[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 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            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:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
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here to provide a submission for the record.'' Once you have followed 
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submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Thursday, May 
19, 2011. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. For questions, or if you encounter 
technical problems, please call (202) 225-3625 or (202) 225-5522.
      

FORMATTING REQUIREMENTS:

      
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or organizations on whose behalf the witness appears. A supplemental 
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address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
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materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    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:]
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    [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:]
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    [GRAPHIC] [TIFF OMITTED] 70881A.005
    
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    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:]
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    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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    [GRAPHIC] [TIFF OMITTED] 70881A.041
    

                                 
    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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