Institute in Pensions and Investments: Republicans build up, then fight, issue of bailouts for pension funds

Concern over underfunding of both public and corporate pension plans has Republican presidential candidate Mitt Romney, his party and other conservatives making a pre-emptive strike against the idea of federal government bailouts.

Concern over underfunding of both public and corporate pension plans has Republican presidential candidate Mitt Romney, his party and other conservatives making a pre-emptive strike against the idea of federal government bailouts.

While the threat might not be imminent, the need to take steps to avoid it is, bailout opponents say. Political analysts see little political appetite for federal solutions to state budget problems, especially as Washington faces its own spending crisis, but “I wouldn’t rule it out,” said Eileen Norcross, senior research fellow with the State and Local Policy Project at the Mercatus Center at George Mason University in Arlington, Va. “I don’t think it’d be very popular if it was phrased (as a pension bailout), but it could come in the form of a soft bailout, like an education funding package. Illinois and New Jersey are pretty much out of time.”

A pension-related budget crisis in those states “is still a few years away, and I think it will come down to the last second, but I think Congress is right to pay attention,” Ms. Norcross said.

Fueling the debate over public pension underfunding is a report issued Sept. 26 by Republican members of the congressional Joint Economic Committee. They warned state pension bailout requests are inevitable, as state legislators fail to fully fund pension liabilities now totaling $2.5 trillion.

“It’s only a matter of time before those same politicians … put their own interests ahead of other people’s constituents, too, by asking for a federal bailout of their unsustainable pension obligations,” said Sen. Jim DeMint, R-S.C., the senior Republican on the committee. He argues that members of Congress have to speak up now, because “reckless state and local politicians will not put pension reform on the table until Congress takes a pension bailout off the table.”

The JEC Republicans’ report uses market-rate accounting methods — rather than public accounting methods that discount pension liabilities over a longer term period — to predict that states like Illinois and California will run out of pension assets in as few as five years. If that happens, other state spending goals would be reduced unless there were tax hikes. If it got to the point of federal bailouts, taxpayers in other states with better funded pension systems would have to help out, the report says.

One of the most vocal critics of public pension underfunding is the Illinois Policy Institute, a non-profit group based in Chicago that promotes free market principles and is a member of the conservative American Legislative Exchange Council. Ted Dabrowski, IPI vice president for policy, said in an interview that while there is no imminent bailout threat from a public plan, “we want to nip a bailout scenario in the bud. Our greatest concern is that states will run (their pension funds) into the ground. We felt the need to create a sense of urgency.”

Illinois a big concern

Groups like the IPI and the Cato Institute and Heritage Foundation point to Illinois as their prime concern in the underfunding debate.

Illinois faces a combined $83 billion unfunded liability for five systems: the $36 billion Illinois Teachers’ Retirement System, Springfield; the $13 billion Illinois State Universities Retirement System, Champaign; and three systems with combined assets of $10.3 billion overseen by the Illinois State Board of Investment, Chicago.

Illinois Gov. Pat Quinn, a Democrat, started making sizable payments to reduce the unfunded liability, beginning with $5 billion in fiscal 2013, but is pushing legislators to do more. A fiscal year 2012 budget document raising the idea of a federal guarantee of state debt prompted a swift response from House Republicans in a letter to Illinois legislators “that there will not be any legislative bailouts.”

Quinn spokeswoman Kelly Kraft said in an interview that the 2012 budget document’s reference to any “federal guarantee” was in error and quickly corrected by the governor. “We have no intention of seeking a bailout. Our pension payment continues to go up, and we are very eager to get pension reform before” the fiscal 2014 budget is adopted.

Hank Kim, executive director of the National Conference on Public Employee Retirement Systems, Washington, said that is the right approach. “It’s about making incremental corrective actions that will have long-term impact. No one is saying you have to cut that whole check now. It does begin with the plan sponsor taking its responsibility seriously, but there are reforms at the state level. I think (the groups raising the bailout issue) are being alarmist.”

John Tuohy, deputy treasurer for Arlington County, Va., and vice chairman of the Government Finance Officers Association’s retirement committee agreed.

“It would really have to get to the point where there is simply no money in the plans,” Mr. Tuohy said. “The number of funds in deep trouble are relatively few. Secondly, I don’t think the feds are in a position to bail out anybody.”

Unions representing public employees and retirees dismiss the idea of a federal bailout for public pension plans as neither “appropriate nor necessary,” said Steve Kreisberg, director of collective bargaining at the American Federation of State, County and Municipal Employees, Washington. “With rare exception, state and local governments, and their employees, have been responsible stewards of their pensions.”

Mr. Kreisberg calls the bailout campaign “a rehash” of a short-lived Republican proposal in 2011 that would have allowed states to declare bankruptcy and have courts reduce pension benefits, among other cuts. “That proposal was quickly shot down by governors from both political parties,” said Mr. Kreisberg.

Republican platform

The concern over the possibility of a federal bailout of corporate pensions came to light during the Republican Party’s gathering to write its political platform.

There was sufficient concern about the potential collapse of some private pension plans and the resulting strain on Pension Benefit Guaranty Corp. resources to adopt platform wording calling for a presidential panel to scrutinize private pension plans in the interest of averting a federal bailout. The proposed panel’s work would be a “first step toward possible corrective action,” according to the adopted platform. The platform also commended some states for dealing with their public pension problems, and called for “immediate remedial action” to address unfunded public pension liabilities.

David John, a fellow with the Heritage Foundation in Washington, said a taxpayer rescue of the PBGC is not unthinkable if enough corporate plans seek protection at the same time. “It depends on how many assets they take over. The GAO has put them on their emergency list for several years now.”

Even though the PBGC’s deficit ballooned to a record $26 billion by the end of 2011, employer groups agree with agency officials that it has enough money to pay benefits over time.

“The agency has never taken a dime from the taxpayer, and we don’t want to start,” said PBGC spokesman J. Jioni Palmer. n