, if the market performs poorly, it is exactly
    like buying stock on margin and losing. You shouldn't be under
    the illusion that because the State issues pension obligation
    bonds and uses them to buy assets to put in a pension fund that
    it has somehow improved its overall fiscal solvency.
        The other thing I would note is that it creates avenues for
    other chicanery, which we saw in Illinois where the State
    issued 10 billion in bonds but only used about 7.3 billion of
    the issuance to shore up the pension funds. The rest was used
    to service debt on the bonds and to close gaps in a couple of
    years of State budgets. So it is just another way for the
    government to make its books more complicated, hide borrowing
    and further actually worsen a State's fiscal situation.
        Chairman BOUSTANY. Thank you, Mr. Barro.
        Mr. Gold, do you want to comment on that?
        Mr. GOLD. I think you have it right. I think Mr. Barro has
    it right. It is borrowing to invest in risky assets. I began
    writing about this when I did my dissertation in 1999. And all
    I have seen since then is greater and greater issuance.
    Illinois is one of the poster children, but a number of other
    States have ventured down that risky route.
        Chairman BOUSTANY. Thank you.
        A new report released yesterday by the Congressional Budget
    Office said, and I quote, ``By accounting for different risk
    associated with investment returns and benefit payments, the
    fair value approach provides a more complete transparent
    measure of the cost of pension obligations than the actuarial
    standards that are currently in use.''
        So for the panel I would like each of you to address this.
    Do you think that CBO is correct? Or are current standards more
    accurate? Why don't we start with Mr. Stapleton.
        Mr. STAPLETON. Thank you, Mr. Chairman. One of the many
    reasons why I am a strong supporter of this particular piece of
    legislation is that, in my view, the Government Accounting
    Standard Board has not done its job in maintaining uniform
    standards that are in line with the financial accounting
    standards boards which govern private sector companies. You can
    look at any number of things, including not fair value
    assessing what the liabilities are. You can look at
    amortization rates. They allow the amortization period to be
    far greater under GASB rules than under FASB rules allowing for
    a smoothing of write-offs over a much longer period of time.
        In the private sector, plan liabilities are valued
    separately. Under GASB plan liabilities, the expected rate of
    return equals the actual rate of return. In the private sector,
    liabilities are valued using corporate high yielding bonds
    which come out around 6 percent.
        And the issue of the sensitivity analysis, I was with Mr.
    Attmore, the Chairman of the Government Accounting Standards
    Board a number of week ago. I asked him from a disclosure
    standpoint, will you simply provide a sensitivity analysis so
    that people, State leaders and public policy makers can judge
    for themselves what these liabilities may be? And he said no.
        And so I view this as simply transparency of information,
    of people being able to reach their own conclusions, whether it
    be State leaders or public policy makers. Thank you.
        Chairman BOUSTANY. Thank you.
        Mr. Barro.
        Mr. BARRO. Yes. I would just say briefly that I think CBO
    was absolutely right in its characterization of the
    appropriateness of the fair value method for valuing
    liabilities. And frankly, I think it is a reflection of the
    near unanimity on this question in the financial economics
    community. It is often portrayed as a debate. But the main
    parties that you see defending the 8 percent discount rate
    practice are pension fund managers and actuaries. I think that
    there isn't a good financial economics argument for the use of
    a discount rate associated with risky investments to value a
    liability that is not risky.
        Chairman BOUSTANY. Mr. Gold.
        Mr. GOLD. In my comments, I made a distinction between a
    funding law such as the PPA of 2006 and a disclosure bill or
    proposals coming out of GASB. There is a history which is built
    into actuarial methods for guiding funding over long periods of
    time, and from that history, developed many of the practices
    which found their way into ERISA, found their way into
    accounting and so on.
        Financial economics is exactly the--well, financial
    economics addresses the difference between an engineering
    approach to developing contributions, which at some future date
    will be adequate if things work out, and valuing promises made
    today. And the financial economics, or fair value approach, is
    far superior for accounting purposes.
        Chairman BOUSTANY. Thank you.
        Mr. Kurtter.
        Mr. KURTTER. Yes, thank you. We do believe that pension
    fund unfunded liabilities may be overstated because earning
    rate assumptions don't reflect current market conditions, that
    directionally those rates are too high. GASB is considering
    initiatives to lower those rates, and several States and
    pension plans have already taken actions to begin lowering
    those rates.
        We don't have an opinion about what the right rate is other
    than to note that directionally these are moving toward more
    realistic number. We look at pension funding on a case-by-case
    basis for each credit involved, and that this is really only
    one factor that we look at in our overall credit assessments.
        Chairman BOUSTANY. Thank you.
        Ms. Lav.
        Ms. LAV. I would not say that 8 percent is the exact right
    number right now. As Mr. Kurtter said, a number of pension
    funds are bringing that down, and one needs to figure out what
    the right number is. But CBO's preferred method is using
    municipal bond rate, adjusted for its tax exemption, and as
    they note in a footnote, there are a number of anomalies to
    that idea. This is for disclosure. I should back up and say
    they say that that does not mean that that should be the way
    that funds contribute.
        As I said, those are two different things. But even using
    municipal bond rate for disclosure has its problems. For
    example, the bond rate is higher in the States with the weakest
    fiscal system. So you have a situation with a higher rate, you
    have lower pension liabilities disclosed if you have the worst
    fiscal system because your bond rate, the interest you have to
    pay is higher. That doesn't make any sense. Also, if you
    compare with corporate bonds, which have interest rates in the
    6, 6\1/2\-percent range, they use their bond rates to discount
    liabilities. But everybody knows that corporate bonds are more
    risky than municipal bonds. So they get to use a higher
    discount rate and show lower liabilities because their bonds
    are more risky than State and local bonds? So there is some
    basic fundamental problems with these conceptions that don't
    necessarily make sense in the actual world.
        Chairman BOUSTANY. Thank you.
        Mr. Lewis.
        Mr. LEWIS. Thank you very much, Mr. Chairman. I want to
    thank each of you for being here this morning. This question is
    for the entire panel. My time is limited, so I ask each witness
    to answer either yes or no to the following question.
        Do you support closing public pension plans?
        Mr. STAPLETON. No.
        Mr. BARRO. It depends on the State, but in most cases yes.
        Mr. GOLD. I am sorry. I missed a word. I am not very good
    at hearing. Do I support what?
        Mr. LEWIS. Closing.
        Mr. GOLD. No, I do not.
        Mr. KURTTER. Moody's does not have an opinion on that
    matter.
        Ms. LAV. No, I do not.
        Mr. LEWIS. Do you have a personal opinion or are you
    speaking for Moody's.
        Mr. KURTTER. I am speaking for Moody's.
        Ms. LAV. No.
        Mr. LEWIS. Let me just ask, does closing public pension
    plans save money? Ms. Lav?
        Ms. LAV. No.
        Mr. LEWIS. Why not?
        Ms. LAV. If you have unfunded liabilities that exist from
    past service or from market losses, you still have to pay off
    those unfunded liabilities. And if on top of that you are
    creating a defined contribution plan, you haven't lost those
    liabilities. You still have to pay them off, and you have to
    put money into a defined contribution plan. And in fact, a
    defined contribution plan for any given level of retirement
    security you want to provide for your employees, which is
    important for attracting quality employees, then you have to
    put more money in a defined contribution plan like a 401(k)
    kind of plan because then you don't have the benefits of pooled
    investment and professional management.
        Mr. LEWIS. Ms. Lav, I would like to understand more about
    the people who benefit from public pension plans.
        Ms. LAV. Sure.
        Mr. LEWIS. What type of State and local workers are
    eligible for public pension plans?
        Ms. LAV. Most State and local workers benefit, so we are
    talking about first responders, we are talking about correction
    officers, we are talking about teachers, we are talking about
    social workers and nurses and bus drivers, schoolbus drivers, a
    whole range of State and local workers.
        Mr. LEWIS. To continue, how much, on average, do these
    retirees receive in pension benefits?
        Ms. LAV. Across States, the Census reports that they
    receive an average of about $23,000 a year.
        Mr. LEWIS. Could you tell us whether all State and local
    workers participate in Social Security?
        Ms. LAV. No. All State and local workers do not participate
    in Social Security.
        Mr. LEWIS. What are the exceptions?
        Ms. LAV. The exceptions are quite a number of teachers,
    about 40 percent of teachers and a majority of public safety
    workers like police and fire, and then there are some States, a
    few States, where most of the workers don't participate. So
    those workers need more from their pensions because they don't
    also have Social Security.
        Mr. LEWIS. Could you tell the Members of the Committee what
    is the purpose behind providing workers with pension benefits?
    What is the intent?
        Ms. LAV. Well, first of all, studies that do what we call
    apples-to-apples comparisons find that public workers
    particularly at middle and higher income, or middle and skilled
    areas, are paid less than their private sector counterparts. So
    pensions are part of their compensation.
        But in general, it is important that people have retirement
    security. And this is part of how State and local governments
    attract quality workers to do the work. And so they provide
    deferred compensation as well as current compensation. It is a
    choice that has been made, an important one.
        Mr. LEWIS. Thank you. I thank all members of the panel. Mr.
    Chairman I yield back.
        Chairman BOUSTANY. I thank the Ranking Member.
        Mr. Buchanan, you are recognized 5 minutes.
        Mr. BUCHANAN. Thank you, Mr. Chairman, for doing this most
    important hearing. I also want to thank our colleague,
    Congressman Nunes, because I think it is very critical. I just
    think back, we were being in business for a lot of years we had
    profit sharing plans and 401(k)s that we have now. But I look
    back on the last 10 years and if you take a look at S&P, for
    example, they are flat-lined.
        So my point is, I am looking at these, I was thinking in
    2008 I was sitting around with a bunch of people having dinner
    at Christmas just before that news, maybe 15, a lot of them
    were investors and everything, and the market, everybody lost a
    third of their net worth then.
        So when we talk about someone put a number together at 8
    percent or 4 percent or 12 percent, in these uncertain times,
    you can come up with any number you want. I always refer back
    to the rule of 72 that if you have an 8 percent number, it
    doubles in 9 years. But the bottom line, these are different
    times. So it just seems like we have to reassess where we are
    at. We need more transparency so that it doesn't lead everybody
    into bankruptcy.
        So I will start with you, Ms. Lav. What do you think a
    number should be today when you are looking to put together
    what you might have to pay out in the next 10 or 20 years, what
    number? Because if you look at the bond rate, maybe there has
    been some appreciation, but if I look at interest rates today,
    it is almost free money if you are going to go into Treasuries,
    and the equity markets have been zero for 10 years on average,
    but historically for a lot of years, they were 10 percent.
        But where do you even begin to get a number that makes any
    sense? That is why I am concerned as more people retire,
    someone mentioned 8 percent, do we need to be dealing with 1
    percent? What makes sense going forward for the workers?
        Ms. LAV. I am not going to put a specific number on it. I
    haven't done that research. That is not what I do.
        But I do know it is not--it is very unlikely to be 4
    percent. You know, I think that it would be somewhat
    irresponsible for States and localities just to invest in
    Treasury bonds. I think that would not make any sense. That
    would not----
        Mr. BUCHANAN. But you understand the S&P, in the last 10
    years, went down, has been down, it has been flat-lined at zero
    and it went down 38 percent in 2008. How do you get to a number
    of 4, 6, 7 percent with any confidence going forward?
        Ms. LAV. Well, I mean pension returns have not been, the
    returns to pension funds have not been zero.
        Mr. BUCHANAN. What have they been in the last 10 years?
        Ms. LAV. In the past couple years, they were in the double
    digits, they were down in the recession----
        Mr. BUCHANAN. Do you know what the returns have been in
    these pension funds on average? Take them across the board.
    What is the average for the last 10 years? Do you have any
    idea? I don't even know that number, but I know my overall
    returns have not been good.
        Ms. LAV. I think CBO had a number, it was in the
    neighborhood of 3 percent or something like that. But this was
    through two back-to-back recessions. I certainly don't think
    you necessarily want to plan for the future of having two
    recessions, one of them the largest since the Great Depression
    within 10 years, I don't think that that is a realistic way to
    plan either, to assume that that is going to happen.
        Mr. BUCHANAN. These are different times today. I am an
    optimist, but at the same token, the reality of it is a lot of
    people are reassessing where they are at. I can't tell you--I
    represent Florida--how much retirees that were hoping to retire
    based on a 6, 8, 4 percent number. They are not seeing those
    returns, so now they are working longer and those kinds of
    things.
        Mr. NUNES. Would the gentleman yield?
        Mr. BUCHANAN. Yes.
        Mr. NUNES. Mr. Buchanan, I want to thank you for your kind
    words on the bill. I want to make sure, I know the bogeyman is
    out here and people are talking about 4 percent or 3 percent
    and the detractors to this bill that are against transparency
    continue to use that rate of return as if that rate of return
    was meant that the Federal Government is now going to say this
    is what the return is going to be.
        The purpose in drafting the legislation had nothing--when
    we looked at that rate, was to do nothing other than to protect
    the workers from the employers, meaning the government. Because
    really, when we look at that discount rate of today, which
    would be around 4 percent, it is not to do anything but compare
    oranges to oranges or apples to apples, so that you can compare
    a plan in Fresno, California, to a plan in Florida. And that
    was the purpose of this discount rate. That is why we put this
    in there just to have a conservative rate so you would be able
    to compare these plans across State lines and from entity to
    entity.
        Mr. BUCHANAN. I thank the gentleman. But I guess my point
    in saying all this is I was trying to work toward the
    uncertainty that we have faced in the last 10 years. And we
    need more transparency. And I appreciate your effort.
        Thank you.
        I yield back.
        Chairman BOUSTANY. I thank the gentleman. Ms. Jenkins, you
    are now recognized for 5 minutes.
        Ms. JENKINS. Thank you, Mr. Chair.
        And I want to thank you all for being here today.
        I find it a bit ironic that Congress, which doesn't have
    the political will to take action to fix Social Security is
    here today talking about our grave concern with our State and
    local government pension plans.
        So I am not sure that any of us have much credibility on
    this issue. But I have great respect for the panel in
    particular as a former president of the National Association of
    State Treasurers, a State treasurer myself, and a board member
    on our public employee retirement system in Kansas; I really
    have the utmost respect for State treasurers. So I would like
    to address some questions to Treasurer Stapleton.
        Some have commented that this bill, H.R. 567, is
    unnecessary because the Government Accounting Standards Board,
    GASB, already provides standards for State and local pension
    plans. I would just like your response to that.
        Mr. STAPLETON. This is not the case. GASB standards, in my
    opinion, have basically permitted plans not only to adopt their
    own rates of return, but basically act like the wild West when
    it comes to assuming plan returns. That is why there are no
    credible levels of comparison between plans.
        I spoke earlier about differences in amortization length.
    Obviously, the longer the amortization period, the less you
    have to write off in a given amount of time. Under the
    Financial Accounting Standards Board, which governs the private
    sector it is a much shorter length of time to write off plan
    assets.
        I have been very disappointed with the oversight of the
    Government Accounting Standards Board and their refusal to
    transparently invest in information that will allow public
    policymakers to make informed decisions. I see this bill as a
    nonpartisan bill, as a bill to increase information, whether 4
    percent is the right rate of return, I can guarantee you that 8
    percent is not the right rate of return. If you go into the
    insurance market and try to get a private contract or somebody
    to guarantee you a rate of return, you will never find somebody
    that will guarantee you an 8 percent rate of return.
        States have increasingly tried to regulate the insurance
    industries, and when they have done that, they have required
    plans to have more assets than liabilities. And so if GASB had
    done its job or would do its job and require the same standards
    that are applicable in the private sector, we wouldn't need to
    be here today. But it is refusing to do that. And so plan
    members are not getting a uniform level of information to
    assess liabilities. And public policy makers need this
    information for State governments to responsibly respond to
    these liabilities because the fact of the matter is that plans
    are not taking the advice of their own actuaries.
        Just look at what happened which was chronicled in The Wall
    Street Journal with Calpers a few weeks ago. They told the
    board to lower the rate of return, then they started getting
    letters in from school districts, from local governments around
    the State that said, we cannot afford for you to lower the rate
    of return. And they said, we are going to discount the
    professional advice of our actuaries and create in effect a
    deferred liability for future generations. And we cannot allow
    that to happen.
        Ms. JENKINS. Excellent. Thank you. The bill, the Public
    Employee Pension Transparency Act, is not mandatory, but does
    condition the continued ability to issue tax exempt bonds upon
    filing certain information about State and local pension plans
    to the Internal Revenue Service. As a State elected official,
    do you think that is fair?
        Mr. STAPLETON. Absolutely. This does not force compliance.
    There is a carrot, which is tax exempt bond financing. But even
    if States comply, after they comply and issue this information
    back to the plan holders and back to their States, they still
    don't have to adopt the rate of return. It is just a way to get
    greater information.
        And as I said earlier, I asked Mr. Attmore at the
    Government Accounting Standards Board what is the problem with
    providing a sensitivity analysis of different discount rates?
    Let's look at 8 percent, let's look at 6, let's look at 4
    percent, but let's make sure that public policy makers at the
    State level have a wide range of information from which to
    reach conclusions. And he said no, in the coming standards,
    that they will not provide that information.
        Ms. JENKINS. And finally in your testimony, you said
    overestimating a pension system's expected return is
    essentially gambling with the financial welfare of the next
    generation of Americans. Can you explain what this gamble
    places at stake for the next generation? And is it fair to say
    that this gamble could also impact the current generation
    through decreased services, increased taxes?
        Mr. STAPLETON. One of the things that opponents of this
    legislation and of transparency with public pension plans in
    general like to point out is they try and make apples to
    oranges comparisons with private sector plans. They will say,
    well, look at the underfunding in private pension systems. The
    problem is that structurally you are talking about two
    different things.
        First of all, as I mentioned earlier, private plans have a
    different valuation assessment for what their liabilities are.
    They peg it to high-yielding corporate bonds at 6 percent. That
    does not happen in public pension plans where the expected rate
    of return equals the actual rate of return. But structurally,
    unless I am an investor in a private company with a lucrative
    defined benefit plan, I don't really care, because I am not
    going to be on the hook.
        But in the public pension system, all taxpayers at the
    State level are on the hook if the plans become insolvent
    because the State of Colorado is not going to let the Jefferson
    County School District go insolvent without finding a way for
    funding. And we are bankrupt, like a lot of States. And the
    only people that can actually make up the difference are the
    taxpayers. And that is why it is important that we have this
    level of transparency so that everybody can know where we stand
    and can take public policy actions to remedy what I believe is
    a very serious problem.
        Ms. JENKINS. Thank you, Treasurer.
        I yield back.
        Mr. BOUSTANY. Thank you.
        Mr. Kind, you are now recognized for 5 minutes.
        Mr. KIND. Great. Thank you, Mr. Chairman.
        I thank the panelists for your testimony here today. As a
    Democratic representative from the great State of Wisconsin, I
    have to admit we kind of received our fair share of attention
    in the last couple of months in the media, both at home and
    nationally.
        This may seem a little heretical to my Democratic
    colleagues up here on the dais, but I commend Governor Scott
    Walker and what he did. I think what he proposed in the State
    of Wisconsin was incredibly bold and courageous in recognizing
    the deep fiscal hole that we were in and coming forward with
    the bold proposals that he did.
        And quite frankly, the fact that hundreds of thousands of
    people showed up in subfreezing weather, braving bitter wind
    chills, blowing snow, bitter winds in their face in both the
    square in Madison and virtually every city throughout the State
    of Wisconsin, I have to believe they wouldn't have done that if
    they had all the facts, if they knew the real fiscal crisis
    that our State was facing and how boldly the Governor was
    really trying to address these issues.
        Because if they had known that the State public pension
    fund was only funded at 99.8 percent and that that 2
    percent--.2 percent shortfall was creating a deep fiscal hole
    for our State, I cannot believe that they would have been out
    there for weeks and months on end protesting what the Governor
    was trying to do with the State public pension system. I mean,
    they wouldn't have been so selfish and so self-centered in the
    demonstrations that they were conducting throughout the State
    of Wisconsin.
        No, I think not.
        I think those individuals, those workers, those families
    knew exactly what they were doing when they were out there
    protesting what the Governor and the Republican legislature was
    trying to jam down their throats. This had nothing to do with
    the budget crisis that the State of Wisconsin was facing.
        In fact, Governor Walker was just here in this town a few
    weeks ago and admitted in testimony before Congress that his
    assault on worker rights had absolutely nothing to do with the
    budget situation that we face in the State of Wisconsin.
        In fact, they stripped that portion out of the bill and
    therefore admitted before the entire world that it had nothing
    to do with the budget implication.
        But nevertheless, the public employees knew that they had
    to be a part of the solution, and they were willing to
    contribute more to their State public pension system. They were
    willing to contribute more to their health care system.
        In fact, Governor Walker got every concession that he was
    asking for from those public employees, but that wasn't good
    enough. He had to go after those worker's rights and strip that
    away, basically telling them, you no longer have a seat at the
    table, and your voice isn't going to matter anymore, and we are
    going to jam these decisions down upon you.
        So it was not surprising seeing hundreds of thousands of
    people going out and braving that cold weather and that bitter
    wind chill day after day protesting what Governor Walker was
    doing to the State of Wisconsin. If we want to have a serious
    conversation about the fiscal hole we are facing at the State
    and Federal and local level, let us talk about the real cause
    of what is driving these budget deficits, which is rising
    health care costs.
        Now, my Republican colleagues have a proposal on how to
    deal with it and that is going to the workers of the country,
    to seniors, to disabled people, the children and saying, you
    contribute more to your health care plans, and that is it.
        They are not proposing anything to deal with rising health
    care costs. And that is just going to shift the burden more and
    more on working-class families throughout the Nation.
        Or there is another approach that we can take and that is
    through the health care reform measure that we passed that will
    reform the way health care is delivered in this country and
    ultimately how we pay for it. So it is based on the value and
    no longer the volume of care that is given. And surprise,
    surprise, this has been a bipartisan agreement for many, many
    years. Some of the most prominent names in the Republican party
    from Newt Gingrich, to Bill Frist, to my former Governor and
    former Secretary at HHS, Tommy Thompson, Mark McClellan, they
    have all been saying we have to go to a value- or outcome-based
    reimbursement system in the health care system, or it will
    bankrupt us. That is what is driving the fiscal crisis at the
    State and at the local level. That is the largest and fastest
    growing area of spending at the Federal level. That is what we
    should be focused on, instead of some one-size-fits-all
    Washington approach to the State public pension system, 99.8
    percent funded in the State of Wisconsin, and yet look at all
    the attention that we garnered as a State over the last couple
    of months.
        Mr. Chairman, I would like with unanimous consent to submit
    for the record a letter dated May 4, 2011, to me from the
    Secretary of the Department of Employee Trust Fund, Dave
    Stella, from the State of Wisconsin.
        Mr. BOUSTANY. Without objection.
        [The information follows:]
        [GRAPHIC] [TIFF OMITTED] 70881A.034

        [GRAPHIC] [TIFF OMITTED] 70881A.035

        [GRAPHIC] [TIFF OMITTED] 70881A.036

        [GRAPHIC] [TIFF OMITTED] 70881A.037

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        [GRAPHIC] [TIFF OMITTED] 70881A.039

        Mr. KIND. In the letter, he adamantly opposes H.R. 567.
        And, in fact, in the last paragraph--and I quote him--he
    says, ``thus, contrary to what the proponents of the
    legislation suggest, the issue is not a current lack of
    transparency and disclosure; it is simply an effort to justify
    a Federal takeover of areas that are the financial and
    regulatory responsibility of State and local governments.''
        For the party that claims to be the party of less
    government in Washington and more responsibility at the State,
    proposing this one-size-fits-all approach with this Federal
    legislation is contrary to even I think your principles. And
    our own Secretary back in the State of Wisconsin is opposed to
    this legislation. So I think we could spend a lot more time on
    the issues that are really driving these budget deficits rather
    than some type of Washington one-size-fits-all approach.
        Mr. BOUSTANY. The gentleman's time has expired. We just had
    a vote called. There are two votes. One is a 15 and one is a 5.
    I think what we will do now is go to Mrs. Black for
    questioning, and then we will recess afterward.
        Mrs. BLACK. Thank you, Mr. Chairman.
        Under the current government accounting standard for rules,
    public plans can discount their pension obligations based on
    expected rates of return on pension assets, as has already been
    talked about in some detail. By putting their value into the
    stock market, private equity and other risky investments, State
    and local plans can decrease the current actuarial value of
    their liability.
        Now, GASB rules are contradictory to basic finance theory
    that I think has already been said here by a number of our
    panelists in the practice of financial markets where discount
    rates are based on characteristics of liability, not asset. And
    Congress actually had banned this type of accounting for single
    employer private pensions, but yet we are still using it in the
    government.
        Do you believe that GASB rules encourage State and local
    governments to take on inappropriate risks with these planned
    assets? And also, added to that, do you believe that H.R. 567
    would have an effect on this practice? And you can start with
    Mr. Stapleton, if we can, and just go down the panel.
        Mr. STAPLETON. Thank you, Mrs. Black.
        Yes, I do believe that the lack of uniform standards
    required by the Government Accounting Standards Board has
    allowed State plans to very dangerously adopt overrealistic
    rates of return. Even if you look at an actuarial analysis,
    which is called a Monte Carlo analysis, that is often provided
    to States, they talk about the probability of achieving
    different rates of return.
        In Colorado's case, there is almost a 30 percent chance
    that we will not achieve an 8 percent rate of return. If I told
    you and other Members of this Committee that there was a 30
    percent chance that they would be in a life-threatening car
    accident on the way to work today, I think I would have a lot
    of people biking. Yet essentially that is the risk that we are
    taking day in and day out with the State's tax money, assuming
    these rates of returns.
        Mrs. BLACK. Mr. Barro.
        Mr. BARRO. I would agree with that, and I think we see that
    in the political resistance to plans that are lowering assumed
    rates of return. In New York, we just had a reduction in the
    rate of return assumed for the State employee retirement system
    and yet, just coincidentally, the plan happened to at the same
    time adjust other actuarial assumptions with regard to
    longevity and such that happened to largely offset the effects
    of the reduction and the rate of return.
        So I think there is significant resistance to reduced rates
    of return. And in order to not lower the rate, you have to
    invest in an aggressive manner. The other thing I had noticed
    is that the defense of this aggressive investment is
    essentially that the government can be indifferent to
    variability and risk in asset returns. Because the government
    is going to be around forever, it has this superior ability to
    take on risk. And the implications of that are really kind of
    perverse.
        Pension funds happen to be vehicles through which we make
    promises to public employees and through which we invest in
    assets. But these are fundamentally unlinked activities, and
    there is no reason that a government couldn't just create
    essentially a sovereign wealth fund by issuing bonds and using
    the proceeds to invest in equities. If the government really
    has a superior ability to take on risk, we should be doing a
    lot more of that. They should issue as many bonds as they can,
    use them to buy up as much stock as they can and use that as a
    cheap source of financing for government activities.
        Now, obviously, that makes no sense because it would
    involve governments taking on tremendous and inappropriate
    investment risks. But that is exactly what they do through
    public employee pension plans.
        Mrs. BLACK. Thank you.
        Mr. Gold.
        Mr. GOLD. The best financial theory, brought to our
    attention by famous economist Fischer Black indicates that
    pension plans should not be investing in risky assets but
    should be investing in bonds. I have written that liability
    measurement using the ``expected return on assets'' rather than
    a bond ``reference portfolio'' does enable, at the very least,
    and encourage, perhaps, risky investing which financial theory
    would not support.
        Mrs. BLACK. Mr. Kurtter.
        Mr. KURTTER. Yes. We think that the preliminary review's
    report of GASB, their project to review pension and accounting
    standards for public-sector pensions, this bill, the many
    reports that have been issued on this subject recently help to
    increase transparency and improve the quality of the debate
    between issuers and investors, thereby improving the amount and
    the quality of information in the market. To the extent that
    transparency is improved, comparability is improved, we think
    this helps to create incentives to issuers to help address
    funding shortfalls and improves the overall quality of
    information available to investors.
        Mrs. BLACK. Ms. Lav.
        Ms. LAV. The fact is that over the last 20 or 25 years, the
    funds have earned close to 9 percent. Over the last 10 years,
    they have earned 5 percent. I didn't have that number in front
    of me before. And over the last about 25 years, 60 percent of
    the revenue to these funds has come from investing. It has been
    investment income. So it does appear that the funds have
    invested prudently. They have made very good returns. And I
    think having them invested entirely in bonds would be wrong for
    the taxpayers of the State who are missing out on the potential
    of these returns to finance the pensions.
        Mrs. BLACK. Thank you.
        Mr. BOUSTANY. The gentleman's time has expired.
        We will now go to Mr. Marchant for 5 minutes.
        Mr. MARCHANT. Thank you, Mr. Chairman.
        Ms. Lav, who in your opinion is the biggest loser if a
    pension fund goes broke or is severely underfunded?
        Ms. LAV. Well, ultimately, the pension funds are in essence
    backed up by the full faith and credit of the State. So, in the
    very unlikely situation that a major pension fund would not be
    able to pay benefits, presumably they would pay it from current
    tax dollars. That is how they paid--prior to the seventies, all
    State and local pensions just about were paid on a pay-as-you-
    go basis. There were not these forward-funded pension funds.
    And then they started investing and prefunding their pension
    funds around 1980, and they built up this $3 trillion fund in
    the pensions.
        And pensions are not in danger of not being able to pay
    their benefits. That is just not the case in most situations. I
    mean, if you want to look at the most extreme, even Illinois
    will be able to pay its pensions.
        Mr. MARCHANT. So you don't feel like there is any benefit
    to an additional amount of transparency for the employees that
    are going to benefit from the pension system?
        Ms. LAV. Transparency is a word that is used in a lot of
    different ways. And when what is called transparency puts up a
    construct that is different from how much States and localities
    have to invest in order to make their pension funds whole and
    to pay their obligations, then you have confusion rather than
    transparency, in my opinion, because you have two different
    numbers and people don't know what to think about it. And if
    they look at an inflated and a very large liability, then some
    other things are going to happen. People are going to try and
    raise taxes to fill it. People are going to cut other programs,
    or they are going to say, oh, we can't keep this pension fund;
    we are going to have to go to a defined contribution or
    something else, because of the liability. It is confusion.
        Mr. MARCHANT. So your theory is that transparency increases
    confusion?
        Ms. LAV. No, not necessarily any transparency. I am saying
    that I don't think that what we are talking about here is good
    transparency.
        I think that what GASB is proposing in its new rules is
    good transparency. It has a much more realistic view of the
    funding level and the liabilities of pension funds.
        Mr. MARCHANT. In my previous career in the State
    legislature, I served on the Texas Pension Review Board. And it
    was not a review board that took very seriously its
    responsibility for years until we got a Governor that decided
    that maybe we ought to meet and maybe we ought to actually do
    our job. And our job was simply to just publish the same kind
    of information that is in this bill. And we found that we got
    the most resistance from the public entities that administrated
    these plans, and we got the most enthusiasm and the most
    inquiries from the actual employees that once they were able to
    look at the disclosure and the comparisons of the Dallas Police
    and Fire Pension Fund versus the El Paso Police and Fire
    Pension Fund, that is when we began to--our main input came
    from the employees.
        And we found that the increased transparency benefited
    really the employees because they then began to demand an
    accountability from the pension funds that they were depending
    on for their retirement.
        I think your first answer was very telling in that, in your
    opinion, the ultimate loser is not the employee but the State
    or the entity. And I think that, at some point, the employee
    needs to be more worried about the content and the investment
    policies and the transparency of their pension planning and
    cannot always rely on the State or the county or the city or
    the school district in bailing a system out.
        Ms. LAV. That would be a very rare situation. I think the
    GASB rules will create the kinds of transparency and
    comparability that you are talking about, which I think is good
    and important and----
        Mr. MARCHANT. We found that GASB was a reactive entity and
    not a proactive entity.
        Ms. LAV. Well, it has----
        Mr. MARCHANT. That was our experience.
        Mr. BOUSTANY. The gentleman's time has expired. The
    committee will stand in recess until we complete the round of
    votes on the floor. I anticipate it will be about 20 minutes.
        [Recess.]
        Mr. BOUSTANY. The Committee will resume business.
        At this time, Mr. Becerra is recognized for questioning.
        Mr. BECERRA. Thank you, Mr. Chairman.
        And thank you all for your testimony today. I appreciate
    that very much.
        One of the things that I am sensing is that there is a
    disconnect between what we are doing here in Washington,
    including this conversation here, and what the American public
    is feeling. In a recent survey of the public--and let me go
    ahead and cite it, the National Institute on Retirement
    Security's survey, that survey found that the vast majority of
    Americans believe that the disappearance of pensions has made
    it harder for them to achieve the American dream. Some 75
    percent of Americans believe that. And it sounds like more and
    more politicians are talking about eroding or eliminating the
    opportunities for Americans to have these pension plans.
    Sometimes the public conveys to us that they don't believe that
    we are listening or that we understand how difficult it is for
    them to prepare for retirement. Some 80 percent of Americans
    responded to the survey saying that precise point. And they
    responded by a percentage of 81 percent saying that they think
    that we should make it a higher priority to ensure more
    Americans, not less, that more Americans can have a secure
    retirement. And so as we hear this discussion about public
    pensions and we take a look at the real facts, I wonder if the
    American public is actually not way ahead of us in talking
    about this. Because if the public believes that we don't get
    it, they might be right because my understanding is that the
    average pension in America for most public employees is
    somewhere in the low $20,000s. Not $80,000, not $150,000.
        Now, they may be confusing that with the big parachutes and
    buyout plans that they heard about during this Wall Street
    scandal where executives were getting billions of dollars or
    millions of dollars in buyout moneys, even though their
    companies were failing. But these are public employees who put
    in many, many years, most of them more than a decade or two, to
    be able to collect some $20,000 to $25,000 a year in
    retirement.
        At the same time, my understanding is that for most States,
    the cost of having these pensions for their public employees
    translates to less than 4 percent of their State budget. Now, I
    know my State is having a tough time. I know any number of
    States have been having a hard time. But I daresay that
    eliminating the pensions that have been paid into by employees
    over decades and getting rid of the opportunities for American
    workers to lead out their lives in retirement and dignity is
    not what folks would expect of us. I have to believe that the
    teachers who have been paying into the system who have been
    working for so many years, the firefighters, the police
    officers, the public employees throughout America who have been
    working for less money than their private sector counterparts,
    because pay scales in the public sector are a little lower, but
    they get a little bit stronger and better protected pension
    benefits; I have to believe that those American workers are
    saying, you are not listening to us; well, we want some help,
    but please don't target our pensions at a time when we want the
    most safety.
        So I have a question to ask. Is it the case that there is
    any State that has said to us, we need to have a Federal
    bailout of our pension system? I know Illinois was mentioned.
        Ms. Lav, you may have already commented on this I was told.
    But has Illinois requested a bailout from the Federal
    Government for its pension program?
        Ms. LAV. No, it has not. In a 472-page budget, there was
    one phrase, not even a sentence, which says; ``significant
    long-term improvements will come only from the additional
    pension reforms, refinancing the liability and seeking a
    Federal guarantee of the debt, or increasing the annual
    required contributions.''
        So there was that one phrase in which a Federal guarantee
    was mentioned. But a couple of weeks later, The Wall Street
    Journal asked Governor Quinn, and there is an article which
    says he said, no, no, we are not planning on doing that.
        Mr. BECERRA. Let me ask a quick question. Is there anyone
    that challenges the figure that the average pension benefit for
    public employees throughout America is around $23,000, $24,000
    a year?
        Ms. LAV. That comes from the U.S. Census.
        Mr. BECERRA. So no one would question it.
        Ms. LAV. No.
        Mr. BECERRA. Does anyone question that the average cost for
    a State throughout the country or the 50 States is somewhere
    around 4 percent or less of their State budgets?
        Ms. LAV. Right. The most recent data shows 3.8 percent.
        Mr. BARRO. I would challenge that idea.
        Mr. BECERRA. Okay. Mr. Barro.
        Mr. BARRO. That is a measure of the actual cash payments
    made by governments. That is not the cost of pension benefits
    that are being provided.
        Mr. BECERRA. Doesn't that go to the question of what we are
    talking about in terms of a State's budget? A State is
    budgeting for a fiscal year, not for 20 years from now.
        Mr. BARRO. Well, that is part of the problem.
        Mr. BECERRA. If I could finish my point. And so while I
    think where you are heading is that we want to make sure that
    these pension plans are solvent for years to come just the way
    we want Social Security to be solvent, we wouldn't use today's
    money that is contributed for a program we need today to pay
    for a program that has to go long term. And so what we have to
    do is deal with the long-term costs of the pension program
    through--and I know my time is expired, if I could just finish
    this point--we want to deal with the long-term costs of the
    program through long-term solutions, not short-term solutions.
    So the short-term solution of fixing a State budget should not
    be foisted on a long-term program that has been funded for
    decades and is supposed to last for decades to try to solve a
    short-term State budget, which is caused principally by the
    downfall, the economic recession and so forth.
        So it could be in a few years we are doing very well, and
    that means that pensions will be doing very well. So what we
    want to do is budget long term for pensions, not have a short-
    term sight and deal with State budgets through our pension
    programs for our workers.
        Mr. Chairman, thank you for allowing me the additional
    time.
        Mr. BOUSTANY. The gentleman's time has expired.
        Mr. McDermott, you are recognized for 5 minutes.
        Mr. MCDERMOTT. Thank you, Mr. Chairman.
        This morning we are gathered once again to watch the
    Republicans attack the middle class and watch them ignore the
    problem of jobs in this country.
        Although there is a twist this morning because this is a
    Subcommittee that has no jurisdiction whatsoever on pending
    legislation. They had to find a Committee that would have the
    hearing because other Subcommittee chairmen would not attack
    unions, so they brought it into this Committee.
        Now, we are sitting here while they cynically abuse the
    Committee process to beat up on the working people of this
    country. If the public wonders why our politics are polarized,
    it is because of all of the incremental steps of abuse. This
    morning is another example.
        Let us be clear: The Republicans hate defined benefit
    pensions, whether it is Social Security at the Federal level or
    it is a public pension at the State level. They want rid of
    them all.
        That is what Wisconsin was about, and it is what this whole
    exercise here today is. Now, instead of focusing on jobs, they
    are going after their political enemies, once again, the
    regular whipping boys, the unions. Let us drag the unions out
    here and kick the living daylights out of them when, in fact,
    they are not the problem.
        Unions built this country. They built the highways, the
    ports, the schools. They created fairness, the 8-hour work day,
    safe working conditions, health care, pensions. They are not
    the robber barons in this society. And union workers are under
    attack because they haven't gotten poor enough. They are under
    attack because they haven't given up, as they showed in
    Wisconsin.
        After two decades, the eighties and then the 2000s, where
    the Republican policies led to huge deficits, transferring most
    of the wealth to the top 5 percent in this country, you would
    think they would be satisfied, but they aren't. Here we are,
    back to the same old stand, attacking the pensions of policemen
    and firefighters and teachers and sanitation workers. Now, it
    is good that we found who the enemies are in this society; the
    police, the firefighters and the teachers and the sanitation
    workers. Let's take away their pensions. Let's destroy the
    system we have developed in this country.
        There is no problem with most State pensions. The State of
    Washington is 99 percent financed. Wisconsin is 99 percent
    financed. If you look at all the records that come from all of
    the agencies, the Pew Foundation and others, and it is very
    clear that these pensions are not in trouble in most places.
    There are some States, but for the Federal Government to leap
    in to fix New Jersey or Illinois or whatever and make
    Washington go through that process is an abrogation of State
    rights, and there is no sense in doing it.
        Some of the witnesses here have said things about public
    officials at the local level, which I think you ought to take
    back, because some of them have been very responsible. In my
    State, we have a functioning system that is well financed.
        Now, the CBO put a report out and the chairman kindly put
    it into the record.
        And, Ms. Lav, I would like you to comment on this line in
    this: It says, ``by indicating a larger amount of underfunding,
    adopting a fair-value approach and reporting pension financing
    could indicate a need for significant increase in funding which
    would further strain State budgets, despite the fact that on
    average a much smaller increase in funding might turn out to be
    significant to cover pension plan funding.''
        It sounds to me like what they are trying to do with this
    bill is jack up the pressure on States; therefore, they will
    dump the pension plans. Is that a fair reading of what this
    bill is about?
        Ms. LAV. Well, I think that is a pretty fair reading. I
    think that some of the sponsors have said that, as is indicated
    in my written testimony.
        I think that what it will do is create this idea that there
    is just this massive underfunding, and people will demagogue
    that. You would have it all in one place. You have a so-called
    transparent--maybe it is on a Web site and everything, and with
    these very large liabilities, and people are going to demagogue
    and say, oh, my God, we can't afford this, and it is going to
    create pressure either to eliminate the plans or pressure to
    cut other spending or pressure for higher taxes. And given the
    volatility of the bond markets and people that invest in State
    and local mutual funds that--mutual funds for State and local
    bonds----
        Mr. MCDERMOTT. Let me stop you there, because you brought
    up the bonds, the bond market.
        Mr. Chairman, I would ask unanimous consent to put into the
    record the Huffington Post article called ``Credit Rating
    Agency Analyst Covering AIG, Lehman Brothers Never
    Disciplined.'' I think we ought to have a hearing on that.
        I yield back the balance of my time.
        Mr. BOUSTANY. Without objection, that report will be put in
    the record.
        [The information follows:]
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        Mr. BOUSTANY. I would remind the gentleman that it is a
    little unseemly to impugn motives of Members of the Committee
    and other Members of the House. The purpose of this hearing is
    simply to explore the issue of transparency and whether or not
    the accounting methods being used accurately depict
    liabilities.
        So, with that, the chair now recognizes Mr. Nunes.
        Mr. NUNES. Thank you, Mr. Chairman.
        I also would like to remind the Committee here that when
    the public employee transparency bill was introduced in the
    House, it was the House Parliamentarian that referred the bill
    to the Committee.
        Also, it amazes me that now CBO is part of the vast right
    wing conspiracy to take out public employee unions. I have a
    quote here that I would like to read from another far right
    winger. Some of you may recognize the name of Mayor Willie
    Brown, the Mayor of San Francisco. He was also the California
    assembly speaker for many years. I guess he is now a right
    winger because I am going to read this, and he must be against
    unions. But here is his quote: ``The deal used to be that civil
    servants were paid less than private-sector workers in exchange
    for an understanding that they had job security for life. But
    we politicians, pushed by our friends in labor, gradually
    expanded pay and benefits to private-sector levels while
    keeping job protections and layering on incredibly generous
    retirement packages that pay ex-workers almost as much as
    current workers. Talking about this politically is politically
    unpopular and potentially even career suicide for most office
    holders. But at some point, someone is going to have to get
    honest about the fact that 80 percent of the State, county and
    city budget deficits are due to employee costs. Either we do
    something about it at the ballot box or a judge will do
    something about it in bankruptcy court. And If you think I am
    kidding, just look at the city of Vallejo.''
        So when the bill was put together, it was put together to
    protect the employees. And Ms. Lav, it amazes me that you don't
    believe that transparency is good for the employees. Why is it
    that you want to hide the numbers from the public employees?
        Ms. LAV. I think transparency is very good.
        Mr. NUNES. You said earlier that it would create confusion.
        Ms. LAV. Well, because I am saying that I am not defining
    forcing this estimation of liabilities at a riskless rate as
    transparency because I think it is more in the category of
    something that is not relevant particularly to the level of
    contributions that State and local employees should be making
    to their plans. And what should be disclosed to people is how
    much it is that this State and this locality have to put into
    their plans to reach full funding over the next couple of
    decades as we recover from these back-to-back recessions.
        And that is the amount that I think you should be
    transparent about so people have an idea, so employees have an
    idea, so the public has an idea, so the investing public and
    everybody else has an idea what has to be put into those
    accounts.
        Mr. NUNES. The bill allows for basically two basic things.
    One is for the pension plan to show how they feel they are
    going to meet the needs. The other is this discount rate that
    you seem to be fixated on and that the left seems to be fixated
    on. And for some reason, you can't get off this fixation about
    3 percent, 4 percent, 5 percent. The truth of why the rate was
    picked is what I said earlier to Mr. Buchanan, is so that you
    would have a conservative ability to compare public employee
    pensions across the line. And I will also say that it amazes me
    how this has now turned into a union-Wisconsin vast conspiracy
    bill here when I think half of the public employee pensions are
    actually for non-union employees. So, I think hopefully we can
    just really raise the rhetoric level down a little bit here.
    This is a good government bill. It is trying to create
    transparency so that public policymakers can make better
    decisions.
        And with that note, Mr. Stapleton, could you just kind of
    comment on--I know you didn't get a chance to respond to some
    of the Members on the Democrat side and some of their
    accusations, so I would like to give you an opportunity to
    respond.
        Mr. STAPLETON. Thank you, Congressman Nunes.
        I would simply say that everybody benefits in my opinion
    from greater information. I think that a risk-free rate of
    return is absolutely as justifiable, if not more justifiable,
    than assuming an 8-percent rate of return.
        In Colorado, we had the market returns compounding--the
    market compounding at nearly 18 percent over the last 20 years.
    And as a result, our plan was only fully funded once. To assume
    that we are going to have that type of run-up again over the
    next 20 years is a complete fallacy. Also, the notion that
    everybody is contributing the same amount is a fallacy.
        Using Colorado as an example, Congressman, we have
    government workers, who according to this year's budget, have
    been asked to contribute a mandatory of 12.5 percent of their
    paychecks into the pension system. The problem in Colorado is
    that government workers only represent 15 percent of the
    membership in the pension system. Everybody else, all 85
    percent of other members, schoolteachers, higher education,
    local government workers, they only have to contribute 8
    percent, and they get the same benefits. So if we are talking
    about fairness here, let's have everybody contribute the same
    amount. Let's have everybody retire at the same age; not some
    get to retire at 60, others get to retire at 58. There is no
    uniformity, and Colorado is not alone. Many States don't have
    uniformity in contribution levels or retirement ages. So this
    is about economic fairness.
        Mr. BOUSTANY. The gentleman's time has expired.
        Mr. NUNES. Mr. Chairman, I would like to just thank all of
    the panel for being here today and for their contribution. I
    know they spent a lot of time on these public employee
    pensions, and I appreciate the panel's time today.
        And I appreciate your time, Mr. Chairman, for holding this
    hearing.
        Mr. BOUSTANY. I thank the gentleman. Let me just remind
    Members on both sides that we want to try to keep from
    impugning motives and stick to really what the heart of the
    subject is. And it was really dealing with the transparency,
    the accounting methods and ultimately, are these pension plans
    fair to the workers at the end of the day? So we will continue
    to work on this issue. And I want to thank the panelists for
    joining us today. You all have been very helpful. Please be
    advised that Members may have written questions that they will
    submit to you. And those questions and answers will be made a
    part of the official record.
        With that, this hearing is now adjourned.
        [Whereupon, at 11:27 a.m., the Subcommittee was adjourned]
        [Questions for the Record follow:]
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        [Submissions for the Record follow:]
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