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70–881 2011

TRANSPARENCY AND FUNDING OF 

STATE AND LOCAL PENSION PLANS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 5, 2011 

Serial No. 112–OS3 

Printed for the use of the Committee on Ways and Means 

( 


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SUBCOMMITTEE ON OVERSIGHT 

CHARLES W. BOUSTANY, JR., Louisiana, Chairman 

DIANE BLACK, Tennessee 

JIM GERLACH, Pennsylvania 

VERN BUCHANAN, Florida 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

KENNY MARCHANT, Texas 

JOHN LEWIS, Georgia 

XAVIER BECERRA, California 

RON KIND, Wisconsin 

JIM MCDERMOTT, Washington 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisory of April 28, 2011, announcing the hearing ............................................ 2 

WITNESSES 

Honorable Walker Stapleton, Colorado State Treasury ....................................... 6 

Josh Barro, Walter B. Wriston Fellow, Manhattan Institute for Policy Research .................................................................................................................... 11 

Jeremy Gold, FSA, CERA, MAAA, Ph.D., Jeremy Gold Pensions ....................... 16 

Robert Kurtter, Managing Director, U.S. Public Finance, Moody’s Investors 

Service ................................................................................................................... 26 

Iris J. Lav, Senior Advisor, Center on Budget and Policy Priorities ................... 37 

SUBMISSIONS FOR THE RECORD 

American Federation of State, County And Municipal Employees, statement .. 81 

International Association of Fire Fighters, statement ......................................... 83 

Joint Group, statement ........................................................................................... 89 

Labor Coalition, statement ..................................................................................... 95 

Municipal Employees Retirement System, statement .......................................... 96 

National Education Association, statement ........................................................... 101 

National Conference on Public Employee Retirement Systems, statement ........ 104 

Public Plans Community, statement ...................................................................... 113 

Service Employees International Union, statement ............................................. 118 

Securities Industry and Financial Markets Association, statement ................... 122 


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TRANSPARENCY AND FUNDING OF 

STATE AND LOCAL PENSION PLANS 

THURSDAY, MAY 5, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 9:30 a.m., in Room 

1100, Longworth House Office Building, Hon. Charles Boustany 

[Chairman of the Subcommittee] presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

Thursday, April 28, 2011 

OS–3 

Boustany Announces a Hearing on the 

Transparency and Funding of 

State and Local Pension Plans 

Congressman Charles W. Boustany, Jr., MD, (R–LA), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, today announced 

that the Subcommittee will hold a hearing on the transparency and funding of State 

and local defined benefit pension plans. The hearing will take place on Thursday, May 5, 2011, in Room 1100 of the Longworth House Office Building, beginning at 9:30 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

Many have expressed increasing concern that State and local defined benefit pension plans (i.e., ‘‘public plans’’) have become dangerously underfunded. Based on the 

plans’ own accounting measures, estimates suggest that as of 2009 they faced an 

aggregate shortfall of between $700 billion and $1.3 trillion. Many economists, however, have argued that these plans are improperly measuring their assets and liabilities in a way that significantly understates the true scope of the problem. Indeed, 

several recent studies have concluded that the plans may actually be underfunded 

by more than $3 trillion. 

Growing concerns about the financial health of these public plans have led some 

public officials to suggest that a Federal bailout of these plans may be appropriate. 

The proposed FY 2012 State budget by Illinois Governor Pat Quinn (D–IL), for example, explicitly suggests that Illinois may seek a Federal guarantee of a new debt 

issuance to cover its unfunded pension plan liabilities. 

In response to concerns about the financial health of these public plans—and 

about possible efforts by State and local governments to secure a Federal taxpayer 

bailout of such plans—Rep. Devin Nunes (R–CA), a Member of the Committee on 

Ways and Means, has introduced the ‘‘Public Employee Pension Transparency Act’’ 

(H.R. 567). This legislation is intended to enhance transparency in this area by encouraging public plans to disclose: (1) various plan funding data using their own actuarial assumptions, including a statement of those assumptions, and (2) the fair 

market value of plan assets and the value of plan liabilities using Treasury yields 

as the discount rate. While H.R. 567 would not impose any new standards on public 

plans with respect to actual funding requirements, State and local governments failing to make the disclosures proposed under the bill would lose their ability to issue 

debt that is tax-preferred under Federal income tax law. Additionally, H.R. 567 provides that the United States would not be liable for any obligation relating to funding shortfalls in State or local pension plans. 

In announcing the hearing, Chairman Boustany said, ‘‘Whether the underfunding of State and local pension plans is $700 billion or over $3 trillion, 

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ments, and for taxpayers in general. The Subcommittee needs to understand how public plans are currently calculating their assets and liabilities, not just so we can get a clearer picture of how underfunded those 

plans really are, but also to determine whether there is adequate transparency in how these plans are reporting their shortfalls. Given that some 

have raised the specter of a Federal taxpayer bailout to cover the unfunded liabilities of these State and local plans, it is important for the Subcommittee to review this issue and to consider possible approaches to ensure that no such Federal taxpayer bailout is ever needed.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the measurement and transparency of funding levels of 

State and local pension plans and will explore whether improvements to those plans’ 

actuarial assumptions—and enhanced transparency in the reporting of the financial 

health of those plans—are warranted. Among the approaches to these issues that 

the Subcommittee will review is H.R. 567. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. Attach your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Thursday, May 19, 2011. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–5522. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

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Chairman BOUSTANY. Welcome to this morning’s Oversight 

Subcommittee hearing on the Transparency and Funding Levels of 

State and Local Pension Plans. According to the Federal, State and 

local levels of government, our country faces a growing burden of 

public debt. Too often, governments have deferred difficult choices 

by pushing obligations off into the future without responsibly saving for the day when those obligations are due. 

At the State and local levels, public employees are often promised defined benefit pension plans subsidized through the Tax Code 

that guarantee payments down the road. But the numbers suggest 

public employee pensions may be dangerously underfunded. This 

raises critical questions about the promises public employers make, 

how pension liabilities are calculated, and whether greater transparency is needed to protect the lives and livelihoods of the men 

and women to depend on these pensions as they plan for their futures. Millions of State and local government employees participate 

in defined benefit plans. These include many of our most valued 

public servants, firefighters, police officers, emergency personnel, 

nurses and teachers. But too often, State and local governments 

have not kept their end of the bargain and are failing to adequately 

fund employee pensions. 

Though there is argument about how best to calculate pension 

assets and liabilities, it is clear that there is not enough money set 

aside to meet future obligations. Economists estimate the plans 

were underfunded by as much as $3.8 trillion in 2009. The corresponding increases in State and local pension contributions 

threaten to affect all Americans through higher State and local 

taxes and reduce services. 

This hearing will consider how accounting standards differ for 

public and private pensions. There is growing consensus that accounting standards for public sector pensions encourage State and 

local governments to overpromise, underfund by taking on risky investments by discounting guaranteed future benefits against unrealistic rates of return. Unlike private pensions, which are required 

by law to use more realistic accounting standards, public plans are 

held to a lesser standard and suffer from lax accounting methods 

that can hide the magnitude of the problem. Public plans can discount future liabilities by making risky investments, a practice 

that imposes added risk on the taxpayers according to a new Congressional Budget Office report just released. 

Of course, some argue that State and local affairs are generally 

not in the business of the Federal Government. But these plans are 

of increasing Federal concern because of our Tax Code which subsidizes retirement savings and gives preferential tax treatment to 

State and local debt. Furthermore, in our age of public and private 

bailouts, there can be little question to where State and local governments will turn when trillions in pension payments come due. 

And as if to underscore this threat, the recent proposed budget of 

the State of Illinois indicates that the Governor might seek Federal 

guarantees of future debt to cover pension liabilities. 

Finally, we also will discuss H.R. 567, the Public Employee Pension Transparency Act, which was introduced by Congressman 

Devin Nunes, a Member of the full Committee. As a condition 

to receiving preferred treatment under Federal income tax law, 


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H.R. 567 requires public plans to disclose funding data and honest 

valuations of plan assets and liabilities. Respecting the rights of 

States and local governments, the bill does not try to tell States 

how to fund or pay pensions, it merely promotes transparency in 

their funding. 

Whether the underfunding of State and local pension plans is 

hundreds of billions or several trillion dollars, it is a serious concern. With more retirees drawing pensions by the day, and some 

in government already raising the threat of a Federal bailout of 

these public plans, it is critical that the Subcommittee take this opportunity to review the issue and consider how better to protect 

workers and retirees as well as the Federal taxpayer. 

Before I yield to the Ranking Member, Mr. Lewis, I ask unanimous consent that all Members’ written statements be included in 

the record and the recently released CBO-issued brief entitled 

underfunding of State and local pension plans. Without objection, 

so ordered. 

Now I will turn to Mr. Lewis for his opening statement. 

Mr. LEWIS. Thank you, Chairman Boustany, for holding this 

hearing. Last month, this Subcommittee held a hearing to attack 

an organization that represents millions of seniors. At that hearing, I asked the chairman, ‘‘who is next? Who else is on your list?’’ 

Now, I have an answer. 

This week is Teacher Appreciation Week 2011. Today, Republicans have set their sights on the teachers who educate our children, police officers who keep our communities safe, and first responders in moments of crisis. They paint teachers, firefighters, librarians and nurses as villains in their quest to widen the gap between the rich and the poor. 

Our neighbors are not the villains. They are not the cause of the 

current economic situation. They are simple, hardworking Americans trying to retire with dignity and escape poverty as they age. 

The Republicans have made many arguments to support today’s 

attack. Republicans blame pension plans for State budget shortfalls. This is not true. States spend less than 4 percent of their 

budget on pension contributions. The Republicans claim that pension benefits are too high. This is not true. The average State pension benefit is modest; about $20,000 a year. 

The Republicans also claim a Federal bailout may be needed. 

This is not true. The losses in the plan are related to the market 

and the recent recession. The Republicans claim that their solution 

would create transparency. It would not. It would create confusion 

and lead to unnecessary cuts in vital State services. Given the 

facts, I ask myself why are we here today? We both know that 

there is no immediate need for the Federal Government to take action. The committee has been looking at this issue since the 1970s. 

I am also mindful that under the Committee rules of this Congress, this Subcommittee’s jurisdiction is limited to oversight of existing laws. Our jurisdiction does not extend to select revenue 

measures. The subcommittee does report out legislation. Therefore, 

any consideration of House bill 567 would need to take place elsewhere under the regular order of the Committee. 

Based on all of this, I believe today’s hearing is simply a distraction from the Republican failure to create jobs. While the American 


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people continue to wait for jobs, the Republicans are playing a dangerous game with the welfare of women, seniors, and now teachers. 

It is time for the American people to take notice, stand up, and 

speak out. Today, I stand for America’s middle class and State and 

local workers across the Nation. I thank the teachers for all that 

they do. And with that, Mr. Chairman, I yield back my time. 

Chairman BOUSTANY. I thank the Ranking Member for his 

opening statement. 

We will now turn to our panel of witnesses. I want to welcome 

the Honorable Walker Stapleton, Treasurer of the State of Colorado, welcome sir; Mr. Josh Barro, who is a fellow with the Manhattan Institute for Policy Research; Mr. Jeremy Gold, who provides pension finance consulting with Jeremy Gold Pensions; Mr. 

Robert Kurtter, managing director of the U.S. State and regional 

ratings of Moody’s Investors Services; and Ms. Iris Lav, senior adviser for the Center on Budget and Policy Priorities. 

I want to thank you all for being here today with us. You will 

each have 5 minutes to present your testimony here before the 

Subcommittee with your full written statement submitted for the 

record. 

Mr. Stapleton, you can now begin. 

STATEMENT OF HON. WALKER STAPLETON, 

TREASURER OF COLORADO 

Mr. STAPLETON. Thank you, Mr. Chairman. 

Chairman Boustany, Ranking Member Lewis and Members of 

the Subcommittee on Oversight, thank you for the opportunity to 

testify this morning in support of the Public Employee Pension 

Transparency Act. My name is Walker Stapleton, and I am the 

treasurer of Colorado. 

Before being elected treasurer last November, I spent my entire 

career in the private sector. I am fortunate to have both an MBA 

and a graduate degree in business economics. One of the most important duties I have as treasurer of Colorado is to serve as the 

only elected official on the board of our State’s Public Employee Retirement Association or PERA. PERA has nearly 500,000 members 

including State workers, members of the State judicial branch, 

teachers in our public K–12 and higher education systems, local 

government workers and members of our State Patrol, among others. 

Last year the Colorado legislature passed pension reform legislation which accomplished two main objectives: It lowered the cost of 

living adjustment from 3.5 percent to 2 percent, and it raised the 

eligible retirement age of members from 55 to 58 for educators and 

from 55 to 60 for everyone else. These are worthwhile reforms, but 

they unfortunately fell far short of the systematic improvements 

needed in Colorado’s pension system to protect current and future 

retirees as well as Colorado’s taxpayers. 

Let me discuss the lingering and growing challenges facing 

PERA and the key factor that Colorado’s pension reform legislation 

did not address. The system is operating with an unrealistic and 

unachievable rate of return which is now set at 8 percent. In Colorado’s case, PERA currently maintains an unfunded liability of 

more than 21 billion based on this 8 percent expectation. Of course, 


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if this rate of return is lowered, the unfunded liability becomes far 

greater, and in my view, more realistic and transparent for PERA 

members and Colorado taxpayers alike. The question is whether 

States like Colorado should be in the business of guaranteeing 

market returns. If the answer to this question is no, as I believe 

it should be, then public pension plans like PERA need to start 

adopting rates of return in line with Treasury yields and stop the 

pervasive underfunding of plans. Overestimating a pension system’s expected return is essentially gambling with the financial 

welfare of the next generation of Americans. 

As you may know, Wilshire Associates, a nationally recognized financial consulting firm, recently completed a study of 126 public 

pension plans, including Colorado’s. Wilshire found that not a single plan would meet an 8 percent return expectation over the next 

10 years. In PERA’s case, they have used an 8 percent rate of return to claim solvency over 30 years, meaning the only way they 

will achieve an average of 8 percent over the next two decades will 

either be to raise the rate of return even higher, which is fiscal fantasy, or to require members to contribute more for the benefits that 

they receive. 

It is also worth noting that approximately 25 percent of PERA’s 

portfolio of investments is currently invested in fixed income products, yielding in the neighborhood of 4 percent, which requires the 

rest of the portfolio to return closer to 10 percent in order to average an overall return of 8 percent. The only way to achieve this unrealistic return is to take outsized market risk, further exposing 

our public pension plans to more volatility. 

If a default occurs, States, unlike private businesses, cannot declare bankruptcy and restructure, and taxpayers will be obligated 

to backfill resulting pension liabilities. 

The Public Employee Pension Transparency Act makes a lot of 

sense. While it is not mandatory for States to adopt, it categorically 

states that the Federal Government will not bail out a State’s public pension system. 

This Act increases transparency standards for public pension systems. Unfortunately, the Government Accounting Standards Board, 

or GASB, refuses to require this minimum level of transparency 

from public pension plans in its accounting standards. The GASB 

currently does not and will not in the future require plans to disclose the sensitivity analysis of discount rates so that plan members, local government leaders and the public can assess for themselves what the underlying liabilities in these plans may be. 

Greater transparency and better information is important for everyone, for the fiscal health of our States, for elected leaders to 

make decisions and for our taxpayers to use when it comes to evaluating the significant liabilities associated with public pension systems in this country. 

I strongly support this legislation and am here today to urge 

every Member of this Committee to support the Public Employee 

Pension Transparency Act. Thank you. 

[The prepared statement of Mr. Stapleton follows:] 


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Chairman BOUSTANY. Mr. Barro, you may proceed with your 

testimony. 

STATEMENT OF JOSH BARRO, WALTER B. WRISTON FELLOW, 

MANHATTAN INSTITUTE FOR POLICY RESEARCH 

Mr. BARRO. Good morning. Thank you, Chairman Boustany and 

Ranking Member Lewis for having me here today to talk about this 

important issue. 

If you are trying to evaluate the pension plan serving a State 

and local government, there are some simple questions you might 

want to ask about it, such as how much do the pensions we provide 

cost? How much do we owe to active workers and retirees? And 

over the next few years, how much more cash are we going to have 

to come up with to make our required contributions into the pension fund? 

But if you pick up the comprehensive annual financial report of 

most State and local pension funds in the United States, you will 

either find no answers to these questions or you will find incorrect 

answers to them. 

The recession has been driving pension contributions skyward in 

States and localities all around the country. And many State and 

local governments are currently feeling the need to reform their 

pension systems. Indeed, 18 States enacted some sort of pension reform law in 2010. But because of this lack of useful financial information, many States have made underwhelming pension reforms, 

and a lot of them are even coming back to do a second round of 

reform having just done reform within the last 18 months. 

As a couple of examples of the pressure that localities are feeling, 

Newark, New Jersey, made $37 million in pension payments in 

2009. They had to make $62 million for 2010. San Francisco will 

make $357 million in payments this year, and their city treasurer 

expects that that will rise to $800 million within 2 years. 

So how can the financial disclosures around pension funds be improved so that State and local law makers have better ability to 

make good choices about pensions? H.R. 567 would make several 

improvements to the way that pension funds make their disclosures, and there are some additional disclosures that these funds 

should also be encouraged to make. 

The most important change relates to the valuation of pension liabilities using a practice called fair valuation of liabilities, or market valuation, as would be encouraged by H.R. 567. As the CBO 

said in a report just yesterday, fair valuation provides a more complete and transparent measure of the costs of pension obligations. 

Using a fair valuation method will help States and municipalities 

and their taxpayers and bondholders better understand where they 

stand with regard to pension liabilities. 

States and cities also don’t know what their future outlook looks 

like for the year-to-year cost of pension obligations. Even though 

pension funds the way they smooth their asset returns means that 

we can expect pension contribution rates to keep rising through 

about 2014, because of stock market losses in 2008 and 2009, most 

pension funds are not releasing projections of how those costs will 

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ning because they don’t know how big those cost explosions are 

going to be. 

H.R. 567 will require a 20-year projection of cash flows which 

will give States and localities better clarity about what their future 

costs will look like. 

There are some additional transparency measures that States 

and localities would be wise to adopt. One, again, relates to asset 

smoothing, that process of gradually recognizing unusual gains and 

losses. Over the last decade, many States and localities, their pension funds have made opportunistic changes in the way they perform smoothing, either increasing or decreasing the length of the 

smoothing period to artificially inflate the appearance of financial 

solvency in their funds. 

In one case, New Jersey, such a shift was actually used to justify 

a 9 percent increase across the board in pension benefits that appeared affordable just because of this accounting trick. States 

should be encouraged to adopt a standardized smoothing practice 

so they do not have the option to game that system. 

Finally, public pension plans do not disclose what is called a normal cost of the pension benefits that they are awarding in a given 

year. That is to say, what is the present cost of all the promises 

we made to active workers this year in exchange for their labor? 

This is a standard feature of private sector pension disclosures. But 

you can’t figure out when you look at a public employee pension, 

and it is not the same amount as the cash contribution that is 

being made into a pension fund. For this reason, it is extremely difficult to do comparisons of the value of public and private sector 

compensation packages. We don’t really have a good sense now of 

what the pension benefits that public employees are getting are 

worth. 

So why should Congress involve itself in this which is a State 

and local issue? States don’t understand how big a hole they have 

dug for themselves. And in certain States such as Illinois where 

the funding ratio of public plans has fallen to 38 percent, even 

under the current GASB standards which are too aggressive in 

terms of valuing the liabilities, the risk is that eventually you will 

have clamor for a Federal bailout of insolvent State and local pension funds that appear to be on the brink of being unable to make 

payments to the State and local employees. It is better to avoid 

that situation now by giving State and local leaders the clarity they 

need to fix their own pension problems so that Washington does 

not have to later. 

Chairman BOUSTANY. Thank you, Mr. Barro. 

[The prepared statement of Mr. Barro follows:] 


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Chairman BOUSTANY. Mr. Gold, you may proceed. 

STATEMENT OF JEREMY GOLD, FSA, CERA, MAAA, PH.D., 

JEREMY GOLD PENSIONS 

Mr. GOLD. Good morning, Chairman Boustany, Ranking Member Lewis and Members of the Subcommittee. Thank you for this 

opportunity to present my views with respect to transparency and 

funding of State and local pension plans. My views are my own and 

do not represent any other persons or organizations. I am an independent consulting actuary specializing in the financial aspects of 

pension plans. I will address the disclosure of the assets, liabilities 

and costs of public pension plans in the context of H.R. 567. 

The disclosures at the heart of H.R. 567 are long overdue, and 

I welcome this bill. H.R. 567 is conceptually right. 

I will suggest three changes that will keep it right in concept and 

make it more useful and efficient in practice. 

The bill calls for two financial measures that are so fundamental 

that they must be made available to every decisionmaker and every 

interested party, the market value of plan assets and the current 

liabilities. 

H.R. 567 requires that the current liability be determined by 

discounting future cash flows using rates of interest derived from 

U.S. Treasury securities. In my written testimony, I quote former 

Federal Reserve vice chair Donald Kohn, who has explained why 

bulletproof promises should be discounted at rates derived from 

bulletproof securities. 

My first recommendation—H.R. 567 calls for averaging Treasury 

rates over 24 months and for segmenting rates for three different 

future periods. These ideas have been borrowed from private pension funding law where they are used to reduce contribution volatility. H.R. 567, however, is not a funding bill. It is a disclosure bill. 

Good disclosure should use the Treasury spot rates at one point in 

time. We cannot spend averaged dollars, nor can we make good decisions based on liabilities that have been averaged. H.R. 567 calls 

for the fair value of assets at one point in time. The proper comparison liability must be based on spot rates at one point in time. 

The comparison of assets at market and liabilities at spot rates 

answers two questions that cannot be answered accurately in the 

pre-H.R. 567 world. First question—will future generation of taxpayers be paying for services provided to earlier generations? Second question—how does this plan’s funding compare to plans in 

other jurisdictions? 

My second recommendation: H.R. 567 calls for extensive projections of future statistics that would be expensive and potentially 

uninformative. The subsections calling for these projections should 

be stricken. Eliminating the projection along with the rate averaging and segmenting should reduce compliance costs to a level 

that I would call modest in the first year and nearly negligible in 

subsequent years. 

My third recommendation: The bill should add a new item which 

will be very valuable and easy to calculate. Mr. Barro just referred 

to it. I call it the current cost. It is the portion of the current liability that has been accrued in the latest fiscal year. Current cost 

asks a third question that cannot be answered in the pre-H.R. 567 


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world: What is the market value of benefits earned by public employees this year? Current costs will make it possible to fairly compare compensation from jurisdiction to jurisdiction and between 

private and public sector employees. 

In summary, I recommend that we use spot Treasury rates, not 

averaged, not segmented. I suggest the elimination of the 20-year 

projection requirement, and I suggest the inclusion of a defined 

current cost computed on the same basis as the current liability. 

I thank you. 

Chairman BOUSTANY. Thank you, Mr. Gold. 

[The prepared statement of Mr. Gold follows:] 


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Chairman BOUSTANY. Mr. Kurtter, you may proceed. 

STATEMENT OF ROBERT KURTTER, MANAGING DIRECTOR, 

U.S. PUBLIC FINANCE, MOODY’S INVESTORS SERVICE 

Mr. KURTTER. Thank you. Good morning. 

Mr. Chairman, Congressman Lewis, Members of the Subcommittee, my name is Robert Kurtter. I am a managing director 

in U.S. Public Financial Group at Moody’s Investors Service. Thank 

you for inviting Moody’s to participate in today’s hearing. 

My comments will focus on our views of the potential credit impact of transparency initiatives like H.R. 567 and the Governmental Accounting Standards Board project on pension disclosure. 

While Moody’s does not rate pension plans themselves, we monitor 

proposals like these and the related developments because our assessment of government pension plans is one of the many factors 

in our credit analysis of government-issued bonds. Moody’s comments on policy initiatives, however, should not be taken as an endorsement or criticism of any such initiative or the conduct of any 

particular issuer. 

In recent years, we have observed increases in the unfunded pension liabilities of State and local governments. This growth has occurred for several reasons. First, during peaks of the stock market 

in 2001 and 2007, some State and local governments enhanced benefits and/or reduced employer contributions. Second, the recent economic downturn significantly diminished the value of pension plan 

assets. Third, adoption of early retirement incentive programs 

shifted costs from payroll to retirement systems. And fourth, demographic factors, including an aging work force and the increasing 

life expectancy of beneficiaries are adding to liabilities. 

State and local governments have needed to increase their pension contributions at a time when declining revenues are also requiring them to impose budget cuts. These developments have 

prompted a discussion about whether the existing disclosure standards of our government pension plans remain appropriate and also 

about whether and to what extent government pension plans are 

underfunded. 

In addition to the proposed legislation, the GASB is considering 

changes to its financial reporting rules for public sector pension 

plans. As I described in my written testimony, if the GASB changes 

were adopted, as proposed, employers subject to its disclosure requirements could calculate their funding requirements as they do 

now, but they would have to use different methods to calculate certain elements of the pension expense they disclose in their financial 

reports. 

Moody’s believes H.R. 567 would increase public access to State 

and local government pension plan data. Additionally, both the bill 

and the GASB proposal would increase comparability of that data. 

At the same time, they could also increase the amount and complexity of the information disclosed. If these or other initiatives 

help investors and government issuers have more informed discussions about the credit risks associated with these obligations, we 

believe these proposals could create incentives for issuers to address their unfunded pension liabilities. 


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Governments have many options to improve the funded status of 

public plans. These include increasing government or employee 

contributions or adjusting benefits. Depending on the specific measures taken, these actions could be positive, neutral or negative for 

bond holders. Though as noted earlier, any changes in the funded 

status of the pension plan would be one of the many factors that 

we would consider in our credit analysis. 

Of course, the decisions that governments make about their pension plans affect much more than their credit profile as bond 

issuers. 

Our opinions do not speak to the wider implications for an issuer 

or its stakeholders of any actions it takes. Also, as a credit rating 

agency, Moody’s does not take a position on whether or how a State 

or local government should address a pension funding shortfall. 

Our role is limited to providing opinions and research about 

issuers’ likely ability and willingness to pay their bonds in full and 

on a timely basis. 

Thank you again for inviting me to testify on this important matter. I look forward to answering your questions. 

Chairman BOUSTANY. Thank you, Mr. Kurtter. 

[The prepared statement of Mr. Kurtter follows:] 


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Chairman BOUSTANY. Ms. Lav, you may now proceed. 

STATEMENT OF IRIS J. LAV, SENIOR ADVISOR, 

CENTER ON BUDGET AND POLICY PRIORITIES 

Ms. LAV. Thank you. Mr. Chairman, Congressman Lewis and 

Members of the Subcommittee, I appreciate the invitation to appear before you today. I will make six related points and I will then 

elaborate on the problems that I see with H.R. 567. 

First, as was mentioned, most State and local employees receive modest pension benefits, averaging less than $23,000 a year. Second, most States can address underfunding in their pension plans 

with relatively modest measures, such as increases in contributions 

from employers and employees and some sensible and moderate 

changes in benefits. Only a few States, those with pensions that 

are grossly underfunded and a history of failing to make required 

contributions, would have to make more extensive changes. 

Third, pension funds, according to the Federal Reserve data, 

have already recouped two-thirds of their recession market losses. 

But smoothing and data lags have led recent studies to portray the 

situation as worse than it is. 

Fourth, the use of a so-called riskless rate, as we are discussing, 

to discount liabilities makes underfunding appear much greater 

than what pension funds report. But, the somewhat academic debate over whether or not to discount liabilities using a riskless rate 

is quite distinct from the actuarial finding of how much States and 

localities have to deposit in their pension funds to meet their future obligations. States and localities should use a realistic measure of future investment returns to set their deposit levels. 

Fifth, H.R. 567 I view in many ways as a solution in search of 

a problem, one that would override the careful process that the 

Governmental Accounting Standards Board has nearly completed. 

The Board’s proposed new rules would standardize State pension 

fund reporting and make it more transparent. 

Sixth, and finally, moving State and local employees from defined benefit to defined contribution plans, which some sponsors of 

H.R. 567 have said they would like to see, would not address the 

funding problem that public pension systems now face. On the contrary, it would raise annual costs in many instances. Some States 

that were considering such a conversion have backed away after 

concluding that they would face higher costs. 

I will now elaborate on the problems with H.R. 567. For the past 

4 years, GASB has been conducting extensive research and consultation and holding hearings with well over 100 stakeholders in 

order to develop new pension financial reporting standards. 

The draft GASB standard makes clear that the liability amount 

that results from the riskless rate does not properly reflect State 

and local government pension liabilities. Instead, GASB has carefully crafted rules that reflect market expectations and applies a 

lower discount rate only to the least well-funded plans in order to 

reflect the greater risk to their solvency. 

Congress should not replace GASB standards and the financial 

market discipline that induces State and local governments to comply with those standards with H.R. 567’s unnecessary Federal intrusion into the issue. Unlike the GASB process, H.R. 567 would 


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likely increase public confusion between liabilities based on a riskless rate and actual liabilities. That could spook bond markets and 

lead States and localities to cut spending for education and other 

key areas or raise taxes more than necessary. It also would create 

an entire new Federal bureaucratic structure to regulate something 

that market forces should manage. 

Most States with significant pension underfunding are moving to 

address it. And they are doing so in a variety of ways. They are 

increasing employee contributions. Eleven States did that last year, 

and 16 States made changes that will reduce benefits for future 

employees. Some 12 States have raised their retirement ages. 

Other States have made changes that will require consistent employer contributions. States should be able to gradually solve their 

underfunding problems with the steps they are already taking, 

with modest increases in employer and employee contributions, 

with a greater recovery in the markets, and by adhering to the new 

rules that GASB will promulgate. The Federal Government does 

not need to intervene in this issue. In fact, that would do more 

harm than good. Thank you. 

Chairman BOUSTANY. Thank you, Ms. Lav. 

[The prepared statement of Ms. Lav follows:] 


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Chairman BOUSTANY. We will now begin questioning, and I 

will begin here with Mr. Barro. 

Some States and local governments have actually borrowed 

money in order to make contributions to their pension funds. And 

in these cases, the government borrows money in hopes that the 

pension fund earns investment returns greater than the interest 

rates so that they can remain solvent and meet their liabilities. 

This might work well if the investments actually earn a great deal 

on returns. But what happens if the investment actually loses 

money? Is this really constituting buying stocks on margin in effect? 

Mr. BARRO. That is really exactly what it is. One of the great 

champions of this was Governor Rod Blagojevich of Illinois who 

pushed forward a $10 billion pension obligation bond issuance in, 

it was either 2003 or 2004. And yes, this practice is purely a creature of the use of discount rates roughly in the range of 8 percent; 

the idea is the government can borrow around 5 percent, invest, 

earn an 8 percent return and they are just getting free arbitrage 

there. Now, of course, the problem with is that the equity investments are risky and the payments that you have to make to the 

bondholders are fixed. 

And so, yes, if the market performs poorly, it is exactly like buying stock on margin and losing. You shouldn’t be under the illusion 

that because the State issues pension obligation bonds and uses 

them to buy assets to put in a pension fund that it has somehow 

improved its overall fiscal solvency. 

The other thing I would note is that it creates avenues for other 

chicanery, which we saw in Illinois where the State issued 10 billion in bonds but only used about 7.3 billion of the issuance to 

shore up the pension funds. The rest was used to service debt on 

the bonds and to close gaps in a couple of years of State budgets. 

So it is just another way for the government to make its books 

more complicated, hide borrowing and further actually worsen a 

State’s fiscal situation. 

Chairman BOUSTANY. Thank you, Mr. Barro. 

Mr. Gold, do you want to comment on that? 

Mr. GOLD. I think you have it right. I think Mr. Barro has it 

right. It is borrowing to invest in risky assets. I began writing 

about this when I did my dissertation in 1999. And all I have seen 

since then is greater and greater issuance. Illinois is one of the 

poster children, but a number of other States have ventured down 

that risky route. 

Chairman BOUSTANY. Thank you. 

A new report released yesterday by the Congressional Budget Office said, and I quote, ‘‘By accounting for different risk associated 

with investment returns and benefit payments, the fair value approach provides a more complete transparent measure of the cost 

of pension obligations than the actuarial standards that are currently in use.’’ 

So for the panel I would like each of you to address this. Do you 

think that CBO is correct? Or are current standards more accurate? Why don’t we start with Mr. Stapleton. 

Mr. STAPLETON. Thank you, Mr. Chairman. One of the many 

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islation is that, in my view, the Government Accounting Standard 

Board has not done its job in maintaining uniform standards that 

are in line with the financial accounting standards boards which 

govern private sector companies. You can look at any number of 

things, including not fair value assessing what the liabilities are. 

You can look at amortization rates. They allow the amortization period to be far greater under GASB rules than under FASB rules 

allowing for a smoothing of write-offs over a much longer period of 

time. 

In the private sector, plan liabilities are valued separately. 

Under GASB plan liabilities, the expected rate of return equals the 

actual rate of return. In the private sector, liabilities are valued 

using corporate high yielding bonds which come out around 6 percent. 

And the issue of the sensitivity analysis, I was with Mr. Attmore, 

the Chairman of the Government Accounting Standards Board a 

number of week ago. I asked him from a disclosure standpoint, will 

you simply provide a sensitivity analysis so that people, State leaders and public policy makers can judge for themselves what these 

liabilities may be? And he said no. 

And so I view this as simply transparency of information, of people being able to reach their own conclusions, whether it be State 

leaders or public policy makers. Thank you. 

Chairman BOUSTANY. Thank you. 

Mr. Barro. 

Mr. BARRO. Yes. I would just say briefly that I think CBO was 

absolutely right in its characterization of the appropriateness of the 

fair value method for valuing liabilities. And frankly, I think it is 

a reflection of the near unanimity on this question in the financial 

economics community. It is often portrayed as a debate. But the 

main parties that you see defending the 8 percent discount rate 

practice are pension fund managers and actuaries. I think that 

there isn’t a good financial economics argument for the use of a discount rate associated with risky investments to value a liability 

that is not risky. 

Chairman BOUSTANY. Mr. Gold. 

Mr. GOLD. In my comments, I made a distinction between a 

funding law such as the PPA of 2006 and a disclosure bill or proposals coming out of GASB. There is a history which is built into 

actuarial methods for guiding funding over long periods of time, 

and from that history, developed many of the practices which found 

their way into ERISA, found their way into accounting and so on. 

Financial economics is exactly the—well, financial economics addresses the difference between an engineering approach to developing contributions, which at some future date will be adequate if 

things work out, and valuing promises made today. And the financial economics, or fair value approach, is far superior for accounting 

purposes. 

Chairman BOUSTANY. Thank you. 

Mr. Kurtter. 

Mr. KURTTER. Yes, thank you. We do believe that pension fund 

unfunded liabilities may be overstated because earning rate assumptions don’t reflect current market conditions, that directionally those rates are too high. GASB is considering initiatives to 


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lower those rates, and several States and pension plans have already taken actions to begin lowering those rates. 

We don’t have an opinion about what the right rate is other than 

to note that directionally these are moving toward more realistic 

number. We look at pension funding on a case-by-case basis for 

each credit involved, and that this is really only one factor that we 

look at in our overall credit assessments. 

Chairman BOUSTANY. Thank you. 

Ms. Lav. 

Ms. LAV. I would not say that 8 percent is the exact right number right now. As Mr. Kurtter said, a number of pension funds are 

bringing that down, and one needs to figure out what the right 

number is. But CBO’s preferred method is using municipal bond 

rate, adjusted for its tax exemption, and as they note in a footnote, 

there are a number of anomalies to that idea. This is for disclosure. 

I should back up and say they say that that does not mean that 

that should be the way that funds contribute. 

As I said, those are two different things. But even using municipal bond rate for disclosure has its problems. For example, the 

bond rate is higher in the States with the weakest fiscal system. 

So you have a situation with a higher rate, you have lower pension 

liabilities disclosed if you have the worst fiscal system because your 

bond rate, the interest you have to pay is higher. That doesn’t 

make any sense. Also, if you compare with corporate bonds, which 

have interest rates in the 6, 61⁄2-percent range, they use their bond 

rates to discount liabilities. But everybody knows that corporate 

bonds are more risky than municipal bonds. So they get to use a 

higher discount rate and show lower liabilities because their bonds 

are more risky than State and local bonds? So there is some basic 

fundamental problems with these conceptions that don’t necessarily 

make sense in the actual world. 

Chairman BOUSTANY. Thank you. 

Mr. Lewis. 

Mr. LEWIS. Thank you very much, Mr. Chairman. I want to 

thank each of you for being here this morning. This question is for 

the entire panel. My time is limited, so I ask each witness to answer either yes or no to the following question. 

Do you support closing public pension plans? 

Mr. STAPLETON. No. 

Mr. BARRO. It depends on the State, but in most cases yes. 

Mr. GOLD. I am sorry. I missed a word. I am not very good at 

hearing. Do I support what? 

Mr. LEWIS. Closing. 

Mr. GOLD. No, I do not. 

Mr. KURTTER. Moody’s does not have an opinion on that matter. 

Ms. LAV. No, I do not. 

Mr. LEWIS. Do you have a personal opinion or are you speaking 

for Moody’s. 

Mr. KURTTER. I am speaking for Moody’s. 

Ms. LAV. No. 

Mr. LEWIS. Let me just ask, does closing public pension plans 

save money? Ms. Lav? 

Ms. LAV. No. 


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Mr. LEWIS. Why not? 

Ms. LAV. If you have unfunded liabilities that exist from past 

service or from market losses, you still have to pay off those unfunded liabilities. And if on top of that you are creating a defined 

contribution plan, you haven’t lost those liabilities. You still have 

to pay them off, and you have to put money into a defined contribution plan. And in fact, a defined contribution plan for any given 

level of retirement security you want to provide for your employees, 

which is important for attracting quality employees, then you have 

to put more money in a defined contribution plan like a 401(k) kind 

of plan because then you don’t have the benefits of pooled investment and professional management. 

Mr. LEWIS. Ms. Lav, I would like to understand more about the 

people who benefit from public pension plans. 

Ms. LAV. Sure. 

Mr. LEWIS. What type of State and local workers are eligible for 

public pension plans? 

Ms. LAV. Most State and local workers benefit, so we are talking 

about first responders, we are talking about correction officers, we 

are talking about teachers, we are talking about social workers and 

nurses and bus drivers, schoolbus drivers, a whole range of State 

and local workers. 

Mr. LEWIS. To continue, how much, on average, do these retirees receive in pension benefits? 

Ms. LAV. Across States, the Census reports that they receive an 

average of about $23,000 a year. 

Mr. LEWIS. Could you tell us whether all State and local workers participate in Social Security? 

Ms. LAV. No. All State and local workers do not participate in 

Social Security. 

Mr. LEWIS. What are the exceptions? 

Ms. LAV. The exceptions are quite a number of teachers, about 

40 percent of teachers and a majority of public safety workers like 

police and fire, and then there are some States, a few States, where 

most of the workers don’t participate. So those workers need more 

from their pensions because they don’t also have Social Security. 

Mr. LEWIS. Could you tell the Members of the Committee what 

is the purpose behind providing workers with pension benefits? 

What is the intent? 

Ms. LAV. Well, first of all, studies that do what we call applesto-apples comparisons find that public workers particularly at middle and higher income, or middle and skilled areas, are paid less 

than their private sector counterparts. So pensions are part of their 

compensation. 

But in general, it is important that people have retirement security. And this is part of how State and local governments attract 

quality workers to do the work. And so they provide deferred compensation as well as current compensation. It is a choice that has 

been made, an important one. 

Mr. LEWIS. Thank you. I thank all members of the panel. Mr. 

Chairman I yield back. 

Chairman BOUSTANY. I thank the Ranking Member. 

Mr. Buchanan, you are recognized 5 minutes. 


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Mr. BUCHANAN. Thank you, Mr. Chairman, for doing this most 

important hearing. I also want to thank our colleague, Congressman Nunes, because I think it is very critical. I just think back, 

we were being in business for a lot of years we had profit sharing 

plans and 401(k)s that we have now. But I look back on the last 

10 years and if you take a look at S&P, for example, they are flatlined. 

So my point is, I am looking at these, I was thinking in 2008 I 

was sitting around with a bunch of people having dinner at Christmas just before that news, maybe 15, a lot of them were investors 

and everything, and the market, everybody lost a third of their net 

worth then. 

So when we talk about someone put a number together at 8 percent or 4 percent or 12 percent, in these uncertain times, you can 

come up with any number you want. I always refer back to the rule 

of 72 that if you have an 8 percent number, it doubles in 9 years. 

But the bottom line, these are different times. So it just seems like 

we have to reassess where we are at. We need more transparency 

so that it doesn’t lead everybody into bankruptcy. 

So I will start with you, Ms. Lav. What do you think a number 

should be today when you are looking to put together what you 

might have to pay out in the next 10 or 20 years, what number? 

Because if you look at the bond rate, maybe there has been some 

appreciation, but if I look at interest rates today, it is almost free 

money if you are going to go into Treasuries, and the equity markets have been zero for 10 years on average, but historically for a 

lot of years, they were 10 percent. 

But where do you even begin to get a number that makes any 

sense? That is why I am concerned as more people retire, someone 

mentioned 8 percent, do we need to be dealing with 1 percent? 

What makes sense going forward for the workers? 

Ms. LAV. I am not going to put a specific number on it. I haven’t 

done that research. That is not what I do. 

But I do know it is not—it is very unlikely to be 4 percent. You 

know, I think that it would be somewhat irresponsible for States 

and localities just to invest in Treasury bonds. I think that would 

not make any sense. That would not—— 

Mr. BUCHANAN. But you understand the S&P, in the last 10 

years, went down, has been down, it has been flat-lined at zero and 

it went down 38 percent in 2008. How do you get to a number of 

4, 6, 7 percent with any confidence going forward? 

Ms. LAV. Well, I mean pension returns have not been, the returns to pension funds have not been zero. 

Mr. BUCHANAN. What have they been in the last 10 years? 

Ms. LAV. In the past couple years, they were in the double digits, they were down in the recession—— 

Mr. BUCHANAN. Do you know what the returns have been in 

these pension funds on average? Take them across the board. What 

is the average for the last 10 years? Do you have any idea? I don’t 

even know that number, but I know my overall returns have not 

been good. 

Ms. LAV. I think CBO had a number, it was in the neighborhood 

of 3 percent or something like that. But this was through two backto-back recessions. I certainly don’t think you necessarily want to 


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plan for the future of having two recessions, one of them the largest since the Great Depression within 10 years, I don’t think that 

that is a realistic way to plan either, to assume that that is going 

to happen. 

Mr. BUCHANAN. These are different times today. I am an optimist, but at the same token, the reality of it is a lot of people are 

reassessing where they are at. I can’t tell you—I represent Florida—how much retirees that were hoping to retire based on a 6, 

8, 4 percent number. They are not seeing those returns, so now 

they are working longer and those kinds of things. 

Mr. NUNES. Would the gentleman yield? 

Mr. BUCHANAN. Yes. 

Mr. NUNES. Mr. Buchanan, I want to thank you for your kind 

words on the bill. I want to make sure, I know the bogeyman is 

out here and people are talking about 4 percent or 3 percent and 

the detractors to this bill that are against transparency continue to 

use that rate of return as if that rate of return was meant that the 

Federal Government is now going to say this is what the return is 

going to be. 

The purpose in drafting the legislation had nothing—when we 

looked at that rate, was to do nothing other than to protect the 

workers from the employers, meaning the government. Because 

really, when we look at that discount rate of today, which would 

be around 4 percent, it is not to do anything but compare oranges 

to oranges or apples to apples, so that you can compare a plan in 

Fresno, California, to a plan in Florida. And that was the purpose 

of this discount rate. That is why we put this in there just to have 

a conservative rate so you would be able to compare these plans 

across State lines and from entity to entity. 

Mr. BUCHANAN. I thank the gentleman. But I guess my point 

in saying all this is I was trying to work toward the uncertainty 

that we have faced in the last 10 years. And we need more transparency. And I appreciate your effort. 

Thank you. 

I yield back. 

Chairman BOUSTANY. I thank the gentleman. Ms. Jenkins, you 

are now recognized for 5 minutes. 

Ms. JENKINS. Thank you, Mr. Chair. 

And I want to thank you all for being here today. 

I find it a bit ironic that Congress, which doesn’t have the political will to take action to fix Social Security is here today talking 

about our grave concern with our State and local government pension plans. 

So I am not sure that any of us have much credibility on this 

issue. But I have great respect for the panel in particular as a 

former president of the National Association of State Treasurers, a 

State treasurer myself, and a board member on our public employee retirement system in Kansas; I really have the utmost respect for State treasurers. So I would like to address some questions to Treasurer Stapleton. 

Some have commented that this bill, H.R. 567, is unnecessary because the Government Accounting Standards Board, GASB, already provides standards for State and local pension plans. I would 

just like your response to that. 


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Mr. STAPLETON. This is not the case. GASB standards, in my 

opinion, have basically permitted plans not only to adopt their own 

rates of return, but basically act like the wild West when it comes 

to assuming plan returns. That is why there are no credible levels 

of comparison between plans. 

I spoke earlier about differences in amortization length. Obviously, the longer the amortization period, the less you have to write 

off in a given amount of time. Under the Financial Accounting 

Standards Board, which governs the private sector it is a much 

shorter length of time to write off plan assets. 

I have been very disappointed with the oversight of the Government Accounting Standards Board and their refusal to transparently invest in information that will allow public policymakers 

to make informed decisions. I see this bill as a nonpartisan bill, as 

a bill to increase information, whether 4 percent is the right rate 

of return, I can guarantee you that 8 percent is not the right rate 

of return. If you go into the insurance market and try to get a private contract or somebody to guarantee you a rate of return, you 

will never find somebody that will guarantee you an 8 percent rate 

of return. 

States have increasingly tried to regulate the insurance industries, and when they have done that, they have required plans to 

have more assets than liabilities. And so if GASB had done its job 

or would do its job and require the same standards that are applicable in the private sector, we wouldn’t need to be here today. But 

it is refusing to do that. And so plan members are not getting a 

uniform level of information to assess liabilities. And public policy 

makers need this information for State governments to responsibly 

respond to these liabilities because the fact of the matter is that 

plans are not taking the advice of their own actuaries. 

Just look at what happened which was chronicled in The Wall 

Street Journal with Calpers a few weeks ago. They told the board 

to lower the rate of return, then they started getting letters in from 

school districts, from local governments around the State that said, 

we cannot afford for you to lower the rate of return. And they said, 

we are going to discount the professional advice of our actuaries 

and create in effect a deferred liability for future generations. And 

we cannot allow that to happen. 

Ms. JENKINS. Excellent. Thank you. The bill, the Public Employee Pension Transparency Act, is not mandatory, but does condition the continued ability to issue tax exempt bonds upon filing certain information about State and local pension plans to the Internal Revenue Service. As a State elected official, do you think that 

is fair? 

Mr. STAPLETON. Absolutely. This does not force compliance. 

There is a carrot, which is tax exempt bond financing. But even if 

States comply, after they comply and issue this information back 

to the plan holders and back to their States, they still don’t have 

to adopt the rate of return. It is just a way to get greater information. 

And as I said earlier, I asked Mr. Attmore at the Government 

Accounting Standards Board what is the problem with providing a 

sensitivity analysis of different discount rates? Let’s look at 8 percent, let’s look at 6, let’s look at 4 percent, but let’s make sure that 


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public policy makers at the State level have a wide range of information from which to reach conclusions. And he said no, in the 

coming standards, that they will not provide that information. 

Ms. JENKINS. And finally in your testimony, you said overestimating a pension system’s expected return is essentially gambling 

with the financial welfare of the next generation of Americans. Can 

you explain what this gamble places at stake for the next generation? And is it fair to say that this gamble could also impact the 

current generation through decreased services, increased taxes? 

Mr. STAPLETON. One of the things that opponents of this legislation and of transparency with public pension plans in general like 

to point out is they try and make apples to oranges comparisons 

with private sector plans. They will say, well, look at the underfunding in private pension systems. The problem is that structurally you are talking about two different things. 

First of all, as I mentioned earlier, private plans have a different 

valuation assessment for what their liabilities are. They peg it to 

high-yielding corporate bonds at 6 percent. That does not happen 

in public pension plans where the expected rate of return equals 

the actual rate of return. But structurally, unless I am an investor 

in a private company with a lucrative defined benefit plan, I don’t 

really care, because I am not going to be on the hook. 

But in the public pension system, all taxpayers at the State level 

are on the hook if the plans become insolvent because the State of 

Colorado is not going to let the Jefferson County School District go 

insolvent without finding a way for funding. And we are bankrupt, 

like a lot of States. And the only people that can actually make up 

the difference are the taxpayers. And that is why it is important 

that we have this level of transparency so that everybody can know 

where we stand and can take public policy actions to remedy what 

I believe is a very serious problem. 

Ms. JENKINS. Thank you, Treasurer. 

I yield back. 

Mr. BOUSTANY. Thank you. 

Mr. Kind, you are now recognized for 5 minutes. 

Mr. KIND. Great. Thank you, Mr. Chairman. 

I thank the panelists for your testimony here today. As a Democratic representative from the great State of Wisconsin, I have to 

admit we kind of received our fair share of attention in the last 

couple of months in the media, both at home and nationally. 

This may seem a little heretical to my Democratic colleagues up 

here on the dais, but I commend Governor Scott Walker and what 

he did. I think what he proposed in the State of Wisconsin was incredibly bold and courageous in recognizing the deep fiscal hole 

that we were in and coming forward with the bold proposals that 

he did. 

And quite frankly, the fact that hundreds of thousands of people 

showed up in subfreezing weather, braving bitter wind chills, blowing snow, bitter winds in their face in both the square in Madison 

and virtually every city throughout the State of Wisconsin, I have 

to believe they wouldn’t have done that if they had all the facts, 

if they knew the real fiscal crisis that our State was facing and 

how boldly the Governor was really trying to address these issues. 


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Because if they had known that the State public pension fund 

was only funded at 99.8 percent and that that 2 percent—.2 percent shortfall was creating a deep fiscal hole for our State, I cannot 

believe that they would have been out there for weeks and months 

on end protesting what the Governor was trying to do with the 

State public pension system. I mean, they wouldn’t have been so 

selfish and so self-centered in the demonstrations that they were 

conducting throughout the State of Wisconsin. 

No, I think not. 

I think those individuals, those workers, those families knew exactly what they were doing when they were out there protesting 

what the Governor and the Republican legislature was trying to 

jam down their throats. This had nothing to do with the budget crisis that the State of Wisconsin was facing. 

In fact, Governor Walker was just here in this town a few weeks 

ago and admitted in testimony before Congress that his assault on 

worker rights had absolutely nothing to do with the budget situation that we face in the State of Wisconsin. 

In fact, they stripped that portion out of the bill and therefore 

admitted before the entire world that it had nothing to do with the 

budget implication. 

But nevertheless, the public employees knew that they had to be 

a part of the solution, and they were willing to contribute more to 

their State public pension system. They were willing to contribute 

more to their health care system. 

In fact, Governor Walker got every concession that he was asking 

for from those public employees, but that wasn’t good enough. He 

had to go after those worker’s rights and strip that away, basically 

telling them, you no longer have a seat at the table, and your voice 

isn’t going to matter anymore, and we are going to jam these decisions down upon you. 

So it was not surprising seeing hundreds of thousands of people 

going out and braving that cold weather and that bitter wind chill 

day after day protesting what Governor Walker was doing to the 

State of Wisconsin. If we want to have a serious conversation about 

the fiscal hole we are facing at the State and Federal and local 

level, let us talk about the real cause of what is driving these budget deficits, which is rising health care costs. 

Now, my Republican colleagues have a proposal on how to deal 

with it and that is going to the workers of the country, to seniors, 

to disabled people, the children and saying, you contribute more to 

your health care plans, and that is it. 

They are not proposing anything to deal with rising health care 

costs. And that is just going to shift the burden more and more on 

working-class families throughout the Nation. 

Or there is another approach that we can take and that is 

through the health care reform measure that we passed that will 

reform the way health care is delivered in this country and ultimately how we pay for it. So it is based on the value and no longer 

the volume of care that is given. And surprise, surprise, this has 

been a bipartisan agreement for many, many years. Some of the 

most prominent names in the Republican party from Newt Gingrich, to Bill Frist, to my former Governor and former Secretary at 

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ing we have to go to a value- or outcome-based reimbursement system in the health care system, or it will bankrupt us. That is what 

is driving the fiscal crisis at the State and at the local level. That 

is the largest and fastest growing area of spending at the Federal 

level. That is what we should be focused on, instead of some onesize-fits-all Washington approach to the State public pension system, 99.8 percent funded in the State of Wisconsin, and yet look 

at all the attention that we garnered as a State over the last couple 

of months. 

Mr. Chairman, I would like with unanimous consent to submit 

for the record a letter dated May 4, 2011, to me from the Secretary 

of the Department of Employee Trust Fund, Dave Stella, from the 

State of Wisconsin. 

Mr. BOUSTANY. Without objection. 

[The information follows:] 


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Mr. KIND. In the letter, he adamantly opposes H.R. 567. 

And, in fact, in the last paragraph—and I quote him—he says, 

‘‘thus, contrary to what the proponents of the legislation suggest, 

the issue is not a current lack of transparency and disclosure; it is 

simply an effort to justify a Federal takeover of areas that are the 

financial and regulatory responsibility of State and local governments.’’ 

For the party that claims to be the party of less government in 

Washington and more responsibility at the State, proposing this 

one-size-fits-all approach with this Federal legislation is contrary to 

even I think your principles. And our own Secretary back in the 

State of Wisconsin is opposed to this legislation. So I think we 

could spend a lot more time on the issues that are really driving 

these budget deficits rather than some type of Washington onesize-fits-all approach. 

Mr. BOUSTANY. The gentleman’s time has expired. We just had 

a vote called. There are two votes. One is a 15 and one is a 5. I 

think what we will do now is go to Mrs. Black for questioning, and 

then we will recess afterward. 

Mrs. BLACK. Thank you, Mr. Chairman. 

Under the current government accounting standard for rules, 

public plans can discount their pension obligations based on expected rates of return on pension assets, as has already been 

talked about in some detail. By putting their value into the stock 

market, private equity and other risky investments, State and local 

plans can decrease the current actuarial value of their liability. 

Now, GASB rules are contradictory to basic finance theory that 

I think has already been said here by a number of our panelists 

in the practice of financial markets where discount rates are based 

on characteristics of liability, not asset. And Congress actually had 

banned this type of accounting for single employer private pensions, but yet we are still using it in the government. 

Do you believe that GASB rules encourage State and local governments to take on inappropriate risks with these planned assets? 

And also, added to that, do you believe that H.R. 567 would have 

an effect on this practice? And you can start with Mr. Stapleton, 

if we can, and just go down the panel. 

Mr. STAPLETON. Thank you, Mrs. Black. 

Yes, I do believe that the lack of uniform standards required by 

the Government Accounting Standards Board has allowed State 

plans to very dangerously adopt overrealistic rates of return. Even 

if you look at an actuarial analysis, which is called a Monte Carlo 

analysis, that is often provided to States, they talk about the probability of achieving different rates of return. 

In Colorado’s case, there is almost a 30 percent chance that we 

will not achieve an 8 percent rate of return. If I told you and other 

Members of this Committee that there was a 30 percent chance 

that they would be in a life-threatening car accident on the way to 

work today, I think I would have a lot of people biking. Yet essentially that is the risk that we are taking day in and day out with 

the State’s tax money, assuming these rates of returns. 

Mrs. BLACK. Mr. Barro. 

Mr. BARRO. I would agree with that, and I think we see that 

in the political resistance to plans that are lowering assumed rates 


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of return. In New York, we just had a reduction in the rate of return assumed for the State employee retirement system and yet, 

just coincidentally, the plan happened to at the same time adjust 

other actuarial assumptions with regard to longevity and such that 

happened to largely offset the effects of the reduction and the rate 

of return. 

So I think there is significant resistance to reduced rates of return. And in order to not lower the rate, you have to invest in an 

aggressive manner. The other thing I had noticed is that the 

defense of this aggressive investment is essentially that the government can be indifferent to variability and risk in asset returns. 

Because the government is going to be around forever, it has this 

superior ability to take on risk. And the implications of that are 

really kind of perverse. 

Pension funds happen to be vehicles through which we make 

promises to public employees and through which we invest in assets. But these are fundamentally unlinked activities, and there is 

no reason that a government couldn’t just create essentially a sovereign wealth fund by issuing bonds and using the proceeds to invest in equities. If the government really has a superior ability to 

take on risk, we should be doing a lot more of that. They should 

issue as many bonds as they can, use them to buy up as much 

stock as they can and use that as a cheap source of financing for 

government activities. 

Now, obviously, that makes no sense because it would involve 

governments taking on tremendous and inappropriate investment 

risks. But that is exactly what they do through public employee 

pension plans. 

Mrs. BLACK. Thank you. 

Mr. Gold. 

Mr. GOLD. The best financial theory, brought to our attention by 

famous economist Fischer Black indicates that pension plans 

should not be investing in risky assets but should be investing in 

bonds. I have written that liability measurement using the ‘‘expected return on assets’’ rather than a bond ‘‘reference portfolio’’ 

does enable, at the very least, and encourage, perhaps, risky investing which financial theory would not support. 

Mrs. BLACK. Mr. Kurtter. 

Mr. KURTTER. Yes. We think that the preliminary review’s report of GASB, their project to review pension and accounting standards for public-sector pensions, this bill, the many reports that 

have been issued on this subject recently help to increase transparency and improve the quality of the debate between issuers and 

investors, thereby improving the amount and the quality of information in the market. To the extent that transparency is improved, 

comparability is improved, we think this helps to create incentives 

to issuers to help address funding shortfalls and improves the overall quality of information available to investors. 

Mrs. BLACK. Ms. Lav. 

Ms. LAV. The fact is that over the last 20 or 25 years, the funds 

have earned close to 9 percent. Over the last 10 years, they have 

earned 5 percent. I didn’t have that number in front of me before. 

And over the last about 25 years, 60 percent of the revenue to 

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come. So it does appear that the funds have invested prudently. 

They have made very good returns. And I think having them invested entirely in bonds would be wrong for the taxpayers of the 

State who are missing out on the potential of these returns to finance the pensions. 

Mrs. BLACK. Thank you. 

Mr. BOUSTANY. The gentleman’s time has expired. 

We will now go to Mr. Marchant for 5 minutes. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Ms. Lav, who in your opinion is the biggest loser if a pension 

fund goes broke or is severely underfunded? 

Ms. LAV. Well, ultimately, the pension funds are in essence 

backed up by the full faith and credit of the State. So, in the very 

unlikely situation that a major pension fund would not be able to 

pay benefits, presumably they would pay it from current tax dollars. That is how they paid—prior to the seventies, all State and 

local pensions just about were paid on a pay-as-you-go basis. There 

were not these forward-funded pension funds. And then they started investing and prefunding their pension funds around 1980, and 

they built up this $3 trillion fund in the pensions. 

And pensions are not in danger of not being able to pay their 

benefits. That is just not the case in most situations. I mean, if you 

want to look at the most extreme, even Illinois will be able to pay 

its pensions. 

Mr. MARCHANT. So you don’t feel like there is any benefit to 

an additional amount of transparency for the employees that are 

going to benefit from the pension system? 

Ms. LAV. Transparency is a word that is used in a lot of different 

ways. And when what is called transparency puts up a construct 

that is different from how much States and localities have to invest 

in order to make their pension funds whole and to pay their obligations, then you have confusion rather than transparency, in my 

opinion, because you have two different numbers and people don’t 

know what to think about it. And if they look at an inflated and 

a very large liability, then some other things are going to happen. 

People are going to try and raise taxes to fill it. People are going 

to cut other programs, or they are going to say, oh, we can’t keep 

this pension fund; we are going to have to go to a defined contribution or something else, because of the liability. It is confusion. 

Mr. MARCHANT. So your theory is that transparency increases 

confusion? 

Ms. LAV. No, not necessarily any transparency. I am saying that 

I don’t think that what we are talking about here is good transparency. 

I think that what GASB is proposing in its new rules is good 

transparency. It has a much more realistic view of the funding 

level and the liabilities of pension funds. 

Mr. MARCHANT. In my previous career in the State legislature, 

I served on the Texas Pension Review Board. And it was not a review board that took very seriously its responsibility for years until 

we got a Governor that decided that maybe we ought to meet and 

maybe we ought to actually do our job. And our job was simply to 

just publish the same kind of information that is in this bill. And 

we found that we got the most resistance from the public entities 


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that administrated these plans, and we got the most enthusiasm 

and the most inquiries from the actual employees that once they 

were able to look at the disclosure and the comparisons of the Dallas Police and Fire Pension Fund versus the El Paso Police and 

Fire Pension Fund, that is when we began to—our main input 

came from the employees. 

And we found that the increased transparency benefited really 

the employees because they then began to demand an accountability from the pension funds that they were depending on for 

their retirement. 

I think your first answer was very telling in that, in your opinion, the ultimate loser is not the employee but the State or the entity. And I think that, at some point, the employee needs to be 

more worried about the content and the investment policies and 

the transparency of their pension planning and cannot always rely 

on the State or the county or the city or the school district in bailing a system out. 

Ms. LAV. That would be a very rare situation. I think the GASB 

rules will create the kinds of transparency and comparability that 

you are talking about, which I think is good and important and—— 

Mr. MARCHANT. We found that GASB was a reactive entity 

and not a proactive entity. 

Ms. LAV. Well, it has—— 

Mr. MARCHANT. That was our experience. 

Mr. BOUSTANY. The gentleman’s time has expired. The committee will stand in recess until we complete the round of votes on 

the floor. I anticipate it will be about 20 minutes. 

[Recess.] 

Mr. BOUSTANY. The Committee will resume business. 

At this time, Mr. Becerra is recognized for questioning. 

Mr. BECERRA. Thank you, Mr. Chairman. 

And thank you all for your testimony today. I appreciate that 

very much. 

One of the things that I am sensing is that there is a disconnect 

between what we are doing here in Washington, including this conversation here, and what the American public is feeling. In a recent 

survey of the public—and let me go ahead and cite it, the National 

Institute on Retirement Security’s survey, that survey found that 

the vast majority of Americans believe that the disappearance of 

pensions has made it harder for them to achieve the American 

dream. Some 75 percent of Americans believe that. And it sounds 

like more and more politicians are talking about eroding or eliminating the opportunities for Americans to have these pension 

plans. Sometimes the public conveys to us that they don’t believe 

that we are listening or that we understand how difficult it is for 

them to prepare for retirement. Some 80 percent of Americans responded to the survey saying that precise point. And they responded by a percentage of 81 percent saying that they think that 

we should make it a higher priority to ensure more Americans, not 

less, that more Americans can have a secure retirement. And so as 

we hear this discussion about public pensions and we take a look 

at the real facts, I wonder if the American public is actually not 

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standing is that the average pension in America for most public 

employees is somewhere in the low $20,000s. Not $80,000, not 

$150,000. 

Now, they may be confusing that with the big parachutes and 

buyout plans that they heard about during this Wall Street scandal 

where executives were getting billions of dollars or millions of dollars in buyout moneys, even though their companies were failing. 

But these are public employees who put in many, many years, most 

of them more than a decade or two, to be able to collect some 

$20,000 to $25,000 a year in retirement. 

At the same time, my understanding is that for most States, the 

cost of having these pensions for their public employees translates 

to less than 4 percent of their State budget. Now, I know my State 

is having a tough time. I know any number of States have been 

having a hard time. But I daresay that eliminating the pensions 

that have been paid into by employees over decades and getting rid 

of the opportunities for American workers to lead out their lives in 

retirement and dignity is not what folks would expect of us. I have 

to believe that the teachers who have been paying into the system 

who have been working for so many years, the firefighters, the police officers, the public employees throughout America who have 

been working for less money than their private sector counterparts, 

because pay scales in the public sector are a little lower, but they 

get a little bit stronger and better protected pension benefits; I 

have to believe that those American workers are saying, you are 

not listening to us; well, we want some help, but please don’t target 

our pensions at a time when we want the most safety. 

So I have a question to ask. Is it the case that there is any State 

that has said to us, we need to have a Federal bailout of our pension system? I know Illinois was mentioned. 

Ms. Lav, you may have already commented on this I was told. 

But has Illinois requested a bailout from the Federal Government 

for its pension program? 

Ms. LAV. No, it has not. In a 472-page budget, there was one 

phrase, not even a sentence, which says; ‘‘significant long-term improvements will come only from the additional pension reforms, refinancing the liability and seeking a Federal guarantee of the debt, 

or increasing the annual required contributions.’’ 

So there was that one phrase in which a Federal guarantee was 

mentioned. But a couple of weeks later, The Wall Street Journal 

asked Governor Quinn, and there is an article which says he said, 

no, no, we are not planning on doing that. 

Mr. BECERRA. Let me ask a quick question. Is there anyone 

that challenges the figure that the average pension benefit for public employees throughout America is around $23,000, $24,000 a 

year? 

Ms. LAV. That comes from the U.S. Census. 

Mr. BECERRA. So no one would question it. 

Ms. LAV. No. 

Mr. BECERRA. Does anyone question that the average cost for 

a State throughout the country or the 50 States is somewhere 

around 4 percent or less of their State budgets? 

Ms. LAV. Right. The most recent data shows 3.8 percent. 

Mr. BARRO. I would challenge that idea. 


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Mr. BECERRA. Okay. Mr. Barro. 

Mr. BARRO. That is a measure of the actual cash payments 

made by governments. That is not the cost of pension benefits that 

are being provided. 

Mr. BECERRA. Doesn’t that go to the question of what we are 

talking about in terms of a State’s budget? A State is budgeting for 

a fiscal year, not for 20 years from now. 

Mr. BARRO. Well, that is part of the problem. 

Mr. BECERRA. If I could finish my point. And so while I think 

where you are heading is that we want to make sure that these 

pension plans are solvent for years to come just the way we want 

Social Security to be solvent, we wouldn’t use today’s money that 

is contributed for a program we need today to pay for a program 

that has to go long term. And so what we have to do is deal with 

the long-term costs of the pension program through—and I know 

my time is expired, if I could just finish this point—we want to 

deal with the long-term costs of the program through long-term solutions, not short-term solutions. So the short-term solution of fixing a State budget should not be foisted on a long-term program 

that has been funded for decades and is supposed to last for decades to try to solve a short-term State budget, which is caused 

principally by the downfall, the economic recession and so forth. 

So it could be in a few years we are doing very well, and that 

means that pensions will be doing very well. So what we want to 

do is budget long term for pensions, not have a short-term sight 

and deal with State budgets through our pension programs for our 

workers. 

Mr. Chairman, thank you for allowing me the additional time. 

Mr. BOUSTANY. The gentleman’s time has expired. 

Mr. McDermott, you are recognized for 5 minutes. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

This morning we are gathered once again to watch the Republicans attack the middle class and watch them ignore the problem 

of jobs in this country. 

Although there is a twist this morning because this is a Subcommittee that has no jurisdiction whatsoever on pending legislation. They had to find a Committee that would have the hearing 

because other Subcommittee chairmen would not attack unions, so 

they brought it into this Committee. 

Now, we are sitting here while they cynically abuse the Committee process to beat up on the working people of this country. If 

the public wonders why our politics are polarized, it is because of 

all of the incremental steps of abuse. This morning is another example. 

Let us be clear: The Republicans hate defined benefit pensions, 

whether it is Social Security at the Federal level or it is a public 

pension at the State level. They want rid of them all. 

That is what Wisconsin was about, and it is what this whole exercise here today is. Now, instead of focusing on jobs, they are 

going after their political enemies, once again, the regular whipping boys, the unions. Let us drag the unions out here and kick the 

living daylights out of them when, in fact, they are not the problem. 


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Unions built this country. They built the highways, the ports, the 

schools. They created fairness, the 8-hour work day, safe working 

conditions, health care, pensions. They are not the robber barons 

in this society. And union workers are under attack because they 

haven’t gotten poor enough. They are under attack because they 

haven’t given up, as they showed in Wisconsin. 

After two decades, the eighties and then the 2000s, where the 

Republican policies led to huge deficits, transferring most of the 

wealth to the top 5 percent in this country, you would think they 

would be satisfied, but they aren’t. Here we are, back to the same 

old stand, attacking the pensions of policemen and firefighters and 

teachers and sanitation workers. Now, it is good that we found who 

the enemies are in this society; the police, the firefighters and the 

teachers and the sanitation workers. Let’s take away their pensions. Let’s destroy the system we have developed in this country. 

There is no problem with most State pensions. The State of 

Washington is 99 percent financed. Wisconsin is 99 percent financed. If you look at all the records that come from all of the 

agencies, the Pew Foundation and others, and it is very clear that 

these pensions are not in trouble in most places. There are some 

States, but for the Federal Government to leap in to fix New Jersey 

or Illinois or whatever and make Washington go through that process is an abrogation of State rights, and there is no sense in doing 

it. 

Some of the witnesses here have said things about public officials 

at the local level, which I think you ought to take back, because 

some of them have been very responsible. In my State, we have a 

functioning system that is well financed. 

Now, the CBO put a report out and the chairman kindly put it 

into the record. 

And, Ms. Lav, I would like you to comment on this line in this: 

It says, ‘‘by indicating a larger amount of underfunding, adopting 

a fair-value approach and reporting pension financing could indicate a need for significant increase in funding which would further 

strain State budgets, despite the fact that on average a much 

smaller increase in funding might turn out to be significant to 

cover pension plan funding.’’ 

It sounds to me like what they are trying to do with this bill is 

jack up the pressure on States; therefore, they will dump the pension plans. Is that a fair reading of what this bill is about? 

Ms. LAV. Well, I think that is a pretty fair reading. I think that 

some of the sponsors have said that, as is indicated in my written 

testimony. 

I think that what it will do is create this idea that there is just 

this massive underfunding, and people will demagogue that. You 

would have it all in one place. You have a so-called transparent— 

maybe it is on a Web site and everything, and with these very 

large liabilities, and people are going to demagogue and say, oh, my 

God, we can’t afford this, and it is going to create pressure either 

to eliminate the plans or pressure to cut other spending or pressure 

for higher taxes. And given the volatility of the bond markets and 

people that invest in State and local mutual funds that—mutual 

funds for State and local bonds—— 


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Mr. MCDERMOTT. Let me stop you there, because you brought 

up the bonds, the bond market. 

Mr. Chairman, I would ask unanimous consent to put into the 

record the Huffington Post article called ‘‘Credit Rating Agency Analyst Covering AIG, Lehman Brothers Never Disciplined.’’ I think 

we ought to have a hearing on that. 

I yield back the balance of my time. 

Mr. BOUSTANY. Without objection, that report will be put in 

the record. 

[The information follows:] 


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Mr. BOUSTANY. I would remind the gentleman that it is a little 

unseemly to impugn motives of Members of the Committee and 

other Members of the House. The purpose of this hearing is simply 

to explore the issue of transparency and whether or not the accounting methods being used accurately depict liabilities. 

So, with that, the chair now recognizes Mr. Nunes. 

Mr. NUNES. Thank you, Mr. Chairman. 

I also would like to remind the Committee here that when the 

public employee transparency bill was introduced in the House, it 

was the House Parliamentarian that referred the bill to the Committee. 

Also, it amazes me that now CBO is part of the vast right wing 

conspiracy to take out public employee unions. I have a quote here 

that I would like to read from another far right winger. Some of 

you may recognize the name of Mayor Willie Brown, the Mayor of 

San Francisco. He was also the California assembly speaker for 

many years. I guess he is now a right winger because I am going 

to read this, and he must be against unions. But here is his quote: 

‘‘The deal used to be that civil servants were paid less than private-sector workers in exchange for an understanding that they 

had job security for life. But we politicians, pushed by our friends 

in labor, gradually expanded pay and benefits to private-sector levels while keeping job protections and layering on incredibly generous retirement packages that pay ex-workers almost as much as 

current workers. Talking about this politically is politically unpopular and potentially even career suicide for most office holders. 

But at some point, someone is going to have to get honest about 

the fact that 80 percent of the State, county and city budget deficits 

are due to employee costs. Either we do something about it at the 

ballot box or a judge will do something about it in bankruptcy 

court. And If you think I am kidding, just look at the city of 

Vallejo.’’ 

So when the bill was put together, it was put together to protect 

the employees. And Ms. Lav, it amazes me that you don’t believe 

that transparency is good for the employees. Why is it that you 

want to hide the numbers from the public employees? 

Ms. LAV. I think transparency is very good. 

Mr. NUNES. You said earlier that it would create confusion. 

Ms. LAV. Well, because I am saying that I am not defining forcing this estimation of liabilities at a riskless rate as transparency 

because I think it is more in the category of something that is not 

relevant particularly to the level of contributions that State and 

local employees should be making to their plans. And what should 

be disclosed to people is how much it is that this State and this 

locality have to put into their plans to reach full funding over the 

next couple of decades as we recover from these back-to-back recessions. 

And that is the amount that I think you should be transparent 

about so people have an idea, so employees have an idea, so the 

public has an idea, so the investing public and everybody else has 

an idea what has to be put into those accounts. 

Mr. NUNES. The bill allows for basically two basic things. One 

is for the pension plan to show how they feel they are going to 

meet the needs. The other is this discount rate that you seem to 


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be fixated on and that the left seems to be fixated on. And for some 

reason, you can’t get off this fixation about 3 percent, 4 percent, 5 

percent. The truth of why the rate was picked is what I said earlier 

to Mr. Buchanan, is so that you would have a conservative ability 

to compare public employee pensions across the line. And I will 

also say that it amazes me how this has now turned into a unionWisconsin vast conspiracy bill here when I think half of the public 

employee pensions are actually for non-union employees. So, I 

think hopefully we can just really raise the rhetoric level down a 

little bit here. This is a good government bill. It is trying to create 

transparency so that public policymakers can make better decisions. 

And with that note, Mr. Stapleton, could you just kind of comment on—I know you didn’t get a chance to respond to some of the 

Members on the Democrat side and some of their accusations, so 

I would like to give you an opportunity to respond. 

Mr. STAPLETON. Thank you, Congressman Nunes. 

I would simply say that everybody benefits in my opinion from 

greater information. I think that a risk-free rate of return is absolutely as justifiable, if not more justifiable, than assuming an 8- 

percent rate of return. 

In Colorado, we had the market returns compounding—the market compounding at nearly 18 percent over the last 20 years. And 

as a result, our plan was only fully funded once. To assume that 

we are going to have that type of run-up again over the next 20 

years is a complete fallacy. Also, the notion that everybody is contributing the same amount is a fallacy. 

Using Colorado as an example, Congressman, we have government workers, who according to this year’s budget, have been 

asked to contribute a mandatory of 12.5 percent of their paychecks 

into the pension system. The problem in Colorado is that government workers only represent 15 percent of the membership in the 

pension system. Everybody else, all 85 percent of other members, 

schoolteachers, higher education, local government workers, they 

only have to contribute 8 percent, and they get the same benefits. 

So if we are talking about fairness here, let’s have everybody contribute the same amount. Let’s have everybody retire at the same 

age; not some get to retire at 60, others get to retire at 58. There 

is no uniformity, and Colorado is not alone. Many States don’t have 

uniformity in contribution levels or retirement ages. So this is 

about economic fairness. 

Mr. BOUSTANY. The gentleman’s time has expired. 

Mr. NUNES. Mr. Chairman, I would like to just thank all of the 

panel for being here today and for their contribution. I know they 

spent a lot of time on these public employee pensions, and I appreciate the panel’s time today. 

And I appreciate your time, Mr. Chairman, for holding this hearing. 

Mr. BOUSTANY. I thank the gentleman. Let me just remind 

Members on both sides that we want to try to keep from impugning 

motives and stick to really what the heart of the subject is. And 

it was really dealing with the transparency, the accounting methods and ultimately, are these pension plans fair to the workers at 

the end of the day? So we will continue to work on this issue. And 


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I want to thank the panelists for joining us today. You all have 

been very helpful. Please be advised that Members may have written questions that they will submit to you. And those questions and 

answers will be made a part of the official record. 

With that, this hearing is now adjourned. 

[Whereupon, at 11:27 a.m., the Subcommittee was adjourned] 

[Questions for the Record follow:] 


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