Hatch: Feds need to be involved in state pension crisis

The report notes that the current crisis is not primarily a result of the global financial meltdown that began in 2008. It points out that Congress held hearings on state and local pensions back in 1978, when critics worried about the open-ended nature of liabilities on taxpayers back then. Two years later, the Government Accountability Office ("GAO") warned Congress that poorly funded public pension plans could lead to a "fiscal disaster and possible loss of employees' earned benefits." The report continues:

There are several reasons for the current crisis.  Some states and local governments have lacked fiscal discipline, some have promised overly generous benefits, and many have failed to make the annual contributions necessary to maintain an actuarially sound pension plan.  States have not been entirely at fault, as they had no control over the recent precipitous drop in interest rates or the volatile stock market.  But regardless of the reason for the current pension crisis, the need for action can no longer be denied.

As Hatch sees it, the current situation creates a series of potential problems for the federal government, most especially the risk of a credit 'contagion' should several big states be at risk of default in part because of their pension obligations. This might impact not only the debt of other, more responsible states, but also of the federal government. "In the event of insolvencies, the demand for a Federal bailout or bailouts would certainly follow," the report notes. It adds that unfunded government pension liabilities were a factor in S&P's downgrade of U.S. debt, and that were some large pension systems to default on their obligations, this could create additional demands on the federal budget, in the form of unanticipated additional costs for federal aid programs like food stamps and Medicaid.

The simple solution to this, the report notes, is not just raising taxes. "The ability to tax is limited by the ability and willingness of taxpayers to pay."

The report notes that several proposals for reform are already on the table, including the Public Employee Pension Transparency Act, which would amend the IRS code to deny tax benefits to municipal bonds issued by a state or municipality that doesn't comply with public employee pension plan reporting requirements. Another approach, the report notes, is to make the voluntary standards of the Government Accounting Standards Board mandatory.

The report ends by observing that a new public pension plan structure is necessary that ensures retirement security for public workers but renders the cost of the plans affordable and their liabilities transparent to taxpayers. "A legislative solution for consideration by Congress will be introduced in the senate in the near future," the report concludes.