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Detroit’s Woes Put New Spotlight on Pension Overhaul Proposals

Sen. Orrin G. Hatch of Utah seemed to be trying to spark interest in an issue that was thoroughly on the back burner when he introduced a bill, with no co-sponsors, early this month addressing troubled public pension funds.

Just nine days after Hatch pushed out the measure, Detroit’s municipal bankruptcy filing nudged the proposal to the forefront of a potentially fierce debate over Washington’s role as a possible lifeline for investors and retirees.

Congress has enforced standards for private sector pension plans for nearly four decades under the 1974 Employee Retirement Income Security Act. But it has largely steered clear of state and local government pensions, except for occasional studies and oversight hearings.

A 2010 Congressional Budget Office study sounded an early warning that the federal government “might be asked to assist in the funding of such plans” and that such aid could “raise the federal deficit and debt” without offsets.

Now, similar alarms are sure to grow as lawmakers examine the scope of Detroit’s problems, highlighted by the city’s Chapter 9 filing that showed a deep financial hole fueled in part by huge pension liabilities. A legion of 20,000 city retirees — twice the size of the municipal workforce — faces likely benefit cuts as the city settles the $9 billion in unfunded pension and retiree health care costs that account for half of Detroit’s debt.

Hatch had suggested just such a wake-up call when he called for an overhaul of the pension management system on July 9. “America cannot continue sleepwalking into the financial disaster that awaits us if we do not get the public pension debt crisis under control,” he said.

Hatch and other conservatives point to the case of Detroit and a spate of similar, if smaller, bankruptcy filings from Central Falls, R.I., to Stockton, Calif., as harbingers of wider trouble. They aim to avert any bailouts or any fallout in the nation’s $3.7 trillion municipal bond market.

Even the measure of unfunded liability is open to debate, however.

The Public Fund Survey, a nonprofit research group, estimates total unfunded liabilities for plans with 85 percent of public pension assets at nearly $700 billion. But Moody’s Investors Service deems that estimate too low. The rating agency last year issued a benchmark estimate of such liabilities that is threefold larger — $2 trillion — based on a scenario for smaller investment gains.

In all, there are about 220 state plans and more than 2,500 local plans. They cover nearly 20 million active government workers, police officers and firefighters, and 7 million retirees.

Soon after Detroit filed for protection under Chapter 9 of the bankruptcy code, the Obama administration made clear it would not seek a bailout similar to the $2.5 billion New York City loan package enacted in 1975. But the White House also signaled it would try to find other ways to assist Detroit and its residents.

While keeping an eye out for potential fallout in Detroit, key players such as Senate Finance Chairman Max Baucus, D-Mont., say they have not decided whether to move public-pension-related legislation in the 113th Congress. “To do this and tax reform would be hard,“ he said.

Like his Senate counterpart, House Ways and Means Chairman Dave Camp, R-Mich., has focused on moving a tax overhaul. He also said he has not decided whether to take action on public pension legislation.

But both top tax writers could face pressure in coming weeks to take a closer look at measures that deal with public pensions. For now, no one is calling for sweeping legislation like the 1974 law, which established the Pension Benefit Guaranty Corp. as a backstop for private plans.

But Hatch has pushed his proposal to give state and local officials a way out of the pension business by allowing them to hire life insurers to offer annuities for new state and municipal employees in lieu of defined-benefit pensions.

Many conservatives would like to go farther.

A proposal (HR 1628) by Rep. Devin Nunes, R-Calif., and a companion Senate bill (S 779) sponsored by Richard M. Burr, R-N.C., would exempt the federal government from liability. Both bills require each public pension sponsor to report annually to the Treasury Department. The measures would deny municipal bond tax breaks if such reports omit higher estimates of unfunded liabilities based on a new formula.

Burr said the bailout ban and disclosure mandate would help “local authorities to make their own reforms by rejecting the illusory notion that problems can be ignored or hidden and later dumped on taxpayers.”

But public employee unions oppose such mandates and back more traditional pensions. They have joined pension managers to oppose new federal laws, while stressing new state requirements for bigger employee contributions, tougher eligibility standards based on age and service, and smaller inflation upgrades.

“There is little likelihood of a pension plan ever coming to the federal government and asking for a bailout,” said Hank H. Kim, executive director of the National Conference on Public Employee Retirement Systems, which represents pension funds. Kim said Nunes’ reporting mandate would ignite “artificially inflamed passions” and run counter to proponents of states’ rights.

In addition to possible infrastructure and first-responder grants, Steve Kreisberg, collective bargaining director of the American Federation of State, County and Municipal Employees, said cities should be eligible for Federal Reserve help. “Why can’t Detroit go to the discount window of the Fed? JPMorgan [Chase] and Citibank do,” he said.

David Skeel, a law professor at the University of Pennsylvania and an expert in public pensions, says he doubts consensus will form for expansive changes or a ban on bailouts. But Skeel believes proposals for more disclosure and state and local flexibility could get traction if there are more big municipal bankruptcy filings or rating downgrades.

Hatch said he was working to build support for his plan to allow states greater flexibility and make clear there is little appetite in Congress for bailouts. “It would go a long way to solving the problems of state and local government,” he said.

The top GOP tax writer said he hoped to move his proposal as a stand-alone bill but also would look for other vehicles. “It could be attached to anything,” he said.

Rep. Mick Mulvaney, R-S.C., a Financial Services Committee member, said Republicans likely would weigh legislation and pursue oversight proceedings to prevent bailouts. “My biggest fear is that the Federal Reserve tries to do things on its own,” Mulvaney said.

Rep. Steve Scalise of Louisiana, chairman of the Republican Study Committee, said addressing pension problems now would head off the kind of bailouts provided to Wall Street firms and automobile companies.

“We’ve got more than enough problems of our own that we need to fix. We sure don’t need to be bailing out states. They need to fix their own problems,” Scalise said.

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