PEPTA: A Bill in Search of a Problem

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This is the second in a four part series on the Public Employee Pension Transparency Act of 2013, also known as PEPTA.  

Many members of Congress have expressed the belief that many state and local pension plans are about to fail, and that cities and towns across the nation are about to default on their municipal bonds.

House members and senators have introduced legislation designed to address this.  Known as PEPTA, the House and Senate versions of the bill would seek to insulate the federal government and the American taxpayers from any responsibility for public pension failures or municipal bond defaults.

Despite the fact that there is no evidence that either public pension plans are about to collapse or that states, cities or towns are about to default on their municipal bonds, these same members of Congress have decided that some type of federal action must be taken to prevent public pension plans from collapsing and municipal bonds from failing, and if it does, from impacting the federal government and the American taxpayer.  What they have proposed is to add a new and significant public pension plan reporting burden that is linked to the ability of a state, city or town to issue tax exempt bonds.

However, as has been the case before, the opinions of members of Congress and the facts do not agree.

Here are the facts:

First, states cannot file for bankruptcy.  They are sovereign entities, established under the Constitution of the United States, and as such have independent taxing and spending powers that they may use to balance their budgets and avoid insolvency.  Moreover, no federal law exists that gives states the power to declare bankruptcy or seek bankruptcy protection.

Second, while municipalities as corporations may file for bankruptcy under Chapter IX of the bankruptcy code, the rules of bankruptcy for cities and towns are highly circumscribed and may include limitations such as the requirement that the state legislature must approve any and all municipal bankruptcy filings.

Third, while states and localities have faced growing budget deficits due to the Great Recession, most have addressed these challenges by making tough spending cuts, raising taxes, and reducing overall employment.  In fact, Fitch, one of the three municipal bonds rating agencies, has said that states, cities and towns have done a significantly better job of addressing their fiscal challenges than the federal government.

Fourth, during this time unfunded pension and health care liabilities have grown because of the lower rate of return on investments and deferred annual contributions. However, since 2008, 45 states have modified their pension plans to help mitigate and ultimately eliminate unfunded liabilities, and numerous cities and towns have done the same.  Increasingly, data document that while still facing difficulties, state and local pensions are becoming increasingly viable and sustainable.

Finally, governors and other state leaders have declared their opposition to any congressional action that would permit states to file for bankruptcy protections.