Wednesday, August 16, 2006
BY DON C. BRUNELL
Government has assumed the responsibility of regulating private businesses in order to protect investors, consumers and employees. But according to a recent New York Times article, someone should be regulating the regulators.
The issue is public pension funds. Elected officials nationwide assuage powerful employee unions with ever more generous pensions. But when budgets get tight, states often defer pension contributions, promising to make up the shortfall later.
Unfortunately, it's a promise many governments cannot keep.
The Times reports that state and local governments owe current and future retirees roughly $375 billion more than they have in their pension funds. The actual figure may be far higher. Barclays Global Investments estimates the actual shortfall nationwide could approach $900 billion.
Public plans are not governed by the Employee Retirement Income Security Act (ERISA), the federal pension law private companies must follow. They are not required to adhere to a uniform accounting standard, and when they get into trouble, they simply raise taxes to cover the shortfall.
In 1994, the Governmental Accounting Standards Board issued accounting standards for municipal pension plans, but even its chairman complained that the rule "fails to meet the test of fiscal responsibility." The rule doesn't matter much anyway, because the Board has no authority to enforce it. Even more shocking, the Board's charter bars it from issuing public statements about the financial practices of individual cities.
For that reason, the growing scandal of unfunded public pensions remained a dirty little secret until 2003, when a whistleblower revealed that the city of San Diego had shorted its employees' pension fund for years. After a series of lawsuits, investigations and criminal indictments, the mayor resigned, and the city now faces a $1.4 billion shortfall in its pension fund.
San Diego is not alone.
The Times reports that from 1998 to 2005, officials in New Jersey ignored instructions from the state actuary to put a total of $652 million into the pension fund for state employees. Instead, they contributed less than $1 million. New Jersey's total pension shortfall is now estimated at $18 billion.
To reduce the burden of their public employee pensions, some states are stretching out their pension contributions over 40 years - five times longer than private companies are allowed. Illinois just stretched its pension contributions over 50 years. Under that schedule, many of its retirees will have been long dead by the time taxpayers finish paying for their benefits.
Extending pension contributions over 30, 40 or 50 years is like funding your savings account with a credit card. In the end, the ultimate cost to the taxpayers of these pensions will be far greater than if the states had followed the same rules required of private companies.
Washington state has its own problems.
In 1998, the state adopted an intricate "gain-sharing" pension plan that was supposed to use stock market gains to augment pension benefits for state employees. But because of political maneuvering and legal loopholes, the program has self-destructed, leaving the state with a $2 billion pension liability.
Some state lawmakers called on their colleagues to end gain-sharing, but to date they have not done so.
Perhaps they are hoping the problem goes away or that they'll be out of office by the time the crisis hits. To some, delay is preferable to facing the ugly reality of coming up with billions of dollars to fully fund state employee pensions.
State and local governments enthusiastically impose reams of regulations on the private sector but appear unwilling to apply the same rules to themselves. Well, as the old saying goes, "What's sauce for the goose is sauce for the gander."
The bottom line is, if private companies managed their pension funds the way many states do, those company executives would be in jail.
Don C. Brunell is president of the Association of Washington Business.