PEPTA: Why NLC Opposes this Bill

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This is the fourth and final part of the series on the Public Employee Pension Transparency Act of 2013, also known as PEPTA.  

Why does the National League of Cities oppose a bill that ostensibly would bring greater transparency to public employee pensions, and ensure that they are fiscally sound and sustainable?

Simply put, the Public Employee Pension Transparency Act of 2013 (PEPTA), which was introduced in April by Rep. Nunes in the House, and Sen. Burr in the Senate, would represent an unwarranted and unjustified intrusion by the federal government in the activities and responsibilities of the states and local governments.

Since the Great Depression, when the Social Security Act explicitly exempted employees of the federal, state and local governments from participation in the nation’s Social Security system, state and local governments have provided their employees with public pension plans designed to provide their employees with some level of income support during retirement.

Each of the states and many of the localities developed these pensions in response to the specific needs of their employees.  For example, most local governments have one type of retirement for their public safety employees – who generally retire at a younger age than their civil service counterparts – and another type of pension for their regular employees.

These retirement plans were either incorporated into state constitutions or state laws that established strict contribution and pay out requirements, including the number of years such contributions must be made as well as the percentage that employers and employees will contribute.  And most importantly, these retirement systems were placed in public trusts that could not be used for any other purpose than to support and sustain the retirement benefits of former employees.

Every state and local retirement plan has been subject to the oversight of a board of trustees and the review of state and local elected officials, auditors and the public.  In addition, each retirement plan must report its financial status using general accepted accounting procedures that are prescribed by the Government Accounting Standards Board (GASB) which was established in 1984 to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, including issuers, auditors, and users of those financial reports.  Since then, most if not all, state and local governments have followed GASB’s reporting rules for public pensions.

In spite of this, or perhaps because of it, PEPTA would mandate a costly and complex layer of federal reporting on top of existing state and local accounting and reporting requirements; give federal regulators sweeping powers to impose duplicative reporting requirements on state and local governments; jeopardize state and local financing of infrastructure and other critical needs by stripping the tax exempt status of bonds issued by states and localities if they do not comply with regulators’ rules (even though historically state and local pensions are subject to state constitutions and state and local laws and regulations); and threatens far-reaching and unintended consequences for the municipal bond market and the economy as a whole.

If the bill became law it would falsely depict the true condition of state and local governments and their retirement systems. For example, it would require that state and local governments report their pension returns as if they invested only in low yield U.S. Treasury bonds, not the diversified portfolios actually in use, thereby implying a significantly larger unfunded liability than is actually the case.  Moreover, it would do nothing to increase transparency.  Public pensions are among the most transparent and open financial systems in the nation given their auditing and public review requirements.  Nor would it improve accountability.  Rather it would pre-empt a multi-year, multi-level effort by GASB that is now being implemented to ensure public pension transparency.

The claim by Rep. Nunes and Sen. Burr and their colleagues that public pension funds are “Often hidden by opaque accounting practices, the costs [for which] are driving an increasing number of states and municipalities toward insolvency, and therefore in need of federal intervention, “is wrong.  This bill is unnecessary, unwarranted and should not be adopted into law.