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STATE AND MUNICIPAL DEBT: TOUGH CHOICES

AHEAD

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

APRIL 14, 2011

Serial No. 112–39

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on April 14, 2011 .............................................................................. 1

Statement of:

Biggs, Dr. Andrew, resident scholar, the American Enterprise Institute

for Public Policy Research; Mark Mix, president, National Right to

Work Committee; Dr. Robert Novy-Marx, professor of finance, University of Rochester Simon Graduate School of Business; and Dr. Desmond

Lachman, resident scholar, the American Enterprise Institute for Public Policy Research ........................................................................................ 91

Biggs, Dr. Andrew ..................................................................................... 91

Lachman, Dr. Desmond ............................................................................ 121

Mix, Mark .................................................................................................. 103

Novy-Marx, Dr. Robert ............................................................................. 116

Walker, Scott, Governor, State of Wisconsin; and Peter Shumlin, Governor, State of Vermont ................................................................................ 15

Shumlin, Peter ........................................................................................... 21

Walker, Scott ............................................................................................. 15

Letters, statements, etc., submitted for the record by:

Biggs, Dr. Andrew, resident scholar, the American Enterprise Institute

for Public Policy Research, prepared statement of .................................... 94

Braley, Hon. Bruce L., a Representative in Congress from the State

of Iowa, atricle dated April 11, 2011 ........................................................... 44

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 6

Lachman, Dr. Desmond, resident scholar, the American Enterprise Institute for Public Policy Research, prepared statement of ............................ 123

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, various articles ....................................................................... 70

Mix, Mark, president, National Right to Work Committee, prepared statement of ........................................................................................................... 105

Novy-Marx, Dr. Robert, professor of finance, University of Rochester

Simon Graduate School of Business, prepared statement of .................... 118

Quigley, Hon. Mike, a Representative in Congress from the State of

Illinois, prepared statement of ..................................................................... 11

Shumlin, Peter, Governor, State of Vermont, prepared statement of .......... 24

Walker, Scott, Governor, State of Wisconsin, prepared statement of .......... 18

(1)

STATE AND MUNICIPAL DEBT: TOUGH

CHOICES AHEAD

THURSDAY, APRIL 14, 2011

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 9:30 a.m., in room

2154, Rayburn House Office Building, Hon. Darrell E. Issa (chairman of the committee) presiding.

Present: Representatives Issa, Burton, Platts, Turner, McHenry,

Chaffetz, Walberg, Lankford, Amash, Buerkle, Gosar, Labrador,

Meehan, DesJarlais, Gowdy, Ross, Guinta, Farenthold, Kelly,

Cummings, Towns, Maloney, Norton, Kucinich, Tierney, Clay,

Lynch, Connolly, Quigley, Davis, Braley, Welch, Murphy, and

Speier.

Also present: Representatives Sensenbrenner and Moore.

Staff present: Ali Ahmad, deputy press secretary; Thomas A. Alexander, Howard A. Denis, and Peter Haller, senior counsels; Robert Borden, general counsel; Molly Boyl, parliamentarian; Lawrence J. Brady, staff director; Sharon Casey, senior assistant clerk;

Katelyn E. Christ, research analyst; Benjamin Stroud Cole, policy

advisor and investigative analyst; John Cuaderes, deputy staff director; Adam P. Fromm, director of Member liaison and floor operations; Linda Good, chief clerk; Tyler Grimm and Ryan M.

Hambleton, professional staff members; Frederick Hill, director of

communications; Christopher Hixon, deputy chief counsel, oversight; Sery E. Kim, counsel; Justin LoFranco, press assistant; Mark

D. Marin, senior professional staff member; Laura L. Rush, deputy

chief clerk; Peter Warren, policy director; Kevin Corbin, minority

staff assistant; Ashley Etienne, minority director of communications; Carla Hultberg, minority chief clerk; Justin Kim, minority

counsel; Lucinda Lessley, minority policy director; Amy Miller and

Alex Wolf, minority professional staff members; Leah Perry, minority chief investigative counsel; Jason Powell and Steven Rangel,

minority senior counsels; Dave Rapallo, minority staff director; Suzanne Sachsman Grooms, minority chief counsel; and Mark Stephenson, minority senior policy advisor/legislative director.

Chairman ISSA. Thank you. The committee will come to order.

Before I begin, and I don’t think that I have to remind the audience broadly, but I will, decorum will be maintained here so that

our two witnesses, both seated Governors, are heard without any

unreasonable interruption. If you agree with them, smile. If you

disagree with them, smile. The fact is that this is about America

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hearing from two Governors who have a high responsibility to

serve their States, and we have a high responsibility to hear them.

The Chair cannot allow any disruptions. And I appreciate that

all those who came to get a message out did so before the gavel,

and I appreciate that if you would like to remain, you can remain

for the entire hearing; we are open to the public. But if there is

any disruption, your seats will go to the people waiting outside,

who also would like to be in attendance. This committee has a

longstanding history of doing that on a bipartisan basis.

I now recognize the ranking member for unanimous consent.

Mr. CUMMINGS. Thank you very much, Mr. Chairman. I ask

unanimous consent that Representative Gwen Moore of the 4th

District of Wisconsin be permitted to attend in this hearing pursuant to Rule 11, Section 2(g)(2)(c), and ask questions of the witnesses.

Chairman ISSA. Per our rule, without objection, so ordered.

The Oversight Committee mission statement is that we exist to

secure two fundamental principles: first, Americans have a right to

know that the money Washington takes from them is well spent

and, second, Americans deserve an efficient, effective government

that works for them. Our duty on the Committee on Oversight and

Government Reform is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know what they get from their government.

We will work tirelessly in partnership with citizen watchdogs to deliver the facts to the American people, bring genuine reform to the

Federal bureaucracy. This is the mission of the Oversight and Government Reform Committee.

Today’s hearing continues the committee’s effort to examine crises brought on by out-of-control spending and mounting debt at the

State level. Now, let me assure you that is not to say every State

is out of control, but virtually every State in the Union, and many

localities, have increased their debt load at a time in which debt

service is at an all-time low.

The American people are well aware of the fiscal crisis Washington faces on a national level. They are ready for Congress to cut

spending, and even President Obama has lauded recent spending

cuts championed by the House Republicans.

What is less known is the severe fiscal problem that some of our

States and municipal governments face. Already this year our Financial Services Subcommittee, under the leadership of Chairman

Patrick McHenry, has done a great service by highlighting problems created by some irresponsible spending. I thank Chairman

McHenry for his efforts.

The facts we have learned from the subcommittee are telling.

Currently, States face a combined budget shortfall of roughly $112

billion for fiscal year 2012, an amount equal to approximately onefifth of their budgets. That, if nothing is done, will pile on more

debt for the future.

The evidence why this has occurred is clear: since 1990, State

and local government spending has increased 70 percent faster

than inflation. When the recession hit, State and local tax revenues

simply no longer sustained that growth.

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Looming just around the corner, unfunded or underfunded pension liabilities pose a daunting threat to State municipal budgets.

This burdens taxpayers with an estimated $3 trillion in debt. I say

estimated because nobody knows the full exposure the taxpayers

have due to the fact that the bond markets are not transparent and

the reporting rules do not force adequate disclosure.

Additionally, as we have seen here, when we have talked about

the correct amounts to be withheld for our postal carriers, we find

that there is up to $61⁄2 billion of discrepancy between two opposing sides on this issue. Indeed, over the past 20 years, State and

local governments have promised to government workers that they

knew they could not keep in some cases, hoping that future wealth

would continue to propel them.

Today we have two Governors with us and we are pleased to welcome Wisconsin Governor Scott Walker and Vermont Governor

Peter Shumlin. They come from two very different States: one larger, one smaller; one in the midst of a tough downturn that may in

fact continue for a very long time as many of the core industries

that have created wealth begin to change, and that transition may

be long and painful. Vermont, on the other hand, a wonderful State

filled with a great deal of industry that may be facing challenges

today, but are likely to be slightly less systemic than what Wisconsin faces. This doesn’t change the fact that both Governors are

dealing with the issues of shortfalls in their own way, and today

we look forward to hearing how they are going to retain the viability of their State long after their terms have ended.

Unionized Federal workers don’t even have collective bargaining

rights. Governor Walker’s bold reforms seem reasonable to those of

us in Washington who understand that our retirement and health

care system at the Federal level is not subject to collective bargaining, but in fact it is based on a single system uniform throughout the Federal work force and not debatable as to withholding or

as to the benefits. That is not to say that Federal workers don’t

have a good program; they do. But their program has been based

on a long list of requests considered by Congress and funded.

So as we deal with Federal issues, hopefully we deal with State

issues who, in many cases, have less room to maneuver, are looking

for more room to maneuver, and believe that they can achieve it

through changes in their laws.

Last, the insolvency of Portugal, Italy, Ireland, Greece, and

Spain, most often called the PIGS, tells us that States within a

greater union can in fact be a challenge for the union. The independent countries of Europe that belong to the European Union are

more loosely configured than our own States. That means that if

we have insolvency in three, four, five of our States, we have a

greater challenge to our common Nation than does the European

Union. And yet the European Union has been constantly trying to

figure out ways to maintain these states within the European

Union, help them bail themselves out, and in fact insist that they

change policies that have gotten them into this problem.

We are not here today to intervene in the sovereign States that

are before us; we are here to understand what they are doing in

self-help.

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With that, I recognize the ranking member for his opening statement.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

I ask unanimous consent that the statement of the National Education Association, dated April 14, 2011, be admitted into the

record.

Chairman ISSA. Without objection, so ordered.

Mr. CUMMINGS. Thank you very much.

Mr. Chairman, I strongly support efforts to help States continue

their economic recovery and eliminate the budget shortfalls caused

by the most severe financial crisis since the Great Depression.

Many States have been forced to make significant cuts in their

budgets; trimming critical programs that help our Nation’s veterans, assist the developmentally disabled, supply health care services to the poor, and provide nursing home services to our seniors.

These are difficult decisions and I have great respect for our Governors who are able to work with governmental and nongovernmental entities to develop innovative ways to preserve as many

services as possible for their citizens, while making fiscally responsible choices.

However, I strongly oppose efforts to falsely blame middle-class

American workers for these current economic problems. We know

better than anybody else in this committee why those problems

came about. This recession was not caused by them. Working

America, firefighters, teachers, and nurses, and so many others,

who are, in the words of Theologian Swindell, so often unseen, unnoticed, unappreciated, and unapplauded, are not responsible for

the reckless actions of Wall Street which led to this crisis in the

first place.

I also strongly object to efforts by politicians who try to use the

current economic downturn to strip American workers of their

rights. Mr. Chairman, we are a country who has consistently increased rights, not taken them away. As a matter of fact, if it were

not for that principle, I would not be sitting here today, and the

women in this Congress would not be sitting here today; the right

to negotiate working conditions that are safe, the right to negotiate

due process protections against being fired arbitrarily, and the

right to negotiate fair pay for an honest day’s work.

Today’s hearing is a study in contrast. We are very fortunate to

have with us two State Governors, Governor Shumlin from

Vermont and Governor Walker from Wisconsin, and we are glad to

have them. Both face budget shortfalls this year. But they approached the rights of workers in drastically different ways. Governor Shumlin of Vermont faced a budget shortfall, ladies and gentlemen, of about $176 million for fiscal year 2012. He negotiated

with State employees, who accepted a 2-year 3 percent pay cut.

Vermont teachers also agreed to work three additional years before

retiring and to contribute more toward their pensions. And the

Vermont State Employees Association voted to increase their pension contribution by 1.3 percent over the next 5 years.

In addition to obtaining these concessions, Governor Shumlin

also did something else: he proposed spreading additional cuts

across various State agencies as well as raising additional revenue

through select surcharges and assessments. In other words, he deVerDate 17-JUN-2003 16:10 Oct 19, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\68361.TXT KATIE PsN: KATIE
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veloped a plan to spread out and share sacrifices across the State.

And we should note that those employees went along with it because they too wanted to strengthen their own State’s fiscal situation.

Governor Walker took a very different approach in Wisconsin. He faced a projected shortfall of $137 million in the current fiscal year.

Within days of the Governor’s announcing a budget proposal to address this shortfall, labor leaders in Wisconsin agreed to accept all

of his financial demands. They agreed to increase their pension

contributions more than twentyfold and they agreed to double their

share of the health insurance premiums.

But Governor Walker did not accept these concessions. Instead,

he went much further by attempting to strip government employees of their collective bargaining rights; he demanded numerous

provisions that had nothing to do with the State’s budget and had

no fiscal impact. For example, he wanted to require unions to hold

annual votes to continue representing their members and he wanted to prevent employees from paying union dues through their paychecks. Governor Walker refused to meet with union leaders and

he declared publicly that he would not negotiate with them.

One of the big questions we will have of Governor Walker today

is why did he not say yes to the unions when they agreed to meet

all of his financial demands. And on a broader level, what is motivating this extreme effort to dismantle the unions themselves? In

my opinion, it is shameful to play politics with American workers

and their families. These are real people, middle-class Americans

who are trying to put food on their table for their family, keep a

roof over their heads, educate their children, and plan for retirement that does not burden their loved ones. We should be helping

these workers, not attacking them, because they are the engine and

the author of the American recovery.

With that, Mr. Chairman, I yield back.

[The prepared statement of Hon. Elijah E. Cummings follows:]

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Chairman ISSA. I thank the gentleman.

The Chair now recognizes the distinguished gentleman, subcommittee chairman, Patrick McHenry, for an opening statement.

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you so much

for holding this hearing today and, Governor, thank you for being

here.

Over the past 2 months, Congressman Quigley, who is the ranking member of my subcommittee, we have held hearings on State

budgets and pensions, and their impact on the municipal bond

market. Two essential questions immediately stood out: first, what

is the true debt burden facing our States and municipalities, and,

second, what must be done to mitigate the immediate crisis and

put all forms of government back on a solvent, fiscal trajectory.

After holding hearings with scholars, State senators, rating agencies, and other parties about State budgets and pensions, we confirmed what leading economists are predicting and what we will

hear from the testimony today, that 2012 will be one of the most

difficult budget years for States and municipalities on record.

Forty-four States and the District of Columbia are now projecting

aggregate budget shortfalls totaling $112 billion for this year alone,

and it only gets worse from here on out.

If that wasn’t enough, there are unfunded pension liabilities up- wards of $3.2 trillion for States and $383 billion for local governments, some of which is kept off of States’ accounting books, representing trillions of dollars in shadow accounting. Today, some of

my colleagues on the other side of the aisle will use the words like

extreme, tax increases, and use those words repeatedly to describe

what is either happening in terms of cuts or what is necessary to

get out of this situation.

We are not facing a revenue problem, it is a spending problem.

But, as always, the numbers don’t lie. Since 1990, State and local

governments have increased spending by roughly 70 percent faster

than inflation. In addition to this unchecked reckless spending, the

looming burden of paying out trillions of dollars in lucrative public

pensions and health care benefits leaves State and local governments in dire straits.

I have stated before that there will be severe consequences if we

are dishonest about the fiscal obligations before us and refuse to

change course. The cost of inaction will be borne by the young

teachers who are told that their cash-strapped school districts can

no longer afford their retirement benefits because it must finance

the exorbitant benefits of others.

Many public servants like firefighters and policemen, faced with

the possibility that their vital jobs that they hold will no longer

provide a standard of living for their families will simply choose

another career. In the end, the people that we count on to teach

our children and to protect our homes and our families will realize

that their government has failed them and actively hurt their retirement security. We have an opportunity to change that.

Numerous States have seen the writing on the wall and decided

to take action. In recent years, at least 15 States passed legislation

reform some aspect of their pension system. For example, Governor

Mitch Daniels of Indiana successfully reformed collective bargaining, leading to more efficient and effective government. GovVerDate 17-JUN-2003 16:10 Oct 19, 2011 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\68361.TXT KATIE PsN: KATIE
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ernor Walker has boldly set out to push through similar initiatives

in Wisconsin. We have seen this in the national news.

Even in the face of extremely heated political attacks, Governor

Walker has shown that he understands and has a genuine commitment to reform and to prevent this fiscal calamity. The Governor’s

proposals were recently welcomed by the bond market and Moody’s

said that Governor Walker’s plan will have a positive effect on the

credit rating of his State. In the end, that will mean less cost and

less expense to his taxpayers in order to get lending.

Change is never easy. But if we wish to ensure an honest retirement for those teach our children or protect our families, and leave

the next generation a country as economically vibrant as the one

that we inherited, we must be serious about the problems we face.

It is our responsibility to be fair to our current retirees and honor

our commitment to them, while at the same time not punishing the

next generation of America for today’s free spending ways. It is

only possible if we take the necessary steps before it is too late. It

is not too late. We still have the opportunity for change, and that

is what this discussion here today is about.

Moreover, in light of the hearings that we have had and the discussion we will hear today, I think it is important that taxpayers

and the market generally have the transparency necessary to understand the fiscal situation States are in. Taxpayers deserve it,

those that are paying into the pensions deserve it, and the American people broadly deserve that.

Thank you, Mr. Chairman, for holding this hearing and thank

you for your leadership. I yield back.

Chairman ISSA. I thank the gentleman and I thank him for what

his subcommittee on a bipartisan basis has been doing on this matter.

We now recognize his partner, the ranking member of the Subcommittee on TARP, Financial Services, and Bailouts of Public and

Private Programs, Mr. Quigley, for his opening statement.

Mr. QUIGLEY. Thank you, Mr. Chairman. I would like to thank

you for convening today’s third hearing on State and municipal

debt. I would like to thank the chairman of the subcommittee for

his efforts in those first two committee meetings. I would also like

to thank our six witnesses for contributing their time and expertise

today.

Let me begin by saying in the end I do think we have a revenue

problem, and the revenue problem at the local level was because

of the economic downturn. It shrunk local governments’ revenue

dramatically, cities and States alike. So it was a revenue problem.

Now, that doesn’t mean that you should raise taxes, because I

understand where you are coming from, but raising taxes during

a recession is a bad idea. But we have to recognize that in the end

this was in large part a revenue problem.

So having addressed that, the other things we will learn in these

hearings is that many States had these big challenges, and you

don’t have to tell me; I come from Illinois. Illinois failed to heed

the Old Testament story that advised that one should save during

the seven good years to survive during the seven lean years. While

Illinois’s current administration didn’t dig the hole that it got, it

has to move forward on substantive fiscal reform.

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Illinois and other States in similar situations owe it to their taxpayers to fix their budget. If States like Illinois, New Jersey, and

California don’t get serious about reform, they will never be able

to keep the basic promises they have made. Reform should be emphasizing, reinventing, streamlining government and adapting to

changing times, but reform should not demonize public sector

workers who have dedicated their careers to government service.

While States have the right to make their own policy, I strongly

support collective bargaining rights for public sector workers, but

recognize that we have to work together, collectively, to solve these

problems.

Collective bargaining rights didn’t cause the recession, and curtailing them won’t fix State budget deficits. What will fix State

budget deficits are common sense reforms that restore budgets

through a sustainable path. Consider public sector collective bargaining facts and figures. A simple calculation shows that States

that allow public sector collective bargaining have an average projected 2012 deficit of 14 percent relative to their budget. Fourteen

percent is big, but States that forbid public sector collective bargaining have projected deficits at 161⁄2 percent. Either way you

spin it, ending collective bargaining rights won’t reduce budget

deficits.

Workers have to play a role to meet these fiscal realities. It is

obvious we have to reduce deficits and long-term debt, but we

shouldn’t take advantage of the economic downturn to achieve longstanding ideological goals. Public sector should continue to have

collective bargaining rights and we need to work together to

achieve responsible reform.

Soon I will be releasing Part 2 of a series of reports on reinventing our Federal budget. This reform will recommend over a

trillion dollars in savings over the next 10 years. This report builds

on Part 1 I released in November, but also on a series of reports

I released as a Cook County commissioner. I bring this up because

I remember how frustrating it was to try to achieve substantive reform at the local level. The truth is these same frustrations are

present here in Washington. But we can’t let those frustrations get

the better of us. States like Illinois need fiscal reform. We need to

streamline, consolidate, and reinvent government not because it is

unimportant, but because its mission is so important; it is where

the wheels hit the street. And if we can remember the true heroes

of 9/11 were civil service workers. That is why we should restore

these local governments to sustainability rather than tear them

down.

Thank you, Mr. Chairman, and I yield back.

[The prepared statement of Hon. Mike Quigley follows:]

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Chairman ISSA. I thank the gentleman.

Members may have 7 legislative days in order to submit additional statements and extraneous material.

We would now like to recognize our first panel of witnesses. No

one on this side of the dais, currently, can introduce them as well

as their own members, so with that I would call on Chairman Jim

Sensenbrenner to introduce his Governor.

Mr. SENSENBRENNER. Thank you very much, Mr. Chairman. It is

my pleasure and honor today to introduce my friend and constituent, Governor Scott Walker. I first got acquainted with Scott

about 20 years ago when he was starting to get active in Republican politics. He was elected 17 years ago to the State Assembly

and in 2002 he won a recall election for chief executive or county

executive of Milwaukee County. He was re-elected to two full terms

as a Republican in one of the most Democratic counties in the

country, and his political success has been based upon the fact that

he tells people where he stands and, once elected, implements that.

He faced some very tough times in Milwaukee County as a result

of an outrageous pension scandal that his predecessor was at the

heart of. He was able to pass nine county budgets or proposed nine

county budgets without a tax increase, and this background allowed him to be elected as the 45th Governor of Wisconsin last fall.

Very few people here, I think, knew who Scott Walker was until

the last 2 months or so. However, those of us who have known

Scott Walker and his commitment to principle were really not surprised that the proposals that he made to close not $137 million

budget deficit, but a $3.6 billion budget deficit through the end of

the next budget period.

So, again, I am sure that you will find Governor Walker as interesting as we in Wisconsin have. He is a very polarizing figure, but

those of us who love him in Wisconsin really thank him for the job

that he has done.

Chairman ISSA. I thank the gentleman.

With all the people that Governor Shumlin could have had introduce him, he chose Peter Welch. The gentleman is recognized.

Mr. WELCH. Thank you, Mr. Chairman, Mr. Ranking Member,

members of the committee that I proudly serve on. It is my pleasure to introduce Governor Peter Shumlin of Vermont.

First of all, a couple things about Peter. He is a private sector

person. He and his brother established and expanded a very successful private business, Putney Student Travel, in Southern

Vermont. He has been on the front line of creating jobs, of having

to pay good wages and good benefits, and deal with the practical

realities of keeping a business going day in and day out, expanding

it, growing it, and being an employer.

He also served in our citizen legislature in Vermont for many

years, first in the House of Representatives and then for several

terms in the State senate, and Peter, as the president pro tem of

the State senate, that is our senate leader, served more years as

senate president than any other Vermonter in history, and that is

10 years.

So he comes to his job with legislative experience, with private

sector experience, with the obligation to pay bills and make the

trains run on time. He is now serving as Governor of Vermont,

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after being elected in this past election. Just to give you a sense

of how Vermont operates, he won a primary with four other Democrats, and there were a recount because his original margin of victory was about 200 votes. During the recount, Peter and the four

other candidates, rented a van, and while we were awaiting the

outcome of who won, went on a unity tour around the State of

Vermont talking together, rather than fighting each other during

the recount. Every single member of five excellent candidates all

said we trust our town clerks; just let them do the count and we

will accept the result.

He also comes to the job with the benefit of the tremendous history that we in Vermont are proud of, a bipartisan tradition, and

it embraces really two things: No. 1, we fight hard in Vermont, Republicans and Democrats, just like we do here, but in Vermont

Democrats think that Republicans usually have a merit to their argument and Republicans think Democrats have something to say,

and we actually do our best to listen to each other because both

sides have enough humility to appreciate that, in fact, there is

truth on both sides and we have to come together for the good of

the State.

Just a little bit of background, we had a Governor Snelling, Richard Snelling, very respected and revered. We had a downturn in

the 1980’s. He did something with the Democratic Speaker of the

House to try to adjust the fiscal situation, because we pay our bills

in Vermont. We don’t have a balance budget amendment, but we

are cheap and we pay our bills, we are frugal. The Democrats

agreed to cut programs that were really important to them, the

Governor agreed to a temporary surtax because we needed some

revenues. It worked out; we came into balance. The taxes went

down and we were able to support our programs.

We then had Governor Dean in good times. He cut taxes. He is

a Democrat. And when he did that, he implemented some tough

budget reforms to make sure we didn’t spend just because we had

a surplus. We sent money back to the taxpayer and we put into

place budget controls.

Peter Shumlin is carrying on that tradition. When we got into a

fiscal situation, Governor Douglas, his predecessor, Republican,

worked with the unions and said, hey, we have to share the sacrifice here. They negotiated pay cuts; they started looking at benefits. They sat down at the table and worked it out and there was

a sense of common purpose, shared sacrifice, and that is the second

approach that has been embodied in Vermont. If there is pain that

has to be sustained, we have to share that pain together, and what

it has done is helped us make progress even in tough times.

Peter, just to give you an idea, as senate president, when we had

a large Democratic majority, he did something that you would get

mentally tested around here if you did it; he appointed Republicans

to chair major committees. So in Vermont the two principles are

listen to each other, there is truth on both sides, and work together

and share sacrifice when sacrifice is required.

So it is my pleasure to introduce Governor Peter Shumlin of

Vermont.

Chairman ISSA. I thank the gentleman.

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Pursuant to committee rules, all witnesses will be sworn in.

Would you please rise to take the oath and raise your right hands?

[Witnesses sworn.]

Chairman ISSA. Let the record reflect that all witnesses answered in the affirmative.

Please be seated.

Gentlemen, we have Congressmen who come before us, Senators

who come before us, and Governors come before us. Governors are

always the best witnesses; they understand that the 5-minutes allows for the Q&A, that in fact your entire testimony will be placed

in the record. To help you with this, you will see the typical green,

yellow, and red lights. As my predecessor on the committee said,

in all 50 States we know what red means. So, with that, I recognize—we didn’t do a coin flip, so who wants to go first? Governor

Walker.

STATEMENTS OF SCOTT WALKER, GOVERNOR, STATE OF WISCONSIN; AND PETER SHUMLIN, GOVERNOR, STATE OF

VERMONT

STATEMENT OF SCOTT WALKER

Governor WALKER. Thank you, Mr. Chairman, distinguished

members of the committee, visiting Members as well. Governor, it

is good to be with you here as well; we got to know each other a

little bit after the elections with the new training for new Governors. It is an honor to be here today.

As was mentioned by several in the testimony, we are not alone

in Wisconsin; there are 44 different States and the District of Columbia that are facing deficits. In fact, in total, over $111 billion

in total deficits ranging from 2 to 45 percent of their budgets. In

our case, in Wisconsin, for the next biennial budget, which starts

July 1st, we face a $3.6 billion budget deficit.

Now, Governors across the country, Democrat and Republican

alike, are facing that challenge; in many cases, proposals that we

have seen from one end of the country to the other, Governors cutting, in many cases they are cutting billions of dollars from aid to

local government, school districts and others; and in turn what it

is forcing in many of those States is one of two things, either massive layoffs or massive property tax increases, and in many cases,

sadly, some of both.

In Wisconsin we have a different option, a progressive, in the

best sense of the word, a progressive option. For us, we are giving

State and local governments the tools they need not just to balance

this year or for the next 2 years, but for generations to come; and

that is important. Now, some here and other places around the

country may say that is a bold political move, but I would argue

it is a very modest request. What we are asking from government

employees like myself is a 5.8 percent contribution for our pension

and a 12.6 percent contribution for health care. That is protecting

the middle class. That protects middle-class jobs and middle-class

taxpayers. And if you ask middle-class workers in my State, they

will tell you they think what we are offering is pretty reasonable.

I will give you a good example; I don’t have to go too far for that.

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tender; his wife works for a department store. They have two beautiful kids; one just turned 4 the other day. They are a typical middle-class family. When this debate first started, he said to me, you

know, I pay some $800 a month for my health insurance premiums

and the little bit I can set aside for my 401K. I would love to have

a deal. I would love to have a deal like what you are offering. I

hear that all across my State. When I go to plants and factories

and small businesses and farms, they say we would love to have

a deal like that because, on average, our middle-class taxpayers are

paying about 20 percent of their health insurance premiums.

In fact, you all know this with Federal employees. Federal employees pay, on average 28 percent of their health insurance premiums. As the chairman alluded to, Federal employees, for the

most part, do not have collective bargaining rights for benefits and

ultimately for salary. Makes me wonder why the protestors are in

Madison and Columbia, not right here in Washington, DC. You

have to look at the facts; it is very clear out there. What we are

offering is more generous than what you offer Federal Government

employees, and yet the outrage is not here, it is in our State capital.

More important, though, than just the fiscal impact, because what we are talking about here ultimately saves $1.7 billion in

State and local government spending over the next 2 years in our

biennial budget. It is not the only way we are balancing our budget, but it is a piece of that. The other important element to remember is this makes government work better.

I can think of no better example than a young woman by the

name of Megan Sampson, who a year ago was named the Outstanding Teacher of the Year, a teacher in the Milwaukee public

school system at the time, and a week later she got a pink slip. She

was one of the teachers laid off. Why? Because her collective bargaining agreement required a contract that protected a system that

pays more than $100,000 in compensation, total compensation per

teacher, with no contribution for health care, and ultimately has a

system based on seniority.

Our reforms allows schools and other local governments to hire

and fire based on performance and merit, paying for performance

so we put our best teachers and our best workers up front. That

ultimately is going to make things work better. It worked in Indiana, when Mitch Daniels did this 6 years ago. We have seen the

government more efficient, more effective, more accountable to the

public; and ultimately great workers were rewarded in that State

and continue to be rewarded today.

The last thing I would just tell you is this ultimately is good for

the economy and our State as well because, in the end, investors

want to look at a State where the State and local government is

stable. We are showing that Wisconsin is open for business. And

the thing, I guess, the most important point I would bring up to

you today is when you think about what we are doing, we are really making a commitment to the future. I have two high school sons;

in fact, some of their classmates are here today from Wauwatosa

East High School. Our proposals are about making a commitment

to the future so our children don’t face even more dire consequences than what we face today.

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For more than 200 years, this country has been based on leadership, where leaders cared more about their children and their

grandchildren than they did about themselves. It is time here in

Wisconsin and across this country. We have leaders again who

worry more about the next generation than the next election, and

that is exactly what we are doing.

Thank you, Mr. Chairman.

[The prepared statement of Governor Walker follows:]

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Chairman ISSA. Thank you, Governor.

Governor Shumlin.

STATEMENT OF PETER SHUMLIN

Governor SHUMLIN. Thank you so much, Chairman Issa, Ranking

Member Cummings. Thank you so much for this invitation today,

to all members of the Oversight and Reform Committee, and particular thanks to my friend and Congressman, Peter Welch, who

does an extraordinary job for us down here in Washington. Thanks

for that warm welcome.

It is great to be here also with Governor Walker. As Governor

Walker mentioned, we met at the baby Governors school out in Colorado, and I don’t want to give you any ideas, any of you Congress

people running for Governor, but if you do, you get to go to school.

We had a wonderful dinner together, Governor Walker and myself

and his wonderful wife, and we share common challenges. We are

among the biggest class of new Governors in the history of America

and we share a very challenging job. In fact, I said to Governor

Walker earlier, I said, if they had told us at baby Governors school

the message that we were taking over, we might have rethought

it, but it was too late. But we are dealing with some really tough

economic times, as you know. And to help make Governor Walker’s

trip to Washington more valuable, I brought a little bit of Vermont

maple syrup down, Governor. I just want to make clear that we are

the No. 1 maple producer in the country, Governor Walker is No.

4, and our syrup, it doesn’t come any better.

Chairman ISSA. Governor, how did you get that through TSA?

Governor SHUMLIN. That is one of the advantages of being Governor. Governor Walker can tell you about this. No more TSA. That

is how I brought the syrup down.

We are both facing the first 100 days, we have similar challenges, creating jobs and raising incomes of those that are earning

less money in Vermont or, on average, the same money as they

were earning 10 years ago. That is both of our challenges in our

respective States and the other Governors share it.

Mr. Chair, I just want to directly address the question of what

is causing this fiscal crisis that both Governor Walker and I find

ourselves in. We know it is a result of the greatest recession in

American history. The result for us is declining revenues and expanding expenses as we face higher unemployment rates, higher

service calls, and the rest, costs and the rests. That is the challenge.

Now, without getting into how we got here, because I know that

has been debated and we will save that debate for another day, I

simply want to talk a little bit about what our challenge is as Governors to create jobs, economic opportunities, and balance our

budgets. And when I look at it, I don’t start with collective bargaining and I don’t start with my public pensions; I start with the

true costs. In Vermont, and this is true of most of the States in the

country, health care is my biggest rising cost. I have watched

health care costs in Vermont double over the last decade, from $21⁄2

billion to $5 billion a year. In 2015 my banking insurance commissioner tells me Vermonters will be spending an additional $1.6 billion on health care, and that is the biggest cost in my State budget.

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Now, what does that mean in real dollars? It means $2,500 by 2015, that is $1.6 billion, $2,500 out of every Vermonter’s pocket,

from those that were born yesterday to those at the other end of

life, in a State where, on average, our people are making the same

wages they were making 10 years ago. So I am going where the

money is for both the State and the people of my State to grow jobs

and economic opportunities. We are trying to get health care costs

under control.

The second driver, believe it or not, is corrections. Our corrections budget has doubled in the last decade. Other Governors are

facing similar challenges. So we are trying to go where the money

is.

Now, I just want to talk a little about our experience with State

pension and retiree health care obligations for State employees, because I think it really matters in this debate. What we have

learned in this area is that there are steps that you can take to

significantly reduce the cost to taxpayers without undermining traditional defined benefit plants, which most objective parties agree

provide better retirement security, serve to retain quality employees, and are more efficient than a defined contribution plan. That

is what we have learned.

How did we get there and how did we work together to get the

job done? What we did—and I was then president of the senate

with a Republican Governor and a Republican speaker—is we

brought the unions together and we understood that it was going

to be an example of shared sacrifice, and so did our State employees, as Congressman Welch suggested.

What did we get? In those discussions, the lesson we learned was

that we get more with maple syrup than we do with vinegar. We

brought them to the table, we talked it out, and here is the result:

shared sacrifice, a 3 to 5 percent pay cut for all State employees,

depending upon your range of salary over a 2-year period with no

step increases; two, we got higher retirement contributions from

our State employees; three, we raised retirement ages for State employees to help us with the problem; four, we reduced health care

benefits to our State employees and some of our teachers; and, five,

what this resulted in was a 25 percent reduction in our annual

payment to pension funds and still have them fully funded.

So the point I am simply trying to make is you can get this job

done, you can balance your budget, you can create jobs in your

State without taking on the basic right of collective bargaining.

Now, the reason I feel so strongly about that is I asked the question, Who got us into this mess and how do we deal with it? I can

tell you, from my perspective as Governor, we just came through

the toughest winter in about 20 years; lots of snow, lots of ice. Our

plow trucks were out almost every day. We have eaten through our

plowing budgets.

I have to tell you, I went out with a plow truck, as I am sure

Governor Walker has done. We get out as Governors. And when I

got behind the windshield of that plow truck in a driving snowstorm, with my plow truck driver, who was working seven or eight

different levers with a 14-foot plow in front of that truck and a

tractor trailer truck passing him on the right and some yahoo on

the left, I have to tell you, in a full whiteout, working a 12 to 14-

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hour day for about $14 an hour, that plow truck driver didn’t get

us into this mess. When I go and visit schools and I see the challenges our kids are dealing with, they didn’t get us into this mess.

My public employees didn’t get us here. We have asked them to

share the sacrifice in getting us out, but it doesn’t mean that we

take away collective bargaining, which is what made the middle

class in America strong and the folks that are under assault in this

recession.

So, in closing, Mr. Chair, I will simply say this: we have found,

as I mentioned, that you can bring folks together around a table,

compromise, get the job done, balance your budget, create jobs, be

fiscally responsible; but you don’t have to take on the basic principle of collective bargaining. You don’t take on your firefighters,

you don’t take on your police officers, you don’t take on your teachers; and you don’t take on your hardworking employees; you work

together with them with maple syrup, not vinegar. It works. Thank

you.

[Applause.]

[The prepared statement of Governor Shumlin follows:]

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Chairman ISSA. Thank you, Governor.

I will now recognize myself for the first round of questions.

Governor, the sign behind me, we don’t normally point to the

sign, it is just the title here today, but the last part where it says

choice or necessity, the cuts you made, in cooperation with your

various union groups of public workers, because probably, like most

States, 80 percent of what you spend, you spend directly or indirectly on the people who work for the government. Was it a choice,

was it a necessity to in fact find a way to provide essential services

for less money and not go into deficit spending?

Governor SHUMLIN. It was a necessity in the respect that while

we don’t have a balance budget amendment, as Congressman

Welch suggested, we have to balance our budgets to get the job

done. So we made the choices that we do in Vermont because we

really like our AAA bond rating. I am a business person. We want

to be fiscally responsible, but we understand that we can’t take

care of the most vulnerable unless we balance our budget.

Chairman ISSA. Good.

I would like to ask Governor Walker the same question. We are

rather in love with the title today, so why don’t we get that answer

out?

Governor WALKER. Well, I think in a rhetorical sense it certainly

is necessary. But we have seen in the past, in my State’s history,

prior to us making these critical decisions right now, for many it

was a choice, and the reason they failed to make the right choice

is why we are here today, and that includes Democrats and Republicans before. For many, many years lawmakers and Governors in

our State have failed to make the right choice, deferred tough decisions to the future. They raided segregated funds; they delayed

payments; they used one-time Federal stimulus aid 2 years ago to

balance their budget, and that is, along with the meltdown of the

economy, largely why we and other States, I think, are facing

major budget crises.

Chairman ISSA. Thank you, Governor. One of the reasons we titled today’s hearing that way, knowing you would be here, is I happen to be from California, and we too, in our State, under Republicans and Democratic Governors, have been increasing debt while

claiming to have balanced the budget. And I am an old businessman like Governor Shumlin. If your assets aren’t, per se, going up

and your liabilities are going up, you don’t claim you are in balance; and that is a problem that I have seen in many States, and

particularly my own.

Governor Shumlin, you mentioned one thing in your opening

statement that was very interesting. You said a defined benefits

plan is more efficient. I would be interested to see what efficiency

do you get by having a plan which promises something in the future that no one can be sure of? Actuarials try, but obviously they

often fail because you see these large adjustments. What is efficient

about that versus knowing that an amount of money is going into

a fund and that amount of money will be invested fairly and, in

fact, will be available as it yields? Which one is more efficient from

a standpoint of predictability?

And I am not talking about 401Ks or individual, I am saying, for

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tractor, you can’t control a contractor that hires you today versus

tomorrow. So even though you try to be defined benefits, you are

a defined contribution plan because you only get in the year in

which you are employed as an electrical contractor from that company that is employing you, you only get that much money; and the

next year you can’t claw back the way your employees can claw

back.

So why did you say that it was efficient? The efficiency question

kind of lost me.

Governor SHUMLIN. Well, it is efficient for two reasons. The first

is it gives the employee a guaranteed retirement plan. And I think

there has been tremendous misunderstanding of that around the

country——

Chairman ISSA. OK. And the second?

Governor SHUMLIN [continuing]. Which is that in Vermont, as an

example, our average pension——

Chairman ISSA. No, I understand why it is more desirable for the

recipient.

Governor SHUMLIN. Right.

Chairman ISSA. Here in the Federal Government we have a defined benefits plan.

Governor SHUMLIN. Right. The efficiency from my

perspective——

Chairman ISSA. Yes.

Governor SHUMLIN [continuing]. As Governor, is simply that the

returns for our investment, not taking a picture of it during the

worst recession, but over time—and unlike General Motors, you

don’t go bankrupt, States don’t go bankrupt; they never have and

I believe bankruptcy has been greatly exaggerated——

Chairman ISSA. Well, it is not within the Constitution.

Governor SHUMLIN. Thank you.

Chairman ISSA. It gives you a choice.

Governor SHUMLIN. Therefore, we are held to a slightly different

standard than a General Motors retirement plan, the point being

the average return for us has been around 81⁄2 percent, and it gives

us the ability to efficiently deliver a predictable defined benefit for

an employee who is often working for less than you would get paid

for their lifetime——

Chairman ISSA. OK, I think I have your answer. I would like to

get Governor Walker, along that line, why is that more efficient

than knowing the amount that you give in a given year under the

budget is the amount, and even if you invest it and you try to make

the same returns, ultimately the State knows that the next year

they are going to give a similar percentage? And like I say, the

Federal Government has defined benefits, but why is that more efficient versus perhaps making sure that you budget without these

ups and downs that come when the yield doesn’t occur?

Governor WALKER. Well, I think when you look at benefits, be

they in the public or the private sector, defined contribution is ultimately more efficient. That is not what I am advocating. In our

case, just like you mentioned with the Federal Government, just

like Vermont, we have a defined benefit as well, particularly for retirement with a pension. Although I think it is important to note

what we are asking for is not changing the benefit itself; we are

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asking for people, again, myself included, to pay more as a contribution for the cost of that.

Representative Quigley talked in his opening statements about

the State of Illinois. I think that is an important distinction. In Illinois, earlier this year, Governor Quinn and the legislature raised

taxes on individuals and on businesses in a supposed attempt to

balance their budget. Yet, today they have a pension system that

is half funded.

We went the opposite way; we lowered the tax burden on job creators, we made it easier to do business in the State, we show that

Wisconsin is open for business, and we have a pension system that

is essentially fully funded. That is important because you get to the

heart of this, that is why Illinois is in that category of California

and others, because they failed to make the tough decisions to get

their finances under control, and that is going to affect their economy.

Chairman ISSA. Thank you, Governor. As I recognize the ranking

member, I just want to make one thing clear for the record. The

Federal Government currently, for regular Federal workers, 28 percent of what goes into our health care benefits are paid for by the

Federal worker. In the case of the Post Office, it has historically

been 20 percent, but one of the major unions has renegotiated it

to 25 percent. That is what is happening here centrally in Washington.

I recognize the ranking member.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

You know, the thing that I think stands out here is the fact that,

and I say this to both Governors, that sometimes we may lose sight

of and that is that, just like the postal workers, we had them before us a few days ago, they were able to shed 100,000 employees

out of 700,000 in 3 years, and one of the things that they said is

that they are Americans too, and they don’t mind sacrificing.

And speaking of sacrificing, Governor Walker, when I listened to

your testimony, you made it sound as if you had made very reasonable offers to the unions, but that they have been unreasonable by

rejecting your offers. For example, you asked employees to contribute 5.8 percent for pension and 12.6 percent for health insurance premiums. You went on to say that most workers outside of

government would love our proposal. You talked about your brothers and, like many other workers in our State, he would love a deal

like the one I offered the government workers.

The thing that I did not hear, though, was that the unions

agreed to double their share of the health insurance premiums and

to increase their contributions to the pension system. That is not

true? Well, what did they do? I want to hear what you have to say

because I am reading an article from your local paper and I am

just wondering what——

Governor WALKER. Sure. I will answer the question, Representative. Two of the statewide union leaders made a statement a week

into the debate about suggesting that they thought they could accept that. In the weeks that followed, up until the bill was signed

into law, nearly every local union that settled the contract settled

it without a pension or a health care contribution. To me, actions

speak louder than words. Those two statewide leaders could not

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speak for the unions and nearly 1,000 municipalities, 424 school

districts and 72 counties. They are the ones who decide at the local

level, and up until the bill was signed into law, they were not following the actions of their leaders. To me, actions spoke louder

than words.

The other key difference here is we got into this trouble, and I

acknowledge both parties in our State, Republicans and Democrats

drove us into this by failing to make tough decisions. If we have

a short-term fix, we just push the problem off to the future. What

we give our permanent, long-term solutions the tools that State

and local governments need, they can only get it if you make those

sorts of changes. And in terms of workplace protections, Wisconsin

has the strongest civil service protections in the country. That was

passed more than a century ago. Those remain even with this new

law in place. That protects grievances, that protects civil service

protections in both hiring and firing decisions. All those protections

remain even after these changes, Mr. Cummings.

Mr. CUMMINGS. Well, I am looking at an article from the Wisconsin Journal’s Sentinel. I guess that is the local paper?

Governor WALKER. One of them.

Mr. CUMMINGS. In this article, Democrat State Senator Jon

Erpenbach makes crystal clear that all the State and local public

employees, including teachers, have agreed to the financial aspects

of your proposal, and all they were asking for is that you not strip

them of their collective bargaining rights. That is not accurate?

Governor WALKER. Again, that was the statement made by the

statewide leaders. The actions they took after those statements,

though, contradict those statements. If they agreed to the 5 and the

12, you would have seen in Janesville and La Crosse and all the

other communities that settled contracts that they would have put

their money where their mouth is and actually did that. That did

not happen until after the bill was signed into law. So I think you

are right about the story accurately explains what was proposed at

the time, but in terms of what they actually did, their actions did

not coincide with the statements of their statewide union leaders.

Mr. CUMMINGS. Did you ever consider dropping your collective

bargaining demands? Did you ever consider that?

Governor WALKER. For us, to me, I was a county elected official

for 8 years. We talk about shared sacrifice? Because my county

faced a crisis, I gave, over those 8 years, $370,000 of my personal

salary back. I made a personal sacrifice, just like I am going to pay

for more for pension and more for health care as Governor of the

State of Wisconsin. During that time I repeatedly met with my

unions and asked them to make modest changes, modest changes

in pension and health care contributions. In fact, 1 year I even

asked them to consider a couple 35-hour work weeks in order to

avoid massive layoffs, and every time the response I got from

AFSCME was go ahead, lay four or 500 people off, we don’t care.

To me, that is why, when I talk about protecting the middle class,

I am not just talking about middle-class taxpayers outside of government. Those middle-class workers that would have been laid off

are people I represent as well, just like I do in the State of Wisconsin.

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If I have to choose between massive layoffs or making these sorts

of reforms, I would much rather stand on the side of protecting

those middle-class jobs and protecting middle-class taxpayers, because, remember, the vast majority of people in the middle class in

my State and across the country have been paying the bill for the

expansive government year after year after year, and, to me, those

are the people I am standing up to protect.

So you will never hear me speak an ill word throughout this entire debate, no matter what others may say out there, I have never

said an ill word of any of the decent public servants who work, the

300,000 decent people in my State who work for both State and

local government. I have great respect for them. I just know that

in this together we have to make changes to make sure their jobs

are protected into the future.

Mr. CUMMINGS. Thank you.

Chairman ISSA. I thank the gentleman.

The Chair now recognizes the chairman of the subcommittee, Mr.

McHenry, for his round of questioning.

Mr. MCHENRY. Thank you, Mr. Chairman.

Governor Walker, I certainly appreciate your testimony. Governor Shumlin, thank you so much as well.

There is this discussion of tough choices. Now, when we are looking at what the government does, there are services that municipalities and States render to their people as a matter of collection

of their tax revenue, whether it is local governments providing police and protection through the police or making sure that if somebody’s house is on fire, you have a fireman show up. So there are

tough choices between the services that the government provides

and the obligations it has.

So, Governor Walker, can you discuss this challenge for a Governor who walks into a very tough budget situation, the challenge

between do you continue to provide these services people expect,

taxpayers expect, or do you continue providing a benefit for a select

few, meaning you have a pension obligation, you have health care

benefits and these types of things that the people that are getting

the benefit are largely not paying to receive, and then you have the

taxpayers who are footing the bill for that? Can you discuss that

challenge?

Governor WALKER. Sure. Again, I will tell you not only as a Governor for the last couple months, for as a county official for 8 years

prior to that, for us, we saw the distinction. We saw the challenge

when, under the environment before we passed this bill into law,

for local governments in particular, we were forced with the sacrifice like I faced or the problem we faced where, when we had a

tough budget time, and we had it long before 2008 because of the

pension scandal I inherited back in 2002, so we were dealing with

this ahead of the curve even before the economic meltdown. When

we tried to make, as I mentioned before, I think, some very reasonable changes when it came to what us, as government employees,

paid for things like pension and health care, even some other adjustments temporarily as part of the work week, we did that for

two reasons: one, to try and protect as many jobs as possible and,

two, in turn, because those jobs provide services, to try and protect

core services for the people we serve. That is essentially the impeVerDate 17-JUN-2003 16:10 Oct 19, 2011 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\68361.TXT KATIE PsN: KATIE
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tus for me when I looked at the budget crisis we were facing going

into the next 2 year cycle of $3.6 billion. I knew we had to make

a fundamental change if we weren’t going to go on the path that

many other Governors across the country are, Democrat and Republican alike, where they are cutting billions of dollars from

schools, from university systems, from local governments and other

areas that affect all the things you mentioned.

And instead they are saying, OK, there are the cuts, now you either make it up through massive layoffs or you make it up through

massive property tax increases. I said in my State I can’t afford to

have anybody, either in the public or the private sector, any more

massive layoffs; I need more people working. We are changing the

business climate. In fact, many of the issues Republican and Democrats alike, we brought together to pass legislation that made us

one of the most proactive, pro-job agendas in the country. We had

to do all that if we want to protect jobs.

By the same token, we know one of the other things that would

cut down that recovery would be a massive tax increase. We saw

it 2 years ago when my predecessor raised taxes on corporations

and on individuals; we saw the jobs leave, we saw the exodus. We

want those people to come back.

Mr. MCHENRY. And I understand competitiveness, especially in

the Midwest, in terms of job creation, so there is competition on tax

rates, obviously, right?

Governor WALKER. Absolutely. We love the fact that while our

corporate tax rate is 7.9 percent, the effective tax rate in Illinois

is now 91⁄2 percent. We love that distinction because we want more

people to come up to Wisconsin.

Mr. MCHENRY. Well, thank you. The other question I have is as

opposed to a private sector pension, where those that are receiving

the pension benefit are the ones that are affected by the changes,

they are the only ones really affected, the difference with that and

public sector pensions is that we, as taxpayers, have to foot that

bill. So it is not simply a lie perpetrated to the recipient of the pension, saying perhaps too rosy a scenario on return on investment

or underfunding these pensions, so on and so forth, it is also a lie

to those taxpayers that have to foot the bill for those underfunded

pensions or less than funded pensions.

So my question to you, Governor Walker, is do you believe that

there is sufficient transparency and disclosure with public sector

pensions today?

Governor WALKER. Oh, I think at both the State and local level,

as well, there needs to be more transparency. One of the things we

are the most proud about this budget is not only that we balanced

the $3.6 billion deficit, but the fact that 2 years ago we had the

largest structural deficit in State history. In my budget I present

at the beginning of March to the State legislature, we reduced the

structural deficit by more than $2 billion, a 90 percent reduction.

It is where Moody’s pointed out that they called it credit positive.

When is the last time you heard anything called credit positive related to a government budget? They called it credit positive because we finally took control of what we should have been doing

for years, and weren’t from both political parties. That is incredibly

positive. But the more people know about it, right now, actuaries

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and a lot of others pay attention to pensions and retirement systems. All of us should be because that is just deferring, in many

cases it has been about deferring the problem to the next generation. We can’t do that anymore.

Mr. MCHENRY. Thank you. I know my time has expired, but certainly those that are arguing now about public sector pensions, you

have those that are saying these pensions are underfunded and it

is bad, those are the optimists. Those that look at the pension system and say this is a calamity are the other side of the coin. No

one is saying that public sector pensions are too well funded or

even sufficiently funded. So thank you for your——

Governor WALKER. Well, and the one thing important to remember, I mentioned the Illinois-Wisconsin distinction, not only do they

half fund it, but you have the speaker of the general assembly, a

Democrat, a long-time union ally, spoke a month ago about the possibility of reducing the pension benefit itself. That is what happens

when you don’t take these issues seriously. That is not a Republican or Democrat issue; this is someone who has been a stalwart

defender of unions who is now talking about, in Illinois the prospect of reducing the benefit. That, to me, would be unacceptable.

We made a promise to our public servants about what the retirement benefits were going to be. We should protect that no matter

what party we are in; we just have to fix it in the way in.

Chairman ISSA. Thank you, Governor.

We now recognize the former chairman of the full committee, Mr.

Towns, for 5 minutes.

Mr. TOWNS. Thank you very much, Mr. Chairman.

Governor Walker, why do people in general, I have talked to people from your State, people just around the Nation, feel that your

focus is on helping the corporations and basically the wealthy at

the expense of the middle class and the poor? Why would they have

that perception of you?

Governor WALKER. It would be erroneous. Maybe it is because

they are watching some of the TV ads that groups from Washington played in the State of Wisconsin, because what we have

done in the first month, first 2 months almost, Democrats voted for

many of the measures we pushed through that create a better business environment in our State. Even the tax cuts we put in place

were things like removing the State tax and health savings accounts, which isn’t about corporations; it is about small businesses,

it is about family farmers, it is about sole proprietorships. The incentives we put in for job creation were targeted specifically for

jobs. So it is ultimately about the workers when a job is created

and there is an incentive to do that.

The other things we did in our legislative package were all

things that were about making it easier to do business in the State

of Wisconsin. And in our budget the things that we are doing are

about protecting jobs and protecting the middle class.

Mr. TOWNS. When you say make it easy, what do you mean by

that, giving tax breaks to the big businesses?

Governor WALKER. No, we don’t give tax breaks to big business.

What we do is something that is targeted for small business and

big alike. We have a specific job tax credit that if you create a job,

there is a tax incentive in there, but it is tied specifically to job creVerDate 17-JUN-2003 16:10 Oct 19, 2011 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\68361.TXT KATIE PsN: KATIE
33

ation. So the person who benefits the most is the recipient of that

job. If there is not a job there, they don’t get a tax break.

Mr. TOWNS. What is the unemployment rate in Wisconsin?

Governor WALKER. We have a 7.4 percent unemployment rate.

Still too high; obviously less than the national average. First 2

months of this year we have had about 13,000 jobs created in the

private sector, about 8,200 new jobs in manufacturing, and next

week we will put out our new job numbers and I think we are

going to be well on the right path.

Mr. TOWNS. Did you have to lay off municipal workers or government employees in order to put your budget in place and to get the

13,000 that was increased? I am trying to get the real balance.

Governor WALKER. No, no, you are right. In our case, in putting

this budget together, we actually avoided it. For the remainder of

fiscal year 2011, the deficit of the budget put together by my predecessor, Jim Doyle, we had to make up about $137 million. We

knew, to set the stage for the $3.6 billion deficit, we had to balance

for the next 2-year budget we had to do a series of things. We made

some other changes, some other reforms. So what we are talking

about here today was one part of it; it saves about $1.7 billion over

the next 2 years for both State and local government, but for State

government the impact through the final couple months, through

June 30th, which is the end of our fiscal year, was a $30 million

savings. By getting that savings, we avoid having to lay off approximately 1,500 State workers. So we avoided layoffs that way.

Mr. TOWNS. Did you ever think about using maple syrup?

Governor WALKER. Well, I have some now. It is pretty good. It

is not as good as the cranberry juice we make in Wisconsin, but

it is pretty good.

Mr. TOWNS. Rather than using the vinegar.

Governor WALKER. Well, I have tried. As a county executive I

tried for 8 years, and the unions basically told me lay off people,

and to me that is just unacceptable. If you are truly for the workers, to me, in this economy, the last thing I want to do is see people

laid off. And this was a much, much better approach.

Mr. TOWNS. Governor Shumlin, how did you get people to have

a different attitude? I just don’t quite understand why people in

Wisconsin would think that way when Wisconsin is just like a lot

of other States in this Nation.

Governor SHUMLIN. Well, thank you, Congressman Towns. I am

sitting here listening to Governor Walker and I am sitting here realizing we all have similar challenges as Governors. Unlike Congress, we all have to balance our budgets. So the real question is

what are we arguing about? And my point is if you want to go after

collective bargaining, which I believe helped build this country,

helped build the middle class that has been under assault in this

recession, just come out and say it, I am going to go after collective

bargaining. But if you want to balance your budget, you bring people in, you talk to them, you have a dialog.

I can guarantee you this, what Vermonters are looking for and

what they expect is the same thing that they expect in Wisconsin

and the same thing they wish for and expect in America: they want

reasonableness, they want compromise, they want bright people

working together to solve problems. And when you use vinegar,

34

when you refuse to meet with unions, when you don’t sit down and

talk with them, when you take on an outright assault on a basic

principle in a Democratic society, which is collective bargaining,

the thing that my grandfather, when he got off the boat, and others

now rely on and relied on to make a decent living, to come from

a beet farmer to success in America, the thing that built our country, well, that is a different debate.

So I think really what we are talking about, because I sit and

listen to Governor Walker talk about how he is approaching his

challenges, all we Governors are doing the same things here, folks.

The question is are you going to bring people together to solve

problems or are you going to go after an assault on a basic principle in America, which is collective bargaining. I think we are trying to do two different things. If you want to go after collective bargaining, just come out and say, hey, we are taking you on. But

don’t try and blame the worst recession in American history on the

need to go after public pensions.

I am listening to the question over here. You know, let’s be honest about this. Taxpayers have always paid for a part of public pension retirement plans. This isn’t something new, folks. This started

with pensions, with asking public employees to give up economic

opportunities that they might have if they did what I did and went

into public sector and built a business and made a lot of money.

In exchange for getting a lower wage, in exchange for less economic

opportunity, they get a guaranteed $25,000, $22,000, on average,

retirement once they are all done.

Now, it is not new news that taxpayers pay a portion of that and

that employees pay the other portion. What is new is that in my

State and Governor Walker’s State we are asking the employees to

pay more than they did before.

Chairman ISSA. The gentleman’s time has expired.

Mr. TOWNS. Let me just say this, Mr. Chairman, in closing. Governor, keep using maple syrup.

Governor SHUMLIN. We are going to try.

Mr. TOWNS. Thank you.

Chairman ISSA. The gentleman from Utah, Mr. Chaffetz, for 5

minutes.

Mr. CHAFFETZ. Thank you.

Governor Shumlin, I would like to talk to you, if I could, about

the pension plan in your State. I come from Utah. We have, I

think, two things that have served us well. One is in our State constitution we have a balance budget amendment that has forced the

issue to actually balance budget. No. 2, we have a defined contribution plan, as opposed to a defined benefit plan, and, consequently,

our State has one of the lowest tax rates, business is thriving, and

we have hundreds of millions of dollars in our rainy day fund.

Now, I went back and looked at the Pew study on Vermont and

you actually are doing better than most States, funded about 92

percent. But explain to me. You had made a comment to the chairman here about the predictability of the pension program, and I

want to talk about the health of that program, because I can’t

imagine that a defined contribution plan is not superior to a defined benefit plan because how do you account for that?

35

Governor SHUMLIN. Well, all I can tell you is that it served my

and other States well that have used defined benefit plans, and

that we have had over time——

Mr. CHAFFETZ. But the healthy over the course of time—if somebody told me they thought they were going to get an 8 to 81⁄2 percent return, I said they are probably smoking those maple leaves.

I can’t imagine that you are getting 8 to 81⁄2 percent return on that

investment. Nobody is getting that kind of return right now.

Governor SHUMLIN. If you look at the averages for State pensions

across the history of defined benefit plans, you will find that we get

about an 8 percent return, on average. And obviously there are

good years and bad years, but unlike General Motors, since we are

not going bankrupt, you have to look at the averages, and that is

what we have gotten. That is why Wall Street, when you——

Mr. CHAFFETZ. But do you think you are going to get that going

forward?

Governor SHUMLIN. May I just finish, Congressman?

Mr. CHAFFETZ. Yes, but going forward do you think you are going

to get that?

Governor SHUMLIN. We do. And that is why Moody’s and the

other bonding agencies allow us to assume that rate of return on

our investments. We are not sort of making this up as Governors;

that is what Wall Street requires us to do. It is based on history.

The second point that I think is really important, if you are a

Governor, you have to deal with the real world, and the real world

is if you were to move from a defined benefit to a defined contribution plan, hypothetically, it would cost you a ton of money in the

first 10 to 15 years for the reason that the current employees help

to support the pension obligations of the States in a defined benefit

plan. If you pull the new ones out, you immediately have a higher

up-front cost than you would otherwise because you have to support your existing defined benefit as you move to a defined contribution. So there are a lot of reasons why we Governors are not

thrilled at the idea, and you are hearing this from Republicans and

Democrats, this notion that if you just moved to a defined contribution, all our problems are going to be solved isn’t in the real world

for us Governors.

Chairman ISSA. Would the gentleman yield, very quickly?

Mr. CHAFFETZ. Yes.

Chairman ISSA. Governor, if you are fully funded, that is not

true. If you are fully funded, you would be able to stop putting

money in the moment you make the switch, because if you are fully

funded, your 81⁄2 percent would pay out all your benefits. So you

can’t have it both ways.

Governor SHUMLIN. We are adequately funded.

Chairman ISSA. Well, OK. As long as we understand that adequately is kicking the can down the road so that studies show that

if you only got the rate of return of the Treasury, you would run

out in 2023 with the current situation. You depend on a high return that you cannot bank on in your own statement.

I yield back.

Governor SHUMLIN. Well, if I can just finish. If I can answer

that, Mr. Chair.

Chairman ISSA. It is the gentleman’s time.

36

Mr. CHAFFETZ. Go ahead.

Governor SHUMLIN. If I can answer that, we don’t make this stuff

up as Governors. Both Governor Walker and I travel down to Wall

Street to try and convince them that we are running sound economic States, that our bond rating depends on our economic future.

We manage our retirement funds based upon the expectations of

Wall Street. Now, Vermont is obviously doing that right since we

have a AAA bond rating. One reason is that we use the actuarial

projections that Wall Street gives us, which are higher than a

Treasury return. And I am just telling you that if you really study

this issue, you will find that Vermont is not doing anything radical

here, we are doing what Wall Street expects us to do, and it is a

higher return than the yield you would get on a Treasury yield,

much higher.

Mr. CHAFFETZ. Governor, Chairman, as I conclude here, I don’t

want to go over my time, I really do think that a flashing red light

for investors for this country, for the Congress, because we fully

anticipate that States will try to be running back to the Congress

to get—we can’t even fund ourselves. We can’t even manage our

books here. I don’t want the States to ever think the can come to

the Federal Government to get a bailout. I think the States that

have not made that difficult choice and made the difficult transition to a defined contribution plan are putting themselves in peril

and at great risk. That is our experience in Utah. We made that

difficult choice. It is on a more sound trajectory, and I think you

will find that States who did make that effort and made that transition will be much more sound financially. That is my perspective

of it. But I think it is going to be one of the big issues moving forward, Mr. Chairman.

I yield back.

Chairman ISSA. I thank the gentleman.

We now recognize the former mayor of Cleveland, Ohio, Dennis

Kucinich, for 5 minutes.

Mr. KUCINICH. Thank you, Mr. Chairman.

Governor Walker, you said the union leaders agreed to the financial cuts, but then you blamed the local unions for not following

through on these pledges. That is because you refused to drop your

demand to strip workers of collective bargaining rights that had

nothing to do with the budget, and refused to negotiate and rejected the unions’ offer. Now, Governor Walker, if the unions in

Wisconsin agreed to the financial cuts you sought, I don’t understand how this can’t continue to be characterized as a debate about

State budget deficits. This is supposed to be a hearing about State

and municipal debt. I don’t understand how repealing collective

bargaining rights for public workers shows us anything about State

debt.

Let me ask you about some of the specific provisions in your proposal to strip collective bargaining rights. First, your proposal

would require unions to hold annual votes to continue representing

their own members. Can you please explain to me and members of

this committee how much money this provision saves for your State

budget?

Governor WALKER. That and a number of other provisions we put

in, because if you are going to put in place a change like that, we

37

wanted to make sure that we protected the workers of our State

so that they had the right to know what kind of value they got out

of it. It is the same reason we gave workers the right to choose,

which is a fundamental American right, right to choose whether or

not they want to be a part of a union——

Mr. KUCINICH. Could you answer the question?

Governor WALKER [continuing]. And whether or not they went up to $1,000——

Mr. KUCINICH. How much money does it save, Governor? Just

answer the question.

Governor WALKER. It doesn’t save any.

Mr. KUCINICH. OK.

Governor WALKER. In the same way that you——

Mr. KUCINICH. That is the point.

Governor WALKER. If you read the Federal budget——

Mr. KUCINICH. It obviously has no effect whatsoever.

Governor WALKER. I will answer your question.

Mr. KUCINICH. I am reclaiming my time. It obviously had no effect whatsoever on the State budget.

I want to ask about another one of your proposals. Under your

plan you would prohibit employees from paying union member

dues from their paychecks. How much money would this provision

save your State budget?

Governor WALKER. It would save employees up to $1,000 per

year they could use to pay for their pension and their health care

contributions.

Mr. KUCINICH. Governor, it wouldn’t save anything, or a minor

administrative cost, if any. It is obvious what the real intent is

here, and I will back it up.

Governor WALKER. It is to give workers a right. It is to give

workers the right to choose.

Mr. KUCINICH. I will back it up.

Mr. Chairman, right here from the State of Wisconsin’s Legislative Fiscal Bureau, this is a nonpartisan State budget agency much

like the Congressional Budget Office, the Bureau was asked to

identify provisions in the Governor’s bill that are nonfiscal, nonfiscal policy items that have no State fiscal effect. This letter confirms the obvious, that Governor Walker’s effort to repeal the

rights of State workers is a nonfiscal, nonfiscal policy item; no effect on the State budget shortfall.

I ask unanimous consent that this letter be included in the

record.

Chairman ISSA. Reserving the right, we will inspect it and plan

to include it in the record.

Mr. KUCINICH. That is unusual you would reserve the right to object.

Chairman ISSA. The gentleman——

Mr. KUCINICH. I am claiming my time.

Chairman ISSA. The gentleman will suspend. Hold the time. We

fully expect to include it in the record. Because it is not a publication that is widely distributed, we simply would like to receive it,

and as soon as it has been quickly vetted during this hearing, it

will be accepted. That is a consistent policy from both sides.

Mr. KUCINICH. I would like to respond.

38

Chairman ISSA. Yes.

Mr. KUCINICH. In the 14 years that I have been on this committee, I have never had a chairman reserve the right to object to

putting an official document in the record that was central to the

purpose of this hearing, determining whether or not you stripping

collective bargaining rights, Governor, is a financial issue or not.

It is not; it is a political issue. That is what I am proving.

Chairman ISSA. The gentleman is incorrect. Chairman Waxman

did it repeatedly. In most cases, just as here, by the end of the

hearing, items which were not part of widely distributed documents

were accepted. I expect to do the same and I would work with the

gentleman to get it done before the end of the hearing.

The gentleman may continue.

Mr. KUCINICH. Well, I just made it a matter of public record anyway.

The title of this hearing is choice or necessity. I think that what

we have been able to demonstrate here is that the attack on collective bargaining rights is a choice, not a budget issue. There are

budget issues as well that need to be addressed in Wisconsin. For

example, according to the National Nurses United in U.S. States

facing a budget shortfall, revenues from corporate taxes have declined $21⁄2 billion in the last year. In Wisconsin, two-thirds of corporations pay no taxes and the share of State revenue from corporate taxes has fallen by half since 1981. That is published in The

Nation by John Nichols. I won’t ask to submit it by unanimous consent. Also, in The Real News Network, they have a report here that

points out that the budget shortfall of $137 million in Wisconsin

could have been covered if the State had just kept going its State

legislated an estate tax, which they let expire after 2008. Also

points out that if they had gone to collect the estate taxes from

their wealthiest citizens, they could have paid down the debt.

Now, I just want to say, in conclusion, Mr. Chairman, that we

really are here at the center of a great debate over the purpose of

government. Whether there is such a thing as a public sphere with

public servants who perform duties on behalf of the public, using

resources that belong to the public, or is government going to be

auctioned off to the highest bidder, to corporations who privatize

and, inevitably, drive up the cost of government, drive up the cost

of services, drive up taxes. That is where this debate is headed nationally. I think that Governor Walker has inadvertently done a

public service by exposing the extent to which this mind-set of

privatizing what is the public sphere, bringing this issue to the

forefront.

So thank you for being here, both Governors.

Chairman ISSA. I guess that is a thank you.

The Chair now recognizes the gentleman from Oklahoma——

Mr. KUCINICH. Thank you, Mr. Chairman.

Chairman ISSA [continuing]. Mr. Lankford, for 5 minutes.

Mr. LANKFORD. Thank you, Mr. Chairman.

And thank you, both Governors, for taking away your time to be

able to be here with us.

Governor Shumlin, I want to be able to do a point of clarification.

You began your oral statement talking about how you didn’t want

to balance the budget based on the backs of those great employees,

39

and I do concur, we have some terrific Federal employees as well,

but the employees as well by dealing with benefits; you wanted to

go after the real crucial issues. But then you ended your statement

by saying but in the previous Governor’s time, they did deal with

payment pensions, retirements, all those things. So while you are

not starting your time, you did say but we have just dealt with that

few months ago, is that correct?

Governor SHUMLIN. It has been an ongoing effort. Both the previous Governor, Republican Governor—don’t forget, I was president

of the senate——

Mr. LANKFORD. Correct.

Governor SHUMLIN [continuing]. So I actually helped negotiate

the——

Mr. LANKFORD. Correct.

Governor SHUMLIN [continuing]. With the speaker, the agreement with the teachers union.

Mr. LANKFORD. I was just trying to provide some clarification because you were talking about you didn’t want to do that on the

backs of workers at this point. You sought corrections and you saw

health care as a major issue, but you just dealt with some of the

retirement issues recently as well.

Governor SHUMLIN. I don’t mean to suggest that we did not ask

our State employees to make sacrifices, we did and they did.

Mr. LANKFORD. Great.

Governor SHUMLIN. All I am suggesting is that we did it by

bringing them to the table.

Mr. LANKFORD. Sure. OK. So it is just the method on that side

in the cooperation that the others had with all the leadership as

well. Obviously, it takes two to tango on that one, as well people

to be able to come together.

Let me ask you a quick question. Do you think the Federal Government should be involved in bailing out States when they have

debt issues? Is there a point in time that you say this State is so

far in debt and so far out of balance the Federal Government

should step in and bail them out?

Governor SHUMLIN. That is a question I am going to leave to you.

That is why I never want to run for Congress.

Mr. LANKFORD. Actually, that is a question I am asking you because, as a Governor, you obviously represent the intents of a

State.

Governor SHUMLIN. I will answer it this way. I don’t think you

are going to have to. And I think that the case for the bankruptcy

of States is greatly exaggerated for political reasons. When I go to

Wall Street and I say, hey, as I did a few weeks ago, we are in

pretty good shape in Vermont, Wisconsin is in pretty good shape,

tell us about some of the States we are really worried about, California, New York, Illinois, and others, and they say, this is Wall

Street speak and the rating agencies, we think that the case is

being exploited for political reasons; that there are not States that

need to go bankrupt.

Mr. LANKFORD. Right.

Governor SHUMLIN. That we are going to see our way through

this and that the case for pension crisis is being overstated by

Washington.

40

Mr. LANKFORD. OK.

Let me ask the same question to Governor Walker. Do you think

the Federal Government should bail out individual States?

Governor WALKER. No.

Mr. LANKFORD. Let me ask a followup question to both of you,

as we have time, and that is are there things we are doing as a

Federal Government that drives up your cost as a State? What I

am looking for and what my committee has been dealing a lot with

are unfunded mandates, things that say I would like to get my

budget under control, these things I can manage, these things I

cannot because the Federal Government has these set of requirements. Are there things we are doing to cause you more debt and

more problems in spending?

Governor WALKER. I see I have 2 minutes. There is no way I can

answer that question in 2 minutes——

Mr. LANKFORD. I will allow your staff to submit all you can for

the record on that.

Governor WALKER. No. 1 thing you could give us, block grant

Medicaid.

Mr. LANKFORD. OK.

Governor WALKER. If you give us a block grant for Medicaid, that is—I had to put $1.2 billion more of general purpose revenue, that

is State aid, State funding, into this next budget even though I had

to cut everywhere else. It is the biggest part of my budget growing;

it is the biggest challenge out there. We have maintenance of efforts that require us to maintain things by the Federal Government

when we have other things that would work better to manage those

costs. We need to get to a point—we have led the country, places

like Gunnerson, Luther have been ahead of the curve when it

comes to the idea and concept of medical homes, paying for performance, paying for outcome, not paying for procedure. If we had

that option, I think any of us——

Mr. LANKFORD. Now, you are aware that—I am also on the

Budget Committee—when we brought up that idea, we have been

told that the Governors will certainly kick people out of nursing

homes and they were ruthless to their populations, and you can’t

be trusted with any of these funds.

Governor WALKER. Well, that argument was made back in the

1990’s when my good friend, Tommy Thompson, was Governor and

he pushed welfare reform. Bill Clinton ultimately embraced that

welfare reform and, in the end, States were given block grants. All

those same sorts of charges were made back then and, instead, we

had some of the most successful welfare reform during that generation. We can do the same thing now.

Mr. LANKFORD. Governor Shumlin, are there areas that we are

doing as a Federal Government that is causing you pain as far as

on the financial side?

Governor SHUMLIN. Yes. And just in terms of Governor Walker’s

response, we are all concerned about health care costs, Medicaid

and Medicare. The only thing I would caveat with is just a block

grant makes me nervous because as our populations grow older,

which is happening in all of our States, as costs and utilization

goes up, I don’t want it to be an excuse for the Federal Government

to get out of its obligation on sharing cost and saying, hey, we are

41

giving you a block grant, you are on your own, if utilization goes

up, it is your problem. So how that flexibility gets translated is

really important to us; the details matter.

Second, another big driver for us is education costs and No Child

Left Behind, and there is no question that those mandates are driving education expenses in our public schools, requiring us to teach

to a test, and requiring extraordinary paperwork of teachers, when

they could be teaching.

Mr. LANKFORD. Thank you very much.

With that, I yield back.

Chairman ISSA. I thank the gentleman.

We now recognize the gentleman from Iowa, Mr. Braley.

Mr. BRALEY. Thank you, Mr. Chairman.

My name is Bruce Braley, and I am proud to be a public employee. In fact, Governor Walker, when you were a 6-year-old growing up in my district in Plainfield, Iowa, I got my first job as a public employee with the Powesheik County Conservation Board, and

I learned how to clean toilets and I learned how to mop floors and

scrape gum off the bottom of school desks, and I also worked out

in the blazing sun building bridges on farm-to-market roads, driving an ax into spikes into creosote-treated lumber; and 1 day on

the job my left hand caught on fire. So I know a little bit about

what public employees do.

You mentioned the TV ads that groups from Washington ran

against you, and yet you, yourself, had a large amount of support

from secret donor groups like the ones that attacked me in my

campaign. Are you willing to go on the record here today and denounce the influence of outside secret money in political campaign

ads?

Governor WALKER. I thought the purpose of today was to talk

about debt and——

Mr. BRALEY. Well, let’s talk about that. You ran campaign ads

on the principle of good government, and I thought that is what we

were here to talk about today. In fact, you ran a campaign ad

called Real Leadership, and when the campaign ad ran, it says

your focus was bringing people together to solve problems. Do you

remember that ad?

Governor WALKER. Yes. And I would argue if you want me to—

you asked me a question and I say I remember it, and that is exactly what I did——

Mr. BRALEY. OK, you have answered the question.

Governor WALKER. In my first month and a half, when Democrats and Republicans came together to push economic

development——

Mr. BRALEY. Excuse me. This is my time, Governor.

Governor WALKER. Well, you asked me a question.

Mr. BRALEY. You answered my question. I asked you if you remembered it.

Governor WALKER. If you want to do a political stunt, go ahead.

Mr. BRALEY. I am not doing a political stunt. I think if Dr. Phil

were here, he would say how is that working for you?

You also ran an ad called Yes, We Can, and you said working

together we can put government back on the side of the people

42

again. You also ran an ad called Make it Right, talking about scandal benefiting politicians. You ran all those campaign ads.

Well, this is your chance to make it right. Are you ready to apologize to the people of Wisconsin for hiring the 27-year-old son of one

of your major campaign donors, who is a lobbyist, and that individual had no college education, very little managerial experience,

and had two drunk driving convictions and was hired for an

$81,000 a year job, when you obviously had better qualified applicants? Are you ready to make an apology today to the people of

Wisconsin? That doesn’t sound like good government to me.

Chairman ISSA. The Chair will ask the gentleman to suspend.

Please turn off the clock.

The Chair would remind all participants, although Members here

at the dais have a right to speak for 5 minutes and say anything

they want and we will consider it germane, our witnesses are only

asked to respond to items which they came here prepared to respond to that are consistent with the subject of the hearing. So it

is for the witness to decide whether a question is germane, while

in fact Members here have an almost unlimited right to say what

they want to say during their 5 minutes.

The gentleman may continue.

Governor WALKER. When I grew up in Plainfield, at least for the

years I lived there, and Chuck Grassley was our State assemblyman back then, there were good, decent people, many of whom

were farmers, many of whom were deacons at my father’s church,

who recognized when times were tough, you had to make tough decisions, particularly when times were tough in the finances of the

church, and that is exactly what we are doing. You may not want

to talk about that, you may want to talk about anything, and I will

answer your question about the 27-year-old.

Mr. BRALEY. I would be interested in your answer because that

is the question the people of Wisconsin want to hear today.

Governor WALKER. Well, I am glad you are interested in the people of Wisconsin——

Mr. BRALEY. I am.

Governor WALKER [continuing]. Because that person was five levels below me. When that hiring was brought to my attention, I and

my staff go back and have that person taken out of that position,

and I acknowledged the fact that there were more qualified people

and I asked someone else to be put into that. So that is the answer

to your question.

Mr. BRALEY. Well——

Governor WALKER. Now, would you look at——

Mr. BRALEY. I am reclaiming my time.

Governor WALKER. Well, if you don’t want to hear the truth, then

keep it up.

Mr. BRALEY. The Milwaukee Journal, Mr. Chairman, has written

an article about this and noted that two of the highly qualified candidates for that administrative post were Oscar Herrera, a former

State cabinet secretary under Republican Governor Scott

McCallum, who had a doctoral degree and 8 years of experience

overseeing the cleanup of petroleum-contaminated sites. The second, Bernice Madison, was a professional engineer who served

43

since 2003 in the post to which Mr. Duchenne was appointed and

had 25 years of experience in State government.

And since the whole focus of this hearing is on good government

practices and how that affects the debt that States have, I think

it is time that we got some straight answers from the people who

are radically reforming State governments, and that is why this is

so important. And I would ask the chairman to hold a hearing, and

I have a letter for the chairman, since we have broad jurisdiction,

according to the committee’s Web site, to look into the other factors

that are impacting State budgets, including cronyism in State government. And I have a letter to the chairman to that effect. I ask

unanimous consent for the article from the Dubuque Telegraph

Herald titled, Walker Insults Young Worker With Cronyism, published on April 11, 2011, to be made a part of the record. And I

yield back.

Chairman ISSA. Without objection. The gentleman yields back.

[The information referred to follows:]

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45

46

Chairman ISSA. The Chair now recognizes the gentleman from

Florida, Mr. Ross, for 5 minutes.

Mr. ROSS. Thank you, Mr. Chairman.

Governors, thank you both for being here. This is very insightful

for me, especially in my home State of Florida, where we are also

going through some of the similar exercises that you all have gone

through. It is interesting because when we look back at the history

of collective bargaining, especially with public sector unions, it was

Franklin Delano Roosevelt and both President John F. Kennedy

who did not feel that there should be collective bargaining or there

should be public sector unions. So being here today on this issue

I think shows the evolution of this and why it is such a crucial

issue, especially in light of the debt and deficits that each State in

this country is facing.

The Federal Government and the Office of Personnel Management has published consecutively for years, up until 2008, a study

of the amount of time that was spent by union employees on official

time. The last time this was published was in 2008, and it shows

that Federal Government union employees spent 3 million hours of

official time to engage in union-related activities. This was a cost

to the Federal taxpayers of about $120 million in 2008. Unfortunately, upon repeated requests by several Congressmen and the

Competitive Enterprises Institute under this President, we have

not received a response from that.

In your respective States, and I will start with you, Governor

Walker, do you keep track of any official or union business done

on official time?

Governor WALKER. I wouldn’t have the numbers off the top of my

head, but I know both at the State level and we see the same thing

at the local level. We certainly saw that when I was the Milwaukee

County executive. And it is an interesting cycle because taxpayers

in many cases are paying taxpayers’ money which not only goes to

workers, but in many cases then goes to government employee

unions, who then use that money for political purposes, when then

elect candidates who then advocate for more government and higher taxes on the middle class. It is a vicious circle.

Mr. ROSS. So Wisconsin does keep track of official time spent on

union activities?

Governor WALKER. For example, there is time at both the State

and the local level that people who are employees of the government who are designated as union officials have to account for time

that is taken as part of their contracts. In many cases we saw at

the local level, the county, the number of individuals who were on

the payroll who were working for the union.

Mr. ROSS. Governor Shumlin, is it the same situation in

Vermont?

Governor SHUMLIN. It is not an issue in Vermont. Our public employees unionized work hard, and they work long days and long

nights, and we are certain that that is what they are doing and

that is what they do with their time. You know, we are a small

State where everybody knows what everyone is doing, and in

Vermont we work hard and our public employees work just as hard

as our private sector employees.

47

Mr. ROSS. In Florida, we are deliberating now in the legislature

on something that was deliberated back when I was in the legislature there, what was known as a paycheck protection act, and it

would require that the employees make an affirmative acknowledgment and confirmation that they will sign over a certain part of

their paycheck to union dues, instead of it just having taken out

regularly. Is that something that has been entertained in either of

your States?

Governor Walker.

Governor WALKER. That is in the legislation that I signed the

law approximately a month ago, and the concept of that is, in the

interest of workers, they should have the right to choose. If they

want to have that money taken out, if they want to be part of a

union and if they ultimately want to have the choice of the way

that they give that money to that union or not, they should be the

one that chooses it.

Mr. ROSS. Governor Shumlin.

Governor SHUMLIN. It hasn’t been any significant part of the debate. You know, we are really, like Governor Walker, we are facing

a tough economy and a tough budget challenge trying to balance

it, and thanks to the largesse of Congress, the last budget deficits

for all we Governors haven’t really had to be dealt with because we

got so much money from Washington. That is over and we have to

balance the budgets the old fashioned way. So we are making

tough cuts, tough choices, and I am doing it by focusing on what

matters, which is health care costs, corrections, and other areas

where I have explosive growth, and I am not worrying too much

about union dues.

Mr. ROSS. In accomplishing these objectives, whether they be

pro-union or anti-union, whatever they may be requires people to

come to the bargaining table, it requires people to come to consensus or compromise; and one of the issues that we saw in Wisconsin was that there were senators on the Democrat side who left

the State and failed to come to the table to address. And as a public official, as one who was elected, I take personal offense to somebody who abrogates their responsibility by not owning up to their

obligations to make these decisions, as difficult as they may be.

So, Governor Shumlin, I would ask you do you condone such activities, where elected officials leave the State or abrogate their responsibilities to enforce their obligations as an elected official?

Governor SHUMLIN. Well, I have to tell you I have my hands full

dealing with the challenges that I am facing in Vermont and I

don’t comment much on what is happening in the other 49 States.

I am just focused on what is happening in Vermont. In Vermont,

everyone is working together with lots of maple syrup to get tough

things done.

Mr. ROSS. Thank you.

Governor Walker.

Governor WALKER. Obviously, I had great concern. When I talk

to factory workers over the last month or two, if you walked off the

job for 3 weeks, you wouldn’t be working there anymore. I think

that is pretty clear out there. So I think there is a real challenge

and obviously the individuals in those 14 senate districts are going

to decide whether or not that makes a difference in the long term.

48

But you said something else about working together, and I believe in that. But I also believe more important than working together is people want results. So in the beginning of this year we

worked together with Democrats and Republicans and one Independent we have in the legislature. We passed the most aggressive

job-creating legislation in the country. We showed that Wisconsin

was open for business. But sometimes working together is a problem. In the past, Democrats and Republicans worked together and

they pushed the problem off to the future, and at some point leaders, no matter what part, have to stand and say we have to do

something about it, and that is what we are doing here.

Mr. ROSS. Thank you, and I yield back.

Chairman ISSA. The Chair now recognizes the gentleman from

Vermont, Mr. Welch, for his questions.

Mr. WELCH. Thank you, Mr. Chairman.

Governor Shumlin, I see that seated behind you is Matt Finsey,

who is a leader of the Public Employees Union, the firefighters; he

is sitting next to his brother from Wisconsin. You are the Governor,

he is a public employee union. Did one of you not get the memo

that you are not supposed to get along?

Governor SHUMLIN. I don’t know if I didn’t get it, but all I can

tell you is we get along great, as you know, and there is nothing

better than our firefighters working hard for us and sacrificing

their lives for us every single day.

Mr. WELCH. You know, as I have listened to Governor Walker describe his problems, it seems to me very similar to what you described to me this morning when we had breakfast as to the problems you face in Vermont. Governors cannot escape the consequences of the greatest recession that we have had since the Depression, and that recession is brutal and shows no mercy, whether

it is a Republican Governor led State or a Democratic Governor led

State. You have described your approach, but clearly there are

points of real contention that you have to deal with as Governor.

You have a legislature that is pushing you, and you are resisting,

to raise revenues; you have public employees who, yes, they did cooperate, but, on the other hand, they have to represent their members and stand up for wages and benefits. Just maybe give a brief

summary of how you managed to get from here to there.

I am going to want to be able to talk to Governor Walker too,

and I don’t have that much time.

Governor SHUMLIN. I will try to be very brief. You know, really,

as you know, my guess is that my approach isn’t much different

than other Governors across the country. We are trying to create

jobs and economic opportunities, and I mentioned the middle class

has been kicked in the teeth over this recession, harder than I

think they have been kicked in years, and we are trying to find

ways to raise their income. And we do that by going after real savings in health care, by going after the recidivism in our corrections

budget that is costing taxpayers $47,000 a year, we have a high recidivism rate, and by going where the real money is while we resisting raising taxes so that we can actually grow jobs and economic opportunities.

You heard Governor Walker talk about wishing to import jobs

from Illinois, and we are all doing that. I am hoping to bring in

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a few jobs from New Hampshire and Massachusetts and New York

as we manage our budget. We are a great place to do business,

work, raise a family, the best place in the country, in my judgment.

And we do it by getting along and by using common sense and reasonableness.

Mr. WELCH. Let me ask Governor Walker. I just want to make

an observation. We have a problem here in Congress, and this is

my own personal observation after serving for 5 years. There is too

much of a winner-take-all attitude. Because when I hear my Republican colleagues say we have to deal with spending, I happen

to think they are right. But I also think we have to look at other

things, too, like the tax code and revenues. I would say that quite

candidly. A lot of disagreement from some of my colleagues.

But one of our problems in Congress is a winner-take-all approach, where, even if you ‘‘win,’’ and you see this with the health

care debate, the Democrats ‘‘won’’ on health care last year, but now

the first act of the new Congress is to repeal it. If you win in a

way where the other side feels they didn’t have a seat at the table

or things were crammed down, and both sides can be doing this,

there is a price because you end up winning on the vote but you

don’t make progress on the policy. And, obviously, your State is the

center of the storm with a very hard confrontation between two

sides, and I am asking if you would just observe or comment on

your thoughts about whether there is a price that may be paid in

your State as a result of the fact that the approach that was taken

did result in this enormous confrontation and a lot of controversy

and a lot of pain, that continues even after your policy, I think,

prevailed.

Governor WALKER. Yes, and I think the results, obviously, were

frustrating. One of the things that frustrated me the most is I

think if you are going to participate in democracy, you have to be

in the arena. And when 14 of my colleagues in the capital decided

to leave for 3 weeks, it made it pretty difficult to do that. In fact,

in particular, one of them, someone we worked with before on jobs

initiatives, spent a good chunk of that time trying to work with us

and, as he revealed in the Wisconsin State Journal a week ago

Sunday, he was closer to us than he was to his other colleagues.

My hope is that people like him and others will continue to come

to the table and work on our jobs agenda, the things we need to

continue to do, and I think we will be on the right track.

But, again, I go back to what I said before. People want us to

work together, but they want that because they want results. When

I look at what Mitch Daniels did 6 years ago in Indiana, essentially

for the State, he did what we are proposing and what we propose

in this legislation to do. His numbers were far below mine in that

first year, the first 6 months he was in office. He was dealing with

some of the same passions, just not as big, because he did it

through an executive order, not through a piece of legislation. But

4 years later he was re-elected with 58 percent of the vote because,

in the end, people saw the results. All the fears didn’t materialize

and the results proved that in that State the government got better, got more efficient, got more effective, and ultimately good public employees in Indiana were rewarded.

Mr. WELCH. I yield back. Thank you, Mr. Chairman.

50

Chairman ISSA. I thank the gentleman.

The Chair now recognizes the gentleman, Mr. Kelly, for 5 minutes.

Mr. KELLY. Thank you, Mr. Chairman.

And both Governors, thank you for being here.

I come from the private sector, so I understand a little bit about

having your own skin the game and being able to sign the front

half of the check. I know that sometimes down here we lose perspective about whose money it is we are spending. And I have to

tell you, when somebody else is picking up the tab, it is easy to

keep saying go ahead and keep on partying.

Now, I want to ask you this specifically, because the chairman

started off with a discussion, also Mr. Chaffetz, about defined benefits in pensions, and I know in Pennsylvania that while all of us

took a hit when the stock market went down with our pensions and

we lost quite a bit of it, at the end of the day that was a loss. If

you can, in both your States, tell me about who makes up the loss

for the benefit that is calculated. I really think defined benefits is

a complete illusion; it gives us the belief that somehow the future

is both predictable and reliable, and we all know it isn’t. So please

tell me the deficiency, the difference between what the defined benefit is based on what the actuaries are saying and the actuality of

it. Who makes up the difference for that?

Governor SHUMLIN. You know, I think it is really important to

stick with the facts, and the fact of the matter is, if you look at

Vermont, this is what happened: In the worst stock market crash

in a long time, we watched it go from roughly $12,000 to $6,000,

the Dow, the average person in a defined contribution plan sold

their stocks when they got discouraged, somewhere between $8 and

$6,000. Those who were in defined benefit plans had people like

Vermont advising them to hold on and hold out, and that is what

we did. So now our retirement plans are higher than they were in

the depths of the loss. The average small investor now has lost

what they saved for retirement.

So, again, it is a great example where a defined benefit plan protects workers more ably than a defined contribution plan, and

Vermont’s example is exactly proof of that theory.

Mr. KELLY. OK, but my question is who makes up the difference

in the loss.

Governor SHUMLIN. My point is there was no loss; we have gotten the gains back.

Mr. KELLY. I understand what you are saying, but there is somebody who does provide the safety net, and we both know that.

Governor Walker.

Governor WALKER. Yes. It is the taxpayers. In our case, before

these reforms, you have talked a lot today about, for example, my

proposal of the 5.8 percent contribution. One of the things I want

to make clear, because it is different than Vermont and other

States., before this reform, other than literally a handful of State

employees, the taxpayers were picking up both the employee contribution and the employer. So I am not upping the employee contribution, I am actually having the employees of the State, including me, actually pay the employee contribution. Again, something

51

that is done in the private sector, as you know, the employer pays

part, the employee pays the other part.

And what I found out when I was traveling the State in the

midst of this debate, particularly when I go to manufacturing

plants and guys would point out they were paying 25 to 50 percent

of their health insurance premiums, most of them having a retirement plan, it wasn’t a pension, it was a 401K, and many of them,

to keep people working, were suspending the employer match just

to be able to keep people from being laid off. That is the reality.

And then when I would walk them through what I was asking, because they would see the ads and they would think, hey, wait a

minute, you are taking all this money away. Just as an example,

in the basic family plan that my family has, we will go up to pay

about $200 a month in premiums, versus about $90 a month.

Again, most people, in the private sector, middle-class taxpayers

wonder, wow, that is unbelievable.

Mr. Kelly. And I have to tell you I think that is the important

thing to understand. If I have a defined benefit, then I can go

ahead and stick with that plan because, come hell or high water,

I am still going to get my defined benefit. When you are a person

whose real money, their money, is in the program and you have a

choice to opt out now and try to keep what you have or lose it, then

you are really put in a box; and I think most people in this country

don’t understand. Now, my daughter is a teacher, my wife is a

teacher. I have a lot of friends whose benefits are guaranteed, and

they are guaranteed by people in the private sector who will see

a raise in their taxes to cover the loss of these pensions, and I

think that is where the divides come.

This is not about union workers versus non-union workers, Republicans versus Democrats; this is about Americans. And if we are

going to share the gains and we are going to also participate in the

pain, we better understand that when you have your own money

in the game, it is a vast difference between somebody who is guaranteed a benefit, regardless of what they put in, and that is the

important thing. Taxpayers make up the difference in all these

losses. That is the model and that is what is wrong with it. You

don’t have the safety net in your private plan, but the public sector

does, and I think that is a vast difference and I think it makes it

a lot easier to stick with a plan that is upside down and say, you

know, what, I’ll go ahead and ride it out because one way or the

other I am still made whole.

Thank you so much for both of you being here. I appreciate it.

And I yield back, Mr. Chairman.

Chairman ISSA. I thank the gentleman.

We now go to the gentleman from Virginia, Mr. Connolly, for 5

minutes.

Mr. CONNOLLY. Thank you, Mr. Chairman, and welcome, Governors.

Governor Shumlin, did I understand in your testimony that you

said that the pension fund in Vermont has an 8, 81⁄2 percent return, annual return?

Governor SHUMLIN. That is correct. That is what we have had

over time. And I think it is really important to address the question of who pays and the statement just made that taxpayers do.

52

At least in Vermont—maybe we are unique; I don’t think so—80

percent of the benefits that we pay out are paid for by return on

investment.

Mr. CONNOLLY. Eighty percent?

Governor SHUMLIN. That is correct.

Mr. CONNOLLY. You are a member of the National Governors Association?

Governor SHUMLIN. Excuse me?

Mr. CONNOLLY. You are a member of the National Governors Association?

Governor SHUMLIN. Yes.

Mr. CONNOLLY. Is it your understanding from your fellow Governors that Vermont is unique and that most State pension funds

are in fact under water or about to go so?

Governor SHUMLIN. It is not my understanding that most are

under water, no.

Mr. CONNOLLY. Mr. Chairman, I would ask unanimous consent

to enter into the record correspondence provided by the National

League of Cities, NACo, NASAC, ICMA, NSA, and a number of

other organizations pointing out, as a matter of fact, that most

State pension systems are very solvent and have been quite stable

for the last half century.

Chairman ISSA. Have they been received by the parliamentarian

yet?

Mr. CONNOLLY. We have copies here, Mr. Chairman.

Chairman ISSA. OK. Bring them up. We will reserve and make

a final decision by the end of the hearing.

Mr. CONNOLLY. Thank you very much.

Governor Walker, when you campaigned for Governor, did you

campaign on the issue of collective bargaining being a problem

with respect to Wisconsin’s budget?

Governor WALKER. I talked about wages and benefits overall,

even ran campaign ads on it. But I didn’t specify exactly what

form; I talked about the broad spectrum. And, in fact, AST Wisconsin, one of the unions that objected to us in campaign flyers

pointing out some of my statements about collective bargaining and

mediation arbitration and other issues. So that was an issue that

was part of the campaign.

Mr. CONNOLLY. Explicitly?

Governor WALKER. Again, I didn’t run an ad saying I am going

to do exactly this, but I talked about the full range and I talked

about it in a couple of debates, about the fact of the full spectrum

of issues.

Mr. CONNOLLY. Good. I had 43 debates when I ran for re-election

last year. That is a lot of debates.

Governor WALKER. I didn’t have that many, I am glad.

Mr. CONNOLLY. Probably more than most Members of this body.

Governor WALKER. That is impressive.

Mr. CONNOLLY. And I enjoyed every one of them.

Chairman ISSA. That is also more than most Members.

Mr. CONNOLLY. Exactly.

But the collective bargaining, in your debates with your opponent, you actually brought up collective bargaining and said that

is something I am going to address if elected Governor?

53

Governor WALKER. I talked about the whole spectrum. I talked

specifically about the 5 and 12 percent. They said how far are you

willing to go? I said I am willing to change the law from one end

of the spectrum, whether it is a modest change or an outright

change. I talked about it there; I talked about it again in the transition; I talked about it——

Mr. CONNOLLY. Governor Walker, I am asking a very specific

question. Did you explicitly single out——

Governor WALKER. No. No. I talked about the whole range.

Mr. CONNOLLY. So you might concede that some might be surprised, then, that you made collective bargaining such a centerpiece of your so-called reform efforts after you were sworn in.

Governor WALKER. No, I would say no because for 8 years as

county executive I not only talked about it, I actually brought it up.

I did what was called the Reality Tour, where we talked about the

challenges, that we were unsustainable and that collective bargaining was driving that.

Mr. CONNOLLY. So from your point of view nobody should have

been surprised once you were elected and sworn in.

Governor WALKER. Hundred percent correct.

Mr. CONNOLLY. Were you, then, surprised at the reaction that

generated in your State?

Governor WALKER. Not in my State. For 8 years I took on the

status quo in a county that had never elected a Republican before.

I was elected with 54, then 57, then 59 percent, because I think

in times of crisis people aren’t so much concerned about Republican

or Democrat; they want leadership, and that is what we took on.

That is what we are trying to do at the State level.

What did surprise me, candidly, was the level of national attention, the folks that came in from Washington and others to be a

part of that debate.

Mr. CONNOLLY. Thank you. Let me ask a quick question. You got

a famous phone call from somebody pretending to be David Koch,

and he said, well, I tell you what, Scott, once you crush these bastards, I’ll fly you out to Cali and really show you a good time. You

responded to that by saying, all right, that would be outstanding.

What did you mean by that and what did you think he meant?

Governor WALKER. At that point I was down in the call, I had

two other people waiting for me and I was trying to get off the call

and get on to the next issue.

Mr. CONNOLLY. It wasn’t that you honestly thought it was Mr.

Koch and that he was promising to reward you for what you were

doing?

Governor WALKER. Did not in that regard, no.

Mr. CONNOLLY. The flying out to Cali thing didn’t strike you?

Governor WALKER. No. I didn’t even know what Cali is.

Mr. CONNOLLY. Have you ever had a conversation with respect

to your actions in Wisconsin and using them to punish members

of the opposite party and their donor base?

Governor WALKER. No.

Mr. CONNOLLY. You have never had such a conversation?

Governor WALKER. No.

Mr. CONNOLLY. Thank you. My time is up.

54

Governor WALKER. I spent 8 years talking about the challenges

of the county official, the fact that I had a series of unions in Milwaukee County who constantly told me to lay people off, as opposed to making modest changes.

Mr. CONNOLLY. Thank you. My time is up.

Chairman ISSA. Thank you.

Dr. DesJarlais.

Mr. DESJARLAIS. Thank you, Mr. Chairman.

Thank you, Governors, for being here today.

Governor Walker, I believe your home State and my home State

of Tennessee has constitutional requirements to balance the budget. Obviously, that constitutional requirement does not exist in

Washington, DC. Do you believe that these constitutional requirements give you additional support and leverage you need to make

the difficult decisions that need to be made to get your fiscal spending under control?

Governor WALKER. Yes. And I think both of us as Governors talk

about the fact that, as Governors, even with either party, for us to

succeed and to have States grow their economy, we have to have

a balanced budget. Whether it is a constitutional requirement, a

legal requirement or otherwise, I think the States that are going

to succeed, regardless of who are the Governors, are the States that

take their fiscal challenges head on.

Mr. DESJARLAIS. Thank you. This last election it was pretty clear

to me, coming from the private sector, that the American people

have sent a referendum that they feel government, overall, is too

large and it is too intrusive, and it is in the way of creating jobs.

So I take heed to that as we sit in these hearings and we justify

a lot of the programs within the Federal Government and whether

they are good or not, and we have had discussions whether or not

private sector versus public sector pay is fair.

Governor Walker, how would you gage the pay and benefits afforded to the public sector workers in Wisconsin? Critics have said

that your reforms are hurting a group of workers that are already

worse off than their private sector counterparts. Are they wrong?

Governor WALKER. Well, let me just point out two quick things

in that. One, this debate, to me, has never been about the level of

pay or compensation, because I think there are great people who

work at the city, the county, or school district State Government.

I have said that repeatedly. What this is about is balancing the

budget and making sure we can do it long-term and giving our

State and local governments the tools. There have been plenty of

studies and there are studies all over the map. There are studies

whether you have a higher education degree or not, whether it is

higher or lower.

I think the key is, again, when I have toured the State and when

I talk to the constituents I have and I talk to the people in the middle class working in our factories and farms and other locations,

they realize they are the ones that foot the bill for more and more

government, and they think it is realistic that if they are paying,

on average 20 percent for health care, they are paying something

for their pension or 401K, whatever they may have, they think it

is realistic that the rest of us who work in the government pay

something similar to that.

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Mr. DESJARLAIS. Thank you.

Governor Shumlin, you had mentioned in your testimony earlier

that you went to where the money was to help get your fiscal house

in order, and you mentioned health care. I was wondering if you

had some insight that you could share with us to how you went

about that and if you have a solution to the health care crisis and

the cost.

Governor SHUMLIN. Wow. Well, how long do we have? The answer is yes, we are working very hard to pass a health care bill

that will be the first in country where health care is a right and

not a privilege; where it follows the individual; is not required by

the employer, which we think will be a huge jobs creator; but, most

importantly, as Governor Walker suggested earlier when he was

talking about health care, where we actually reimburse providers

based upon keeping people healthy, health care outcomes instead

of the fee per service model. And we have put together an ambitious plan which is passing the senate almost as we speak; it has

already passed the house, so I am going to sign it into law. Then

we are going to come down to Congress and beg you for a few waivers. So I am so glad that we have this opportunity to start begging

now.

Mr. DESJARLAIS. OK. We will be interested to see how that turns

out, as we certainly have our challenges here. Do you believe that

collective bargaining is really a basic human right?

Governor SHUMLIN. I believe it is a basic right in democratic society. And I say that as a guy who grew up, born and raise, in

Vermont. My ancestors, like so many probably in this room, came

to this country with nothing, passed through Ellis Island, ended up

picking beets, my great, great grandfather out in the Midwest

somewhere; and, frankly, were it not for the right to collectively

bargain, I don’t believe that my relatives or most middle-class

Americans would have the opportunities for economic progress that

they enjoy today.

Mr. DESJARLAIS. You had made a comment at the National Governors Association meeting that the ability to collectively bargain

is a basic human right in democracy. This is in direct contradiction

with Franklin Roosevelt, who was a pro-union person, and he said

meticulous attention should be paid to the special relations and obligations of public servants, to the public itself, and to the government. The process of collective bargaining as usually understood

cannot be transplanted into public service, and it goes on to say a

strike of public employees manifests nothing less than intent on

their part to obstruct the operations of government until their demands are satisfied. Can you comment on that?

Governor SHUMLIN. I would just say that even someone as great

as Roosevelt could be wrong once.

Mr. DESJARLAIS. I might disagree on that point, but my time is

out and I thank you for your comments.

I yield back.

Mr. GOSAR [presiding]. I thank the gentleman.

I want to acknowledge my colleague, Mr. Murphy, from Connecticut.

Mr. MURPHY. Thank you very much, Mr. Chairman.

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Both Governors, thank you for you attendance today and for

sticking with us throughout this process.

I guess I just have a simple statement and question for you, Governor Walker. I guess for those of us that have been watching this

debate play out, and I think this has been covered by several of my

colleagues, it is hard to square the concessions that have been

made by the unions, their willingness to come to the table and the

continued drive to strip them of collective bargaining rights, and

obviously there has been a lot of conversation around the country

as to how this plays in to a much broader debate that is happening

around the Nation. When we look at the amounts of outside money

that has been spent in Wisconsin, both with respect to your election, to the fight over the legislation, and then most recently, in the

last few weeks, with respect to this election for the court, it is hard

to make the argument that this debate only plays out in the context of Wisconsin’s budget fight. In fact, some of the key players in

this drama seem to be pretty open about how this is ultimately

about trying to kill a pretty important constituency for working

families, and I think we had the quote on the board earlier when

Mr. Connolly was asking his questions, but let me read it aloud.

The State senate leader, Scott Fitzgerald, said recently during an

interview on Fox News, he said, ‘‘If we win this battle and the

money is not there under the auspices of the unions, certainly,

what you are going to find is President Obama is going to have a

much more difficult time getting elected and winning the State of

Wisconsin.’’ And in a fund-raising letter that he sent out, he was

making the pitch that Republicans should be supported because

they faced down big labor’s bully tactics in the Democratic walkout

on the State senate to break the power of unions in Wisconsin once

and for all.

This sounds a lot like a much broader political play to try to defeat your opponents, to try to defeat the advocates for working families, and I guess I am sure you have a good answer to this question, but I would like to know if you agree with the statements of

your State senate leader, Scott Fitzgerald, and how you address the

concerns of many of ours that the reason that you have $2.1 million

being spent on behalf of your candidate for the court, the reason

that you have groups like the Koch brothers pouring in thousands

and thousands of dollars is because this is about a much broader

effort and it seems that some of the key players in the fight, certainly in the State legislative level, are very open about how this

is a much broader assault on unions and the allies of unions.

I guess I specifically want to know if you disagree with that very

specific statement made by the senate leader.

Governor WALKER. Two things. One, I think any outside observer

of politics in our State would probably jump to that conclusion for

all the parties involved. They would look at the $4 million the

unions pumped in during the debate and the TV ads that went on;

they would look at the money you reference and others and say

outside of Wisconsin there is a lot of people who are viewing this

in a larger context.

Mr. MURPHY. Except this fight wasn’t started by labor; this fight

was started by——

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Governor WALKER. No, but you just asked about the money and

I clearly recognize that. I want to put in context that there is a lot

of money all the way around coming from all sorts of sources, and

I think a lot of whom are looking at multiple reasons for this. I

can’t answer for Scott Fitzgerald, I can’t for others; I can answer

for Scott Walker, and I can tell you for me it is about, certainly in

part, about the budget, but it is also ultimately about making government work better and, I think, protecting—when I talk about

the middle class, it is not just the paying middle class, it is even

middle class individuals who work for State and local government

because, for us, we ultimately believe, and we have seen the alternative, we are protecting middle-class jobs by avoiding what many

other States are doing with massive layoffs at both the State and

local level, and by ultimately putting in place a system where the

government is going to work better, particularly for schools. I have

two kids in a public school. I care very deeply about it. I would like

to have a system, like we do elsewhere in society, where we pay

for performance, not just reward based on seniority. I would like

to have people based on merit and performance. This measure,

these reforms empower us to keep our best teachers in the schools,

to keep our best city and county and State workers in place, and

that is part of the package as well.

Mr. MURPHY. My time is almost up. I understand you can’t speak

for him, but you can certainly opine as to whether you agree with

your State senate leader when he says that this is ultimately about

trying to defeat President Obama in Wisconsin. Do you agree

with——

Governor WALKER. I can tell you what it is for me. It is not about

that, it is ultimately about balancing the budget now and in the future; not just in the temporary, because we have had too many people temporarily trying to push our problems off to the future. This

is a long-term answer and it is about long-term reform in our government so our schools, our local governments, and our States operate better. That is what it is for me.

Mr. MURPHY. There are millions of dollars being pumped into the

State who disagree with that vision, but I appreciate your answer.

Thank you very much.

Mr. GOSAR. I thank my colleague.

I want to acknowledge my colleague, Mr. Gowdy, from South

Carolina.

Mr. GOWDY. Thank you, Mr. Chairman.

Governor Shumlin, I noted the conciliatory tone in both your introduction and your opening statement. I made a couple of notes.

You mentioned the Unity Tour, which I found inspiring. You said

come to the table. You mentioned the word reasonableness and

openness, and on four different occasions you said come together.

My question to you is how do you do that when the side with whom

you disagree has absconded from the State and is essentially a fugitive from responsibility. What table do you sit at when you are

not in the same State?

Governor SHUMLIN. Well, you know, you don’t apply the reasonableness plea in the heat of the crisis; you avert the crisis. And I

will just tell you by way of our experience under the Republican

Governor, Jim Douglas, we needed to get roughly $25 million out

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of our pensions for teachers to balance our budget, and things

weren’t going so well in those negotiations with the Governor. So

the Democratic senate president, myself, and the Democratic

speaker sat down with the union and said, listen, we are going to

have to get these savings, and we can do it with you or we can do

it without you, and, really, we would like to do it with you, and

they turned to us and said we want to do it with you. So my point

is when you are going to work together, when you are going to do

what the American people want most desperately from their politicians, and God knows they want it from Washington right now and

so do I, reasonableness, compromise, common sense, you have to

start with that foot; you can’t ask for it once you have created a

crisis.

Mr. GOWDY. But there is a concept of mutuality that is inherent

or required for that to happen. I know you would agree with me.

I also want to say inherent in your comments, to me, and in your

testimony, frankly, is civility.

Governor SHUMLIN. Right.

Mr. GOWDY. In the last 2 weeks alone, Members of this body

have been told by a colleague to go to hell. Not purgatory, not

shule, not haitis, not the river sticks, but hell. We have been told

that we want to kill women. And my colleague from Virginia just

made a reference to a surreptitious phone call that was placed to

an elected official. Will you help me and join me in decrying the

rhetoric and the tactics that I just laid out?

Governor SHUMLIN. You know, I think that civility has to be applied to all public officials, and I think that we need to raise the

bar collectively, and that applies to Washington, it applies to State

governments across this country. We have——

Mr. GOWDY. Do you think that making surreptitious phone calls,

pretending to be someone you are not, enhances civility and discourse in this country?

Governor SHUMLIN. All I can say is I have no disagreement with

you that the civility tunnel runs both ways, and we all have a responsibility as public servants, and the American people expect it,

for us to be civil all the time.

Mr. GOWDY. You, in response to Dr. DesJarlais, I think, and,

again, I always allow for the possibility that maybe have been misquoted, the ability to collectively bargain is a basic human right in

democracy. What is your authority for that statement? What is

your constitutional authority for saying that?

Governor SHUMLIN. Well, free speech.

Mr. GOWDY. Beyond your ability to say it, where would you point

me in the Constitution for support for the underlying notion?

Governor SHUMLIN. You know, it is my belief, as a Governor of

a State, that collective bargaining is a right and something that

has served this country with extraordinary progress and distinction, and it has allowed, as I mentioned, families like mine, who

came from nothing, to succeed economically in the best democracy,

in the best economy, in the best business climate that anyone could

ever design. So all I can say is I see it as a basic right.

Mr. GOWDY. Are there exceptions?

Governor SHUMLIN. We are allowed to organize.

Mr. GOWDY. Are there exceptions?

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Governor SHUMLIN. Not that I can think of.

Mr. GOWDY. Law enforcement?

Governor SHUMLIN. I think law enforcement should be able to

collectively bargain just like anybody else. They have in our State

and it has had great results.

Mr. GOWDY. In my State of South Carolina, we laid off prosecutors, law enforcement officers, and teachers; we furloughed them

for 5 days last year because we have a fiscal crisis like almost

every other State. Is that something that you would entertain in

your State? Could you ever see furloughing the core functions of

government, which all three of those categories are, could you ever

see that happening?

Governor SHUMLIN. We actually did move our courts from a 5-

day week to a 4-day week. I would not furlough——

Mr. GOWDY. Your Federal courts or State? Because the Federal

judges have always been on a 4-day week.

Governor SHUMLIN. We have noticed. Our State judges.

Mr. GOWDY. I see my time is up. Thank you.

Mr. GOSAR. I thank the Member.

Acknowledge my colleague, Mr. Tierney, from Massachusetts.

Mr. TIERNEY. Thank you, Mr. Chairman.

Thank you, Governors, for being here today.

Governor Shumlin, let me just ask you. When you were trying

to resolve your fiscal problems in the State, did you start off with

the unions by telling them that you were going to require them to

hold annual votes to continue representing the government employees, that you were going to no longer deduct union dues from the

employees’ paycheck, and then expect them to come to the table

and start a really good solid conversation with you? Is that the way

you began your conversation?

Governor SHUMLIN. No, Congressman Tierney, that is not what

I led with.

Mr. TIERNEY. OK. I just think that is a point worth making. But

let me also ask you what percentage of your annual State government spending is the contributions to your pension accounts?

Governor SHUMLIN. It is about 4 percent, and I think it is important that we remember that. When I talk about the real challenges

of Governors having to balance a budget, my health care costs are

going up by double digits, my corrections budget has doubled. My

challenge is not pensions. Of course it is a consideration, but our

pension funds are now performing quite well and we are doing OK.

Mr. TIERNEY. Governor Walker, what percentage of your State

spending is related to the pensions account?

Governor WALKER. If you look overall—and I don’t have the exact

percentage off the top of my head, but——

Mr. TIERNEY. Well, let me ask you this——

Governor WALKER [continuing]. But I can give you the

numbers——

Mr. TIERNEY. I prefer you give me the percentage, but if you

don’t know that, is it significantly more or less than the 4

percent——

Governor WALKER. Well, the total budget for the next biennial is about $60 billion. The total amount of savings that we have from

the reforms we put in is 1.4 for the——

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Mr. TIERNEY. You don’t choose to answer the question. Look, the

National Association of State Retirement Administrators says that

less than 3 percent of all State and local government spending is

generally used to fund public pension funds.

Governor Shumlin, you are at 4 percent, so you think that is generally, roughly right?

Governor SHUMLIN. That is correct.

Mr. TIERNEY. Governor Walker, do you want to make an opinion

one way or the other or pass on it because you——

Governor WALKER. Again, I can followup and give you the percentage based on the numbers.

Mr. TIERNEY. I would appreciate it if you would do that. Thank

you.

We talked just a second, Governor Shumlin, about the defined

benefit versus the defined contribution on that. From your earlier

conversation, my understanding is that you recognize that when

you switch from defined benefit to defined contribution, there is a

tremendous shift in the risk to the beneficiary, am I right?

Governor SHUMLIN. Risk and cost.

Mr. TIERNEY. And they both go more heavily onto the shoulders

of the employees, correct?

Governor SHUMLIN. And the taxpayers.

Mr. TIERNEY. And basically, generally, in your State and I think

in others, that when this original situation was set up, that was

part of the bargaining process, that the employee may have taken

less in pay or some other area they were negotiating on in return

for having a little more security in retirement, am I right?

Governor SHUMLIN. That is the promise that was made.

Mr. TIERNEY. OK. So it was the employer making that deal, as

well as the employee.

Governor SHUMLIN. That is correct.

Mr. TIERNEY. Seems like a fair deal to you, fair thing to negotiate?

Governor SHUMLIN. Yes.

Mr. TIERNEY. Let me ask both of you, if I could, on that. Do either of you ask for the authority for bankruptcy for your respective

States?

Governor WALKER. No.

Mr. TIERNEY. Governor Shumlin.

Governor SHUMLIN. No.

Mr. TIERNEY. OK. Do either of you believe that a bankruptcy

court is better able to overcome political differences than the political process in your State, Governors and legislature?

Governor WALKER. No.

Governor SHUMLIN. No.

Mr. TIERNEY. Do either of you think that the bankruptcy court

is better able to restore fiscal stability in your respective States?

Governor WALKER. No.

Governor SHUMLIN. No.

Mr. TIERNEY. And do either of you think that the bankruptcy

court would be a better manager of your State’s finances?

Governor WALKER. No.

Governor SHUMLIN. No.

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Mr. TIERNEY. OK. So you both agree with the letter that Governor McGuire, who is a Democrat from Washington, and Governor

Heineman, who is a Republican from Nebraska, sent to congressional leaders that essentially made that point. Their letter said

that allowing States to declare bankruptcy is not an authority that

any State leader has asked for, nor would they likely use it. States

are sovereign entities in which the public trust is granted to its

elected leaders. The reported bankruptcy proposal suggests that a

bankruptcy court is better able to overcome political differences, restore fiscal stability, and manage the finances of a State. These assertions are false and serve only to threaten the fabric of State and

local finance.

Would each of you gentlemen be pretty much in agreement with

that comment?

Governor SHUMLIN. That is the NGA’s position and I support it.

Mr. TIERNEY. Governor Walker.

Governor WALKER. I agree.

Mr. TIERNEY. Thank you.

I yield back. Thank you, Mr. Chairman.

Mr. CUMMINGS. Would the gentleman yield? Would the gentleman yield?

Let’s go back to you, Governor Shumlin. You know, you were

talking about the maple syrup and whatever and your methodology. There was one word that you left out, and the reason why

I think you got the cooperation that you got is because of respect.

The workers felt that you respected them. I heard your story, and

I wouldn’t be here either if it were not for unions. No doubt about

it. My parents were former sharecroppers in Manning, SC, came up

to Baltimore, got a union job, and that is why I am here today. So

I just wanted you to know. And they felt respected.

Governor SHUMLIN. I appreciate your comment. Obviously, respect for our firefighters, for our police officers, for the folks that

risk their lives every day, for the folks plowing the roads and all

of our public employees is incredibly important to any chief executive.

Chairman ISSA [presiding]. The gentleman from Arizona, Mr.

Gowdy. I am sorry, the gentleman from Arizona, Dr. Gosar.

Mr. GOSAR. Thank you.

I want to get back to our original topic here, about State and municipal debt. We are not talking apples to apples in your States.

Let me get this right. You actually are a tax giver to the Federal

Government and you are a tax taker from the Federal Government,

if I am not mistaken, right? For every dollar of tax you get only

82 cents back and Vermont gets $1.12 back, right?

Governor WALKER. You know, I am an expert on the cheese in

our States, not the apples.

Mr. GOSAR. OK. Well, apples and cheese go along with wine and

maple syrup.

Governor WALKER. Yes, that is true.

Mr. GOSAR. But there is a difference. So my link here is that I

am coming back to the basic core problem with all States is the

Federal mandate, and things that some of the States should be

doing, right? Particularly Governor Shumlin, you talked about

health care and corrections. Isn’t that a 10th amendment right?

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Wouldn’t you like, don’t you like the ability to have some flexibility

in regards to oversight of those funds?

Governor SHUMLIN. Well, yes, frankly, but you need to define

what we mean by flexibility, because my fear is, as we have

this——

Mr. GOSAR. Well, part of—I think you are going there.

Governor SHUMLIN. If I can just finish what we were saying. As

we get a little bit toward the next budget discussion is that flexibility means we are going to leave the requirements and take the

money on behalf of the Federal Government, and the States are

going to be in tougher shape than we are in already with underreimbursements for Medicaid and Medicare.

Mr. GOSAR. Well, and I understand, because with the unfunded

mandate there is this hidden cost that no one wants to talk about,

and that is for that Federal law to be enacted in a State, we hire

more workers that are not on the private sector, they are on the

public sector, and, therefore, these roles continually go up. So part

of this is based upon, or the majority, if I look across the board,

coming from Arizona, and, holy cow, we will get to those numbers

here in a second. But the problem is the budget problems in each

of the States are derived by the unfunded mandate by the Federal

Government.

Governor SHUMLIN. You know, I think that is an oversimplification. I think the budget challenges in the States are derived from

the worst recession in American history that was brought on by a

lot of greed on Wall Street and a housing bubble that got transferred to Main Street. That was the culprit.

Mr. GOSAR. Oh, I have to stop you there, because didn’t we also

have a problem with the Federal Government in that? Didn’t the

Federal Government establish itself in the risk pool and all the aspects of risk telling the regulators and telling the banks and telling

the financiers you will do this? So there is equal blame to go

around, and that is not where we want to go about.

Governor SHUMLIN. All right, but I would actually argue that if

we want to get into that, that it was the lack of regulation——

Mr. GOSAR. Thank you.

Governor SHUMLIN [continuing]. Of Wall Street that led us to the

crisis.

Mr. GOSAR. And that is government. Once again, government

problems, and coming from the Federal Government. But what I

am trying to get back to is it is not an oversimplification, because

when we are telling you a rule, if it is intrinsic to the Federal Government’s mission, do you think they ought to pass the buck to you

or they should fully fund it?

Governor SHUMLIN. I think the Federal Government should keep

its promises to the States.

Mr. GOSAR. And are you prepared to honor those promises to

communities?

Governor SHUMLIN. Absolutely.

Mr. GOSAR. OK. So when we are talking about health care and

corrections, I am having a problem here on where this unfunded

mandate is coming from, because we constantly are kicking the can

down the road and these are the core principle problems that you

brought up, health care and corrections.

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Governor SHUMLIN. Well, you know, it isn’t the mandates. We

don’t have Federal mandates standing in our way in the way of corrections that are really a budget challenge. On health care we——

Mr. GOSAR. Wait a minute. I have a famous sheriff out in my

neck of the woods and the Federal Government is breathing down

his neck and telling him, yes, you can do that, no, you can’t do

that. So there is some oversight in regards to the Federal Government that dictates exactly how you can incarcerate a prisoner or

how you have to go through a process, does it not?

Governor SHUMLIN. I don’t see it as a cost driver in my State

budget.

Mr. GOSAR. Hmm.

How about you, how do you feel, Governor Walker?

Governor WALKER. Well, there is no doubt that not only the mandates from the Federal Government to the State government, but

many times the mandates that then go on to the local governments

are driven largely by the mandates that start here. And to the extent that we get more freedom and flexibility, one thing the Governor said earlier I would concur is I would love to have a block

grant. I want to make sure that that doesn’t mean that that is just

say, here, have it, now we are going to cut it in half, either. I realize that there is a core group of people on things related to Medicaid, but I do believe if you put the power back in the hands of

the people at the State level, the States are better equipped to

tackle those challenges and in turn can—one State versus another

State is going to have very different needs and very different outcomes. And the more that we can adjust to that and not have a

one-size-fits all, the better off we are going to be.

Mr. GOSAR. Thank you.

Chairman ISSA. I thank the gentleman.

The gentlelady from New York, Mrs. Maloney.

Oh, she has returned. The gentlelady from California, Ms.

Speier.

Ms. SPEIER. Thank you, Mrs. Maloney and thank you, Mr. Chairman.

And thank you both for your participation here today. I don’t

know that I would have done this if I were the two of you, but I

am glad that you have.

Let me start off with Governor Walker. I have here a Web site,

www.standwithwalker.com, that is supported by the Americans for

Prosperity and it is, of course, funded by the Koch brothers, and

in it they say the following: When public sector workers gain sweetheart contracts filled with plush benefits unheard of in the private

sector, the taxpayer loses every time.

Do you agree with that statement?

Governor WALKER. I haven’t seen that statement before, but I

know one of your colleagues asked me earlier who pays, for example, for the pensions and things of that nature, it is the taxpayers.

So I don’t know about that statement in particular, but conceptually who pays for the pension and health care benefits? It is the

taxpayers, including public sector employees who are taxpayers as

well.

Ms. SPEIER. Well, these are quite facts about Wisconsin’s budget

repair legislation.

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The second point is respecting the public trust. When teachers

choose not to teach purely to pad their already lavish contracts. Do

you believe that statement, that they have lavish contracts?

Governor WALKER. Lavish contracts? No. Again, you weren’t here

earlier, but I was asked about that as well, and I pointed out, to

me, this is not about—I forgot which of your colleagues, one of the

doctors asked whether I thought public employees were paid too

much or too little, and I said that is not what this is about. This

is about trying to balance the budget and provide long-term reforms that make government work better.

One other——

Ms. SPEIER. Let me ask you this. Excuse me for reclaiming my

time. Do you think the teachers in Wisconsin are paid adequately?

Governor WALKER. If we could set up a system where we rewarded based on performance and merit, I would be even willing

to pay more.

Ms. SPEIER. Well, let me just——

Governor WALKER. But we don’t have that system right now; we

have one solely based on seniority.

Ms. SPEIER. Do you know what the starting teacher’s salary is

in Wisconsin?

Governor WALKER. Starting? Depends on the district. I know, for

example, the Milwaukee public school system, the total compensation package for an average employee is about $101,000.

Ms. SPEIER. Well, the starting teacher’s salary in Wisconsin is

$25,222, and Wisconsin ranks 49th in the Nation in terms of starting salaries for teachers.

Governor WALKER. And the reason for that is because that talks

about starting salaries, not total benefit packages. So, for example,

if you are in a school district like many where they don’t pay anything for health care, that is an added benefit in terms of what the

costs are.

Ms. SPEIER. You are 49th in the Nation in what you pay your

school teachers.

Now, let’s talk about contributions. How much have you received

in contributions from the Koch brothers?

Governor WALKER. From the Koch brothers? None directly that

I know of. There are probably other groups that supported us, but

I don’t know what the total is.

Ms. SPEIER. Well, I am under the impression you received

$43,000 from the Koch brothers during your gubernatorial campaign.

Governor WALKER. Could be. I had 50,000 contributors. I couldn’t

tell you who they were.

Ms. SPEIER. Did you take the phone calls of all those 50,000 contributors when you were in the middle of that crisis?

Governor WALKER. I talked to a whole lot of people every day.

Ms. SPEIER. All right.

Let’s move on to Governor Shumlin. I was really impressed by

one of the statements, many of the statements you made, but one

in particular, in which you said that Wall Street really believes

that this crisis creation is really relative to the States and their potential bankruptcy is really a figment of the imaginations of some

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who are politically motivated to create that kind of angst. Could

you expound on that a little bit?

Governor SHUMLIN. Sure. And I want to be careful, because if I

misspoke, I want to be careful here. I hope I didn’t say it was a

figment of the imagination.

Ms. SPEIER. No, it was my term.

Governor SHUMLIN. OK. What they said was, and in meeting

with rating agencies that I just went through, and Governors do

that, we go down and make sure that our bond ratings are strong

and that they know how we are managing our budgets, and what

they said in two of the three rating agencies is, when I asked about

this question, that they feel like the doom and gloom about pensions of the States is greatly exaggerated for political reasons; that

they don’t think any States are going bankrupt; that they don’t

think it is the States’ biggest challenges; and that they are puzzled

by the current perceived crisis.

Ms. SPEIER. Now, in much of our discussion today about defined

contribution, what is missing is the fact that the taxpayers have

to pay 50 percent of that pension benefit every single month, regardless. And in a defined benefit plan, as you pointed out, 80 percent of the cost is actually borne by the growth that the investments receive. The taxpayers then end up only paying about 20

percent. Is that not correct?

Governor SHUMLIN. That is correct. And another point that is important to remember is, which I mentioned earlier, but I want to

make sure it is emphasized, that in this financial crisis we have

asked our public employees, our unionized employees to pay more.

Both our teachers and State employees have agreed to pay more,

to increase the share that they are paying. Somehow that is getting

lost between the trees here. The fact of the matter is, yes, you are

correct, 80 percent of payments come from investments in the fund;

and, second, we have asked our employees and they have agreed

to pay more than they were paying pre-crisis. So we are balancing

this crisis, to some degree, on their backs.

Ms. SPEIER. Thank you.

I yield back.

Chairman ISSA. I thank the gentlelady and I thank Governor

Walker and Governor Shumlin for being here.

Mrs. MALONEY. [Remarks made off mic.]

Mr. WALBERG [presiding]. I am up next.

Mrs. MALONEY. [Remarks made off mic.]

Mr. WALBERG. I accept that. No, we are not closing. I am just allowing the chairman a vote opportunity in Judiciary Committee, as

I was voting and chairing a subcommittee. I was dealing with a

noncontroversial issue and I apologize for not being here. DavisBacon is what we were talking about, so I had to be there. But I

did read your testimonies and appreciate you being here, so I did

want to ask some questions.

Governor Walker, I also appreciate the fact of what you build in

Milwaukee and enjoy riding my Road King. I understand you ride

as well. And I have enjoyed both in Wisconsin and in the beautiful

State of Vermont. There are days I wish I were there right now.

As a former State official in the State legislature, I am very familiar with your situation, Governor Walker. When I started my

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tenure back in 1982 there, we had a $1.8 billion budget deficit. A

process of a number of years we enacted 26 tax cuts, regulatory reform, a number of things that went to ultimately, when I left in

1999, we had a budget surplus, a rainy day fund of $1 billion.

Hasn’t history repeatedly proven that lowering taxes encourages

economic growth and ultimately increases revenue for the States?

Governor WALKER. Yes, we have seen that in the past, and we

saw the opposite of that 2 years ago when my predecessor and the

legislature moved to pass a budget repair bill in 24 hours that

raised taxes by about $1 billion, and we saw, obviously, higher unemployment and job loss after that. So clearly raising taxes in an

economic crisis is not the right answer. The more you put money

back in the hands of job creators, I believe the better off you are

going to be.

Mr. WALBERG. Build the economy.

Governor WALKER. Absolutely.

Mr. WALBERG. Well, right now Michigan, as you know, in talking

with our new Governor, we are at a $5.7 billion budget shortfall.

Governor Snyder is taking some aggressive steps and being pushed

back as well, as you have experienced, including dealing with an

emergency manager authority over municipalities. That leads to

my question. What do you think of that type of authority and what

are some other reforms that may need to be pursued in order to

strengthen the fiscal standing of States like your own?

Governor WALKER. I would have to look specifically at what Rick

is proposing there in terms of oversight of the local government. I

will tell you, though, this goes to the heart, as a former county official, of what I am talking about and why we pushed reforms that

weren’t just about the momentary. They weren’t just about fixing

things together, or even over the next 2 years, but about providing

long-term relief. Let me be clear, because I think sometimes people

confuse this into thinking this has an impact on private sector

unions. It doesn’t; collective bargaining is fully intact for any of the

private sector unions out there. This legislation that we signed into

law doesn’t have an impact on that for the public sector. To be able

to make changes that ensure stability, financial stability in governments at the State and the local level, we had to make these

changes, and even more so to make sure that government can continue to be reformed, and where we can improve the system and

ultimately reward good employees. That also was a part of this

package as well.

So, in totality, I believe we give local governments the kind of

long-term tools they need not only to balance their budgets, but to

make prudent decisions so they can protect core services.

Mr. WALBERG. I appreciate that. Well, I was going to ask both

Governors, but let me continue my questioning here at this point.

What steps can, Governor Walker, or should not, I guess the positive and the negative, what steps can or should not Congress do

to help you in your budget situation? And I guess following up with

that, do you agree that another State bailout is not the solution?

Governor WALKER. Well, to me, asking the taxpayers, and me as

a Federal taxpayer, which obviously we are reminded of this week,

asking me to bail out another State isn’t something I am particularly interested in as a taxpayer. To me, I think each of us in each

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of the 50 States have to make, in many cases, the tough decisions

to ensure that we not only balance our current budgets, but we

make long-term decisions. And if we look to other people at the

Federal level or other entities to do that, I think that puts us in

a very precarious position.

One other thing, if I might digress for just 1 second from your

question. The gentleman from Massachusetts, and I apologize, I

think his nameplate is turned, asked me a question about process,

and one thing is just important to put in the record. We didn’t start

the debate the way that it has been characterized. In December,

after the elections but before I was sworn into office, the public sector unions in the State rushed to the lame duck session in the legislature and to the Governor and tried to pass through contracts

that would have locked us in to a more dire financial situation with

costs that I believe we couldn’t account for with a $3.6 billion deficit on the horizon. So that was the initial act.

Now, we were successful in appealing even to some of the Democrats in the legislature to stop that from happening and giving us

a chance to do that, but when people ask why didn’t we begin by

negotiating, it was really the tone was set early on by the process

that was taken after the election but before we were sworn in, and

that is why it became clear to us that we needed to empower both

our State and local government to make those sorts of long-term

changes.

Mr. WALBERG. I thank the Governor and now turn to Ms.

Maloney. And I thank you for putting up with the confusion that

went on there.

Mrs. MALONEY. Well, thank you and thank you for your very

thoughtful questions.

Welcome, Governor. I thank you for your testimony and for being

with us here today.

Governor Walker, many unions and some elected officials, including some Republican Governors, have criticized your actions as extreme, referring to them as some sort of fringe effort to attack

workers’ rights and dismantle unions. How do you respond to these

criticisms? Do you feel your actions were extreme or out of the

mainstream in any way?

Governor WALKER. No, because I believe fundamentally if what

we have heard said over and over again was a fundamental right,

you all in Congress would be acting on it right now. You do not

have collective bargaining, other than Postal Service workers, for

the vast majority of public employees who work for the Federal

Government for wages and for benefits. If it is a fundamental right,

why aren’t you debating it right here now? It is not; it is a government entitlement. Collective bargaining is important for the private sector, for the examples we have heard about the impact it

has had on families and legacies. Private sector unions are my

partner in economic development, I work with them, and I hope to

work with our public employees.

Mrs. MALONEY. OK.

Governor WALKER. But collective bargaining itself is not a fundamental right. Rights come from the Constitution, and nowhere in

the Constitution does that clearly define that.

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Mrs. MALONEY. Well, many of the criticism does come from

unions, but I have a stack of editorials here from major papers

across the country, and I would like to go through some of the

headlines. We have the Chicago Sun Times, and its editorial says,

Cut Pensions But Don’t Bust Unions. We have the Philadelphia

Enquirer, and it says, A Bridge Too Far. The Los Angeles Times

says, ‘‘Wrong in Wisconsin.’’ And the Boston Globe, its headline

says, By Overreaching, Wisconsin Governor Hinders Reforms in All

States. I even have some editorials from your own State’s papers,

the Milwaukee Wisconsin Journal, the Centennial, and the Green

Bay Press Gazette. I would like to read from a few of these and

get your response.

The Philadelphia Enquirer calls your actions ‘‘a partisan plot

masquerading as fiscal prudence.’’ The New York Times says,

‘‘Even when unions have made concessions, Republican officials

have kept up the attack. The Republicans claim to be acting on behalf of taxpayers, and this is not believable.’’ The LA Times says

your claim ‘‘that public employee unions must be crushed in order

to balance the State’s budget is deeply disingenuous.’’ And the Milwaukee Wisconsin Journal Centennial writes that ‘‘unions have

conceded on benefits, but parts of Walker’s budget repair bill unfairly targets collective bargaining for public employees.’’ Even the

Green Bay Press Gazette, a newspaper that I believe endorsed you

when you ran for Governor, says your approach ‘‘casts the debate

as an anti-union campaign and not a tough but fair shared sacrifice.’’

So what is your reaction to these statements by respected papers

across our country?

Governor WALKER. Sure. Thank you for your question. I would

point out two things. One, just a factual error that a couple of

those papers alluded to and I mentioned before. The unions did not

reach settlements. Two public employee unions made a statement,

neither of which was codified in any agreement and none of

which——

Mrs. MALONEY. But, Governor, this was not referring to those

specifics——

Governor WALKER. No, I will answer your other point——

Mrs. MALONEY. But may I finish? Because my time is expiring.

I believe the point that they made in these editorials is the same

point that many of us on this panel have been trying to make

today, and we are trying to make the point that it is one thing to

ask for shared sacrifice for financial reasons, but it is very unfair,

and you appear to be trying to strip American workers of their

rights, and there does not seem to be any financial rationale at all.

That is what these editorials are making.

Governor WALKER. Sure.

Mrs. MALONEY. Instead, it appears very much to me and to others to be ideologically and politically motivated.

Governor WALKER. Per your original question, I would say many

of those same voices said the same thing about Mitch Daniels in

2005. After his time in office, after people saw the benefits of the

collective bargaining reforms he put in place, where government

got more efficient, more effective, more accountable, and where ultimately public employees who were doing a great job got reVerDate 17-JUN-2003 16:10 Oct 19, 2011 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\68361.TXT KATIE PsN: KATIE
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warded, the people in his State re-elected him with 58 percent of

the vote. I think it is because they recognized results. They wanted

results, and that is what they got.

Chairman ISSA [presiding]. I thank the gentlelady.

We now recognize the former chairman of the full committee, the

gentleman from Indiana, Mr. Burton, for 5 minutes.

Mrs. MALONEY. Mr. Chairman, may I put these editorials in the

record?

Chairman ISSA. Without objection, so ordered.

Additionally, the earlier unanimous consent for Mr. Connolly is

accepted, so his will also be placed in the record.

[The information referred to follows:]

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Mr. BURTON. Governor, you can’t run out on me now; I was going

to say something nice about you.

Unidentified SPEAKER. Congressman Burton, he is going to be

right back, and we just——

Chairman ISSA. Ladies and gentlemen, we are going to take a 2-

minute recess.

[Recess.]

Mr. BURTON [presiding]. Governor Walker, I really appreciate

you mentioning Mitch Daniels. He is my Governor and we think he

has done one hell of a job, and we are proud that you think so as

well. And he did a lot of the things that you have tried to do in

Wisconsin by executive order, and, as you said very clearly, the

State is in good fiscal condition. He has done an outstanding job

and we are very proud of him, and that is why he got re-elected

by such a large majority. And he won re-election at a time that,

for the first time since 1964, we lost a State to the Democratic candidate, Mr. Obama, for President. So it shows you against the tide

he did very well.

I would like to ask you, Governor Shumlin, you don’t have a balanced budget requirement in your State.

Governor SHUMLIN. No, we do not.

Mr. BURTON. And you are going to adopt a single payer system

for health care?

Governor SHUMLIN. We are trying, yes.

Mr. BURTON. And how are you going to pay for that?

Governor SHUMLIN. Well, our challenge in health care reform

across the country in both Federal and State, in my judgment, has

been that no one has gotten cost containment right. So our first

challenge is to design a system where we are using our dollars

more efficiently and ensuring that we are spending less on health

care. Once we figure out how to get cost containment right, and

that is a real challenge, as you know, we are then going to figure

out the best publicly financed method to pay for it, and that decision will be made in 2013.

Mr. BURTON. Are you familiar with the situation in Tennessee

with their plan or the situation in Massachusetts with their plan?

Governor SHUMLIN. I am not clear what you are alluding to.

Mr. BURTON. Well, I mean, they went to a program that is not

exactly like yours, but similar; the government was going to control

the health care and the expenditures and that sort of thing.

Governor SHUMLIN. Well, I can tell you that I don’t study Massachusetts and other States as much as I study Vermont and, frankly, we have already done that. We have Dr. Dynasaur, which covers

all our children. The Republican Governor, Jim Douglas, passed

Catamount, which covers you up to 300 percent of poverty with a

great benefits package. We have VHAP, Vermont Health Access. So

no one has better access, I don’t believe, with the exception of

maybe Massachusetts, than the State of Vermont. So my challenge

is that we have done access; we now have a cost problem. They are

doubling every 10 years; it is driving businesses and middle-class

Americans who are paying more and more money for less and less

insurance. We think we can get it right in Vermont.

Mr. BURTON. Without raising taxes?

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Governor SHUMLIN. Well, the point is we are raising taxes right

now because health care premiums are going up so quickly, the tax

being money coming out of Vermonters’ pockets at a higher rate

than they can earn for rising health care costs. I pay it as a business person when I give my employees health insurance; it is a

health care tax. Rising cost for a tax on business and a huge hindrance to job creation.

Mr. BURTON. So you probably will have a tax increase.

Governor SHUMLIN. No, we won’t have a tax increase. What we

will do is design a system where we spend less on health care than

we are spending now and find a way to pay for it where it follows

the individual and isn’t required by the employer. The tax increase

now is coming from the rate at which health care costs are growing, about twice of our income. That is what we are trying to fix.

Mr. BURTON. I understand there is going to be an offset there,

but how do you make the offset? I mean, you have to have the

money to offset the rising cost of health care. How are you going

to get it?

Governor SHUMLIN. We are going to reduce the rising cost of

health care. We are getting the money right now——

Mr. BURTON. No, no, I understand that. But if you can’t reduce

the rising cost. Let’s say it doesn’t work——

Governor SHUMLIN. If we can’t reduce the cost, we won’t pass the

bill.

Mr. BURTON. You won’t pass the bill.

Governor SHUMLIN. That is right.

Mr. BURTON. So you won’t have a tax increase.

Governor SHUMLIN. Our goal is to pay less for health care and

ensure that we are delivering quality health care to all Vermonters

without the waste.

Mr. BURTON. Well, I understand, and you are a very good politician; you are skating the issue. You are not saying you will not

raise taxes, but, if necessary, you probably would have to.

Governor SHUMLIN. What I am saying is that we are paying the

tax right now. It is on my business; it is on every business in

Vermont; it is every Vermonter’s——

Mr. BURTON. I understand, Governor.

Governor SHUMLIN [continuing]. Paying for premium.

Mr. BURTON. I can see how you got elected, Governor; you are

sharp.

Let me just say, Governor Walker, I don’t see how the local municipalities in your State who are facing rising costs could possibly

have survived without huge property tax increases or other tax increases unless you did what you did, so I was very happy that you

had the perspicacity to hang in there when you had those problems. I would just like to ask you now—I know this is before the

court, your supreme court. Do you have any idea when they are

going to make a ruling on your case?

Governor WALKER. Well, an appeal has been made to the supreme court right now. Very well, maybe likely today, the circuit

court mentioned yesterday they may even, by today or tomorrow,

put forth a ruling on the original issue on the open meetings law.

But one way or the other it will probably end up in the supreme

court, but it could be as early as this week.

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Mr. BURTON. And that will probably be a close vote, I would

imagine, on the supreme court.

Governor WALKER. It is hard to tell. I am not a lawyer, but when

I was in the legislature I had the audacity to actually read the legislation I voted on, so sometimes I was accused of being a lawyer.

But I read the statutes, and in this case the law is pretty clear,

and I think in the end, whether it is the circuit court, the court

of appeals, or the supreme court, ultimately they will rule in favor

of the legislature. I have said all along it is not if this will be the

law, it is when.

Mr. BURTON. They are providing a speed reading course for

Members of Congress so they can read 2,500 pages in one 24-hour

period, so I am happy that you in Wisconsin were reading the bills.

As I understand it, the State and local governments, you asked

the employees to contribute 5.8 percent to their pensions and 12.6

percent to their health care premiums, and the current private sector employees are paying about 20 percent. So what you were talking about was substantially less, even though you were having an

increase, substantially less than what the private sector was paying.

Governor WALKER. That is correct. Middle-class taxpayers in our

State are paying more and they are also, on top of that, paying for

the government that they will have to pay for.

Mr. BURTON. Now, do you have a merit pay system in Wisconsin?

Governor WALKER. We have a civil service protection system

where we have some benefits for those non-represented employees,

but we don’t have the same things under those individuals who are

represented employees. This would allow us to do that not only at

the State level, but ultimately at the local level, which is particularly important in schools, cities, towns, counties, so forth. We

could pay for performance and that would be exceptional.

Mr. BURTON. Very good.

Well, I see the boss is back, so I will turn the chair back to him

and I yield back.

Chairman ISSA [presiding]. The Chair now recognizes the

gentlelady from the District of Columbia.

Mr. CUMMINGS. Mr. Chairman? Mr. Chairman.

Chairman ISSA. The ranking member is recognized.

Mr. CUMMINGS. I would just ask unanimous consent that Ms.

Norton be given 7 minutes, as was Mr. Burton. He just took 7 minutes. I just want to make sure we got equal time, that is all.

Chairman ISSA. Absolutely. We have run over on almost every

person, but certainly I expect that the next speaker may run over

a similar period of time.

The gentlelady from the District of Columbia.

Ms. NORTON. Thank you. Thank you both.

I am very grateful for both of you to come this morning because

you present us with a contrast in approaches running a State government in hard times, and I certainly want you to know that I

recognize that there would be great differences between your two

States. Both of you, though, come from States with a history of

strong unions and collective bargaining, so in an important way

you are comparable. But, of course, there has been quite different

results with those unions. You are facing something of a backlash,

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Governor Walker, court cases and all the rest of it. I do want you

to know that I believe you faced a terribly serious situation. For

a new Governor to come in and be faced with what you and, for

that matter, Governor Shumlin were faced with is nothing to do

anything but take seriously. There are certainly no more funds

from the Federal Government, as your predecessor had. We are not

mitigating anything for you out there. And cuts are proceeding

here. Now there are warnings that we could face a double dip. I

am telling you that is what happened in 1937. The history books

tell us that President Roosevelt experienced something of a backlash to his spending to get out of the Great Recession, and then in

1937 they called the results the Roosevelt Depression. So I think

the States don’t even have what we have.

I would like to ask you, Governor Walker, have you yet met with

your top union leaders?

Governor WALKER. As has been the practice in the past, the head

of the Office of State Employee Relations, Greg Gracz, has talked

to them about how we move forward from this point.

Ms. NORTON. Wouldn’t it be good, now that you have come out

of the worst of the fight, to seek a meeting with them so as to

mend as much of the breach as you could?

Governor WALKER. Again, on not only this issue, but on where

the employee contracts go forward from this point, that is why Mr.

Gracz set up that meeting. And on other issues beyond just the

public employee contracts, but with the head of the AFL–CIO, for

example, on issues related to unemployment compensation and

changes that need to be made in the future or may need to be

made, we have an Unemployment Compensation Council, and both

he and——

Ms. NORTON. You are the head of the government. You had the

press conferences; you called the shots. These people are not going

away. You would not have to be engaged in negotiation with them

or in the details, but a simple meeting, would that not send a signal to the State that you at least had reached out in hope of better

relations in the future?

Governor WALKER. Well, my better relations at this point have

been with the workers of the State. I have reached out and

talked——

Ms. NORTON. Many of the workers are in fact represented, and

unless they believe that their unions have a better relationship, I

don’t know why in the world they would figure that somehow you

could jump over them and have a better relationship, given what

has already happened to them, Governor Walker.

Governor WALKER. Again, the common practice in the past is to

work through the position that Mr. Gracz has right now——

Ms. NORTON. All right, Governor Walker, I see that you are just

where you were. It is what happened in the past that led to the

most serious breach Governors had with his workers in memory.

Let me ask Governor Shumlin. You have also had hard times in

your State, and let me see if the figures I have been given are correct: that the State employees voted to accept the 2-year 3 percent

cut; that the teachers are agreeing to three additional years of

work before retiring and to contribute a greater percentage of their

pay toward their pensions, and pensions are at the root of much

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of the trouble of the States; that your State Employees Association

voted to increase the pension contribution by 1.3 percent over the

next 5 years. How have you been able to get unions to give up so

much and apparently to maintain some kind of relationship with

collective bargaining in your State?

Governor SHUMLIN. Well, Congresswoman Norton, you know, I

think you got to the heart of it right in the beginning of your comments. The first thing that I did as Governor, after getting sworn

in, that every day, was call the Vermont State Employees Association, our State employee union, into the office and tell them that

I needed to make $12 million worth of additional cuts, and I wanted their cooperation, through hiring freezes and other methods,

which are not part of the list of concessions——

Ms. NORTON. Did you threaten them if they didn’t——

Governor SHUMLIN. I absolutely didn’t threaten them. I said we

have to work together to solve this problem. And guess what? They

stood with us and we have made the cuts. In fact, we have exceeded the $12 million target that we needed to get for this fiscal year.

My point is I have seen both examples. In the last 8 years we

had a Republican Governor who never invited the teachers union

up to his office and, therefore, turned to the speaker and myself to

get the concessions on the $25 million from them. My point is that

reasonableness, compromise, common sense, that is what the

American people are looking for. But what they are looking for

more than anything is for us to all sit around the table together

to solve real problems. We have done that in Vermont. I know that

other Governors are doing it. I think we all would be well served

by that approach.

Ms. NORTON. Governor Walker, I wouldn’t be so presumptuous as

to give you any advice. You know your situation better than any

of us. But if I may, Mr. Chairman, use an analogy based on relationships here in the Congress, you are aware that the Congress

is considered to be very polarized. Now, the chairman and I are on

very different sides when it comes to matters affecting national policy and affecting even the District of Columbia. But when I have

had a disagreement with him, while I have not recruited him to my

position, I have always felt that this was somebody I could talk

with and that we would have a civil conversation. I am known to

be combative, sir. I represent people who have a vote in this committee but don’t have any vote on the House floor, second per capita in Federal income taxes. But I don’t say I never want to speak

to these Republicans who are going to vote for this congressional

resolution coming up. So I am not going to tell you what to do, but

I do want you to know I am in the minority here, and whether I

was in the minority or the majority, and even though we vote often

party line, we maintain good relationships.

Analogizing that to your situation, after you have had a tough

fight with a bunch of unions, I would want to take the high road

and say I am the big guy here; I am calling you in, this is why I

did it, I hope things go better in the future, and be done with it.

Thank you, Mr. Chairman.

Chairman ISSA. I thank the gentlelady.

We have a vote. I do not want to hold the Governors over, so we

have two people left present who have not spoken. I am going to

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ask you to be at or below 5 minutes so that you both can get in,

and then we will recess this panel and thank the Governors.

Mr. Davis.

Mr. DAVIS. Thank you very much, Mr. Chairman.

I want to thank both you gentlemen for not only your patience,

but your very thoughtful responses. I am concerned that there appears to be a systematic attack on American workers, and part of

that attack seems to be designed to blame them for fiscal challenges facing the States.

Governor Shumlin, in your testimony you attribute State budget

shortfalls not to American workers, but to ‘‘the greatest economic

recession since the Great Depression.’’ As you stated, our revenues

are down and the need for government services is up. Is that an

accurate depiction?

Governor SHUMLIN. Absolutely.

Mr. DAVIS. The Washington Post columnist Ezra Klein explained

the same point with respect to Wisconsin; indicated whatever fiscal

problems Wisconsin is or is not facing at the moment, they are not

caused by labor unions. That is also true for New Jersey, for Ohio,

and for the other States. There was no sharp rise in collective bargaining in 2006 and 2007, no major reforms of the country’s labor

laws, no dramatic change in how unions organize. And yet the

State budgets collapsed; revenues plummeted, taxes had to go up,

and spending had to go down all across the country. Blame the

banks, blame global capital flows, blame lax regulation of Wall

Street, blame home buyers or home sellers, but don’t blame the

unions, not for this recession.

Governor Walker, how do you respond to that view?

Governor WALKER. Thank you, Representative, for your question.

As I mentioned earlier in my testimony, I think there are a number

of reasons that brought at least Wisconsin to a $3.6 billion deficit.

One, like Vermont and other States, is the economy, no doubt

about it. You mentioned a bunch of different reasons that people

acknowledge were a part of the recession. I won’t get into the details of that, but tell you that one significant part, without a doubt,

is the economy. And that is why we are working so hard to improve

that and show that Wisconsin indeed is open for business so future

budgets are easier to tackle.

In our State, though, beyond that, and something I have acknowledged is not a partisan issue, it has been Democrats and Republicans alike in the past, have deferred tough decisions. For 16

years, the last 8 biennial budgets—and it goes back before that,

probably, but for at least 16 years since the State started measuring the structural deficit, State lawmakers and past Governors

have deferred tough decisions by raiding things like the transportation fund or the patient compensation fund in our State, by pushing off school aid payments to the next biennial, by——

Mr. DAVIS. Well, let me ask you——

Governor WALKER. And then the last point I just mentioned was

2 years ago the last budget was balanced with several billion dollars of one-time Federal stimulus aid. All those things, which I believe my colleague mentioned as well, all those things collectively

added to our problems. What we have tried to identify are possible

solutions, and my reforms that we are talking about here today

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represent a portion of that. About $1.7 billion with the savings in

the next 2 years will come from those, but I have a $3.6 billion deficit, so——

Mr. DAVIS. Well, let me ask you. There are those who suggest

that you have balanced your budget on the backs of middle-class

working families; you have cut funding for public education, low

cost prescription drugs, and in-home health care; and at the same

time gave tax breaks to wealthy corporations. How do you justify

that position?

Governor WALKER. I would say that is just not true. If you look

down the line at the budget we proposed, the biggest beneficiaries

of our budget are middle-class taxpayers in the State of Wisconsin.

The biggest tax relief we provide is an absolute freeze on the property tax levy in the State of Wisconsin in our budget. That affects

middle-class taxpayers as much as anybody else out there.

In terms of the middle class, I would contend, in our State, the

middle class are the very people who have been paying the largest

share of taxes to pay for the expanse of government in the past.

If you look at just the numbers, $3.6 billion. Our reforms save $1.7

billion. That means the rest of that, nearly $2 billion that has to

be balanced, come from a variety of other areas. Some of that has

to come from a reduction of State aid to local governments, but

that is because, in turn, unlike other States that are cutting aids

to local governments, we are actually giving them the tools to balance their budget without massive cuts in service, without massive

layoffs.

Mr. DAVIS. Thank you very much, Mr. Chairman. My time is up.

Chairman ISSA. I thank the gentleman.

The gentlelady from Wisconsin.

Ms. MOORE. Thank you so much, Mr. Chairman. The Governor

and I have a really long history; we are friends. I am crazy about

his kids and his wife, but I am not going to spend my 5 minutes

pretending that we agree on anything.

I am going to start by suggesting to you, Governor, that I just believe your $3.6 billion structural deficit. I think that I served on

the finance committee for many years, and the chairman has asked

the right question. State and local government spending cuts,

choice or necessity. That $3.6 billion deficit—I am not going to call

it a structural deficit—is simply the difference between what the

agencies request and your austere budget. So in between there

there is a lot of debate about whether or not there is a $3.6 billion

structural deficit.

You know, even when you consider stuff like the Medicaid pay- ment, which was one-time only, $169 million, $200 million in that

patient compensation fund that the courts say you have to pay

back—but, of course, that wasn’t even in your budget repair bill—

or the $58 million for the Minnesota Reciprocity Fund, which also

was not in your budget reconciliation bill, the Fiscal Bureau for

current year fiscal 2011, you had $121 million in cash, which is not

a lot of money. So you started out by giving $117 million worth of

tax breaks, which reduces revenue for the next fiscal year. And, in

contrast to giving these wealthy people tax breaks, you cut the

earned income tax credit, doubling the taxes on the poorest parents

by cutting their earned income tax credit.

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With respect to collective bargaining, you know, you said in your

testimony that folks were running and having a fit to settle contracts that they had been working on for a year. All 11 examples

that you have given, members were already making concessions

around health care, every single 1 of the 11 people that you raised.

You said yourself that the pension fund is 99.67 percent funded. So

the question is choice or necessity. And in terms of public workers

making more money than the private sector, that is not true; they

make 8.2 percent less considering their education and training, and

that is what pension funds are, deferred compensations. They have

bargained for years for less money in order to have a pension,

which is deferred compensation.

Now, let me ask you, choice or necessity. Did you really have to

end Medicaid benefits for dialysis patients or put waiting lists for

disabled people who need home health care? What in the world

does balancing a budget have to do with your program in Milwaukee to expand education vouchers so that the richest person in

Milwaukee County can take $6,500 away from the poorest kids in

the State for education? What in the world does that have to do

with balancing a budget?

You reinstate the 30-hour work week on welfare recipients and you tax welfare recipients $20 a month to balance the budget.

Transportation. I know, if there is time, if the chairman gives us

time, because I am using my 5 minutes to make my statement. You

know, you are going to say you gave $410 million to your favorite

fund and your favorite folk you love to the highway people, $410

million, Governors in the past have raided it for education. You

took a billion dollars out of education, which most Governors don’t

do. But you didn’t do it for transit. There are 12 communities in

Wisconsin that give 24 million rides a year that are going to suffer

because of what you have done. And you know, you are going to

lose $46 million in Federal funding because you have taken collective bargaining away, and that is against Federal law.

So, you know, Governor, I asked the question, if you have time

to answer, State and local government spending cuts, choice or necessity? And I yield back the balance of my time.

Chairman ISSA. Would the gentlelady yield for a question?

Ms. MOORE. Yes. I have 10 seconds left.

Chairman ISSA. Well, in that 10 seconds, what Federal law requires collective bargaining and you would lose money over it?

Ms. MOORE. Transportation. There is a transportation prohibition against—we have communities in Wisconsin that provide public transportation, and you have to have public workers collective

bargaining agreements in place in order to get the transit reimbursement.

Chairman ISSA. Would the gentlelady be willing to put that in

the record, the data supporting it?

Ms. MOORE. Yes.

Chairman ISSA. Thank you.

Ms. MOORE. Thank you.

Chairman ISSA. I thank the gentlelady and I thank our two Governors. Members, left and right, have a lot of unanswered questions, but only because many of us spent too much time not asking

the questions, and in some cases we simply ran out of time. So I

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would ask both the Governors if you, with the aid of your staff,

would mind answering some supplemental questions from the committee.

[Witnesses answer in the affirmative.]

Chairman ISSA. Let the record show you have answered in the

affirmative, which I appreciate. Additionally, at the beginning we

received general leave for you to add additional information that

you choose to, perhaps expanding on any answers you gave or providing supplemental information.

I thank you again. This has been great for the committee and I

am sure good for those who took the time to watch or to attend.

With that, we stand recessed until about 10 minutes after the

last vote.

[Recess.]

Chairman ISSA. It is now my pleasure to recognize the second

panel of witnesses. Dr. Andrew Biggs is a resident scholar at the

American Enterprise Institute for Policy Research; Mr. Mark Mix

is the president of the National Right to Work Committee; Dr. Robert Novy-Marx is a professor of finance at the University of Rochester Simon Graduate School of Business; and Dr. Desmond

Lachman is a resident scholar at the American Enterprise Institute

for Public Policy Research and an adjunct professor at Georgetown

University.

Pursuant to the House rules, all witnesses will be sworn in.

Would you please rise to take the oath?

[Witnesses sworn.]

Chairman ISSA. Let the record indicate all witnesses answered in

the affirmative. Please be seated.

We will suspend opening remarks. I simply want to thank you

for your patience. I know that we had an audience that included

your presence, and your testimony is every bit as important because ultimately the facts will determine a great deal of what the

committee does going forward.

With that, Dr. Biggs.

STATEMENTS OF DR. ANDREW BIGGS, RESIDENT SCHOLAR,

THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH; MARK MIX, PRESIDENT, NATIONAL RIGHT

TO WORK COMMITTEE; DR. ROBERT NOVY-MARX, PROFESSOR OF FINANCE, UNIVERSITY OF ROCHESTER SIMON

GRADUATE SCHOOL OF BUSINESS; AND DR. DESMOND

LACHMAN, RESIDENT SCHOLAR, THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

STATEMENT OF DR. ANDREW BIGGS

Mr. BIGGS. Thank you very much. Chairman Issa, Ranking Member Cummings, and members of the committee, thank you for the

opportunity to testify with regard to the financial and budgetary

challenges facing State governments. I will touch on three topics

related to State government finances: public sector pensions, public

employee compensation, and State investment practices.

Financing for public employee pensions poses significant challenges. But as bad as the current pension funding situation may

appear, the reality is likely far worse. The GAO reports that fundVerDate 17-JUN-2003 16:10 Oct 19, 2011 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\68361.TXT KATIE PsN: KATIE
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ing for public sector pensions currently equals around 12 percent

of public sector wages. But these figures are based on current accounting rules which allows plans to discount guaranteed benefit liabilities using expected interest rate on a portfolio of risky assets.

Economists are nearly unanimous in believing this approach to be

both technically wrong, as it understands the true value of plan liabilities, and from a policy perspective dangerous, as it encourages

State and local pensions to take excessive investment risk.

If public sector pensions were required to use economically sound

accounting rules, the cost of pension funding would rise from

around 12 percent of employee wages to an astronomical 46 percent. This latter figure represents the true value of the pension

benefits being promised and the true burden being placed on the

public. The difference between the 12 percent and 46 percent figures represents the value of the risk that State pension funds are

taking. States reduce the apparent pension cost burden by investing in risky assets. But this merely increases the contingent liabilities borne by taxpayers should investment returns falter.

Whether States resolve rising employee health and pension costs

by increased taxes or reduced benefits depends in part upon how

they judge the overall compensation of public sector employees. A

number of recent studies have concluded that public employees in

Wisconsin and other States are significantly underpaid relative to

what similar individuals would receive in the private sector. These

studies have been cited in arguing against changes to public sector

compensation. But existing analyses of State and local pay significantly undercount future pension benefits, omit entirely retiree

health coverage, and ignore the value of higher public sector job security. Correcting for these errors generates very different conclusions.

In certain large States, such as California, average public employee compensation is around 30 percent above what similar private sector workers would receive. In Wisconsin we found a public

sector pay premium of around 10 percent.

While compensation varies from State to State, the broad view

that State and local employees are significantly underpaid is almost certainly false.

Finally, I wish to touch on the investment practices of State and

local pensions. Public pension accounting literally says that a plan

that takes more investment risk immediately becomes better funded, to the tune of tens or even hundreds of billions of dollars. For

policymakers seeking to avoid difficult choices, riskier investment

portfolios are an attractive alternative. Since the mid-1980’s, the

typical public sector pension portfolio has nearly doubled the share

of equities that it holds. Today the shift is toward so-called alternative investments, which include private equity, hedge funds, and

the like.

In forthcoming research, I calculate that public sector pensions

have actually increased the risk of their target portfolio allocations

since the financial crisis of 2007. There is the danger that rather

than learning from experience, pensions will seek to double-down

in an effort to avoid the inevitable. A number of States have also

issued billions of dollars of pension obligation bonds, meaning, in

effect, they are making risky investments with borrowed money.

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But increased risk in pension investments make State and local

finances as a whole more subject to the shifting winds of financial

markets. Moreover, it is not clear that lawmakers fully understand

the investments they are making. The solution to this problem is

better pension accounting that removes the dangerous incentives

toward ever-increasing levels of investment risk. Better information is the key to better policy.

Lawmakers around the country can turn State and municipal finances around, just as lawmakers here in Washington can turn

around Federal finances. But time is a luxury that is growing

short. While still mired in a recession, it is difficult to contemplate

painful long-term reforms. But there is reason to believe that such

reforms, if properly enacted, can generate new confidence among

citizens, businesses, and financial markets that American government at all levels has the capacity to get on top of its budgetary

problems. And during an economic slowdown, renewed confidence

is essential to a recovery.

Thank you very much.

[The prepared statement of Mr. Biggs follows:]

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Chairman ISSA. Thank you.

Mr. Mix.

STATEMENT OF MARK MIX

Mr. MIX. Mr. Chairman, thank you for the opportunity to participate.

May we live in interesting times. That was allegedly an old Chinese blessing; more accurately a curse that seems to be pronouncement appropriate for the topic of today’s hearing.

Clearly there are tough choices ahead as States and municipalities deal with the clear and present danger of fiscal crisis. There

is growing evidence that the fiscal house of many States and municipalities are in desperate states. Several questions arise as a

takeoff point for this discussion, but an obvious one is what municipalities and States must do to fix it. But that question can’t be answered until we understand the cause of the condition. This is

where I will comment.

I believe that the primary cause of the current condition is the

inability to implement reform as a result of actions taken decades

ago that empowered government union officials with privileges that

are inappropriate to the functions of government. Specifically, I am

talking about granting private sector labor organizations the privilege of a monopoly bargaining over government workers. Let’s be

clear here. This does not mean that government workers don’t have

the right to join a union and they can’t associate; it means about

recognition. That right shouldn’t be taken away for the right to join

and associate.

But it does mean that the model we ascribe to the private sector

is completely inappropriate for government, and that is now becoming clear. And I am in good company with that premise. As we

have heard already the testimony of Members of Congress citing

President Roosevelt’s opposition to government bargaining. But he

also agrees with George Meany, the new President of the AFL–CIO

in 1955, who said it is impossible to bargain collectively with the

government.

At the February 1959 meeting of the AFL–CIO executive council,

a statement prepared by representatives of the Government Employee Council was endorsed which included the following. It said,

in terms of accepted collective bargaining procedures, government

workers have no right beyond the authority to petition Congress,

a right available to every citizen.

In New York City, the petri dish of government union power,

Democrat Mayor Robert Wagner was advised to break a campaign

pledge made to government union officials because granting union

monopoly bargaining would grant too much power to union officials

and wet their appetites for even more. His advisors told him it

would give unions too much sway over elected officials. And Wagner’s advisors were right. After the New York City model had been

in place for several years, former New York AFSCME Union President Victor Gotbaum boasted, we have the ability to elect our own

boss.

A New York State court spelled it out more precisely in the years

earlier, in a case called Railway Mail Associates versus Murphy, in

which they opined to tolerate or recognize any combination of civil

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service employees of the government as a labor organization or

union is not only incompatible with the spirit of democracy, but inconsistent with every principle upon which our government is

founded. To admit as true that government employees have the

power to halt the functions of government unless their demands

are satisfied is to transfer to them all legislative, executive, and judicial power. Nothing could be more ridiculous.

Fast forward to today. We see dramatic impact of the process

which is inconsistent with every principle upon which our government is founded. In May 2010, the Business Insider Web site published a list of the nine States most likely to default. The news and

analysis oriented site ranked heavily unionized California, Illinois,

Massachusetts, Michigan, Nevada, New Jersey, New York, Ohio,

and Wisconsin as the worst default risks. An average of 61 percent

of public sector employees in those nine States with the worst default risk are under union monopoly bargaining power in 2009.

That is overall public unionization of 20 percent higher than the

typical State.

In the nine States with the worst default risk from 1999 to 2009,

aggregate private sector jobs fell 4.2 percent, but State and local

government jobs increased by 9 percent. Not one of the 22 States

with the 2009 public sector unionization rate of under 30 percent

was found to be on the Business Insider’s most likely to default

list.

Further, Washington Examiner editor Dave Freddoso recently

analyzed the relationship between public sector unionization and

State per capita debt. Freddoso found that among the States with

fewer than 40 percent of State and local government workers

unionized, the median per capita State debt in 2007 was $2,238.

Among the States between 40 and 60, the median debt was $3,609.

But among the States with more than 60 percent of the State and

local government workers unionized with monopoly bargaining

laws, the median per capita debt was $6,380. And these are 2007

numbers, before we even got to the economic crisis.

Excessive spending, taxation, and debt are endemic to governments everywhere, but there are large measurable differences between the States that have handed monopoly privileges to public

safety union officials and States that have resisted the pressure. In

any discussion of State municipal debt and the tough choices

ahead, they must include the issues of growing government union

monopoly power and the impact on the States, municipalities, and,

most important, taxpayers.

[The prepared statement of Mr. Mix follows:]

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Chairman ISSA. Thank you.

Professor Novy-Marx.

STATEMENT OF DR. ROBERT NOVY-MARX

Mr. NOVY-MARX. Contrary several of the statements made here

this morning, State and local pension systems are significantly underfunded. The shortfalls faced by these systems represent massive

debts that public employees and retirees expect State and local taxpayers to repay. The amounts that are owed are large enough to

threaten the continuing viability of many State and local government systems and impose considerable risk for Federal taxpayers.

The exact magnitude of the problem has been concealed by the

flawed accounting methodology prescribed by the Government Accounting Standards Board [GASB]. I can illustrate these flaws with

a simple example. If I take a dollar out of my right pocket and put

it into my left pocket, I presume that you will all agree that doing

so has made me neither richer nor poorer. The idea that moving

money from one pocket to another could somehow makes you richer

insults common sense.

Yet, this is the idea upon which the States’ current claims that

pension funds are only a trillion underfunded is based. Under

GASB rules, a plan’s reported financial status improves when it

takes on more investment risk. When a plan moves a dollar from

its right pocket bonds into its left pocket stocks, it magically gets

richer, less underfunded.

This logic is clearly flawed. A dollar of stocks is not worth more

than a dollar of bonds. When you, as an individual, move money

from your money market fund into the stock market, you are not

suddenly richer. You do not get to pretend that you owe less on

your home mortgage. The payments that you are obligated to make

on your house are completely unchanged. How you invest your assets has no impact on the current value of your liabilities. This is

just as true for the States as it is for individuals, despite GASB’s

claims to the contrary.

Properly accounted for, the unfunded portion of pension promises

already made to State and local workers is roughly $3 trillion, or

three times as large as that recognized under GASB. This exceeds

all recognized State and local debt combined and represents a debt

owed to State and local government workers of roughly $25,000 for

each U.S. household.

These large unfunded liabilities are a serious concern, but perhaps even more troubling is how the current methodology accounts

for new benefit accruals; that is, how governments value the retirement benefits as a part of workers’ total annual compensation.

Under current accounting, the annual recognized cost of newly

earned pension benefits averages roughly 12 to 15 percent of total

wages, with plan members contributing, on average, slightly less

than half that amount. The true cost of these service accruals is

roughly twice as large, 25 to 30 percent of total wages, meaning

that each year most State and local workers earn employee financed pension benefits worth more than 20 percent of their salaries.

This is not to say that public employees are overcompensated. I

personally value services provided by government workers and am

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certain that many public sector workers are underpaid. This does

not, however, provide an excuse for misvaluing the benefits they receive. Undervaluing the deferred compensation these pension benefits represent has serious negative consequences for the way government is operated. It encourages excessive growth in the public

sector; it also encourages States to finance current operations with

off balance sheet debt, leaving even larger bills for future taxpayers.

In negotiations between States and their workers, undervalued

retirement benefits give both sides at the bargaining table incentives to trade current wages for future pension benefits. Workers

will happily give up a dollar today for two dollars worth of benefits,

but the government accounting methodology values it less than a

dollar. Current administrations may happily agree to this arrangement if it frees up money in current budgets. As a result, State,

city, and county pension plans have become a pervasive tool for circumventing balanced budget requirements.

Because the current contributions fall short of the cost of new

benefit accruals, the State and local pension problem is getting

worse, not better, and this represents a concern for the Federal

Government. If the Federal Government cannot credibly commit to

allowing States to fail, then the States have little incentive to fix

their problems. In the event of a Federal bailout, taxpayers in fiscally more responsible States will subsidize those in more profligate States. So any State that undertakes the unpalatable combination of tax increases and service cuts required to address this

pension problem now risks losing its share of any Federal funds

used in the future to rescue the system.

The Federal Government, consequently, has an urgent need to

establish incentives for States to deal with their pension problems.

The Public Employee Pension Transparency Act, H.R. 567, is a useful first step. Congress should consider even stronger measures,

however, to ensure that Federal taxpayers are not the ultimate underwriter of State debts. These should include incentives for States

to close current plans to new workers and, instead, enroll new

hires in transparent defined contribution plans and Social Security.

They should also encourage States to fully recognize the true magnitude of their legacy pension liabilities.

Thank you.

[The prepared statement of Mr. Novy-Marx follows:]

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Chairman ISSA. Thank you.

Dr. Lachman.

STATEMENT OF DR. DESMOND LACHMAN

Mr. LACHMAN. Thank you, Mr. Chairman, and thank you for inviting me to testify before this committee.

The European sovereign debt crisis offers a cautionary tale to the

United States about the very high costs that could be associated

with continuous delays in fashioning a credible medium-term plan

to address its budget problems.

In 1999, when the Euro was first launched, the European Stability and Growth Pact required that member countries contain

their budget deficits to no more than 3 percent of GDP and that

they maintain their public debt levels at below 60 percent of GDP.

Despite those strictures, by 2009 Greece and Ireland registered

budget deficits around 15 percent of GDP, while Portugal and

Spain registered budget deficits in the region of 10 percent of GDP.

It is now expected that Greece and Ireland’s public debt to GDP

will reach over 160 percent and 120 percent, respectively, by 2012,

even under optimistic assumptions.

A notable feature of the European debt crisis is that until very

recently markets failed to discipline profligate governments in the

European periphery, and those governments were able to borrow at

interest rates only marginally higher than those required of the

German government. Markets also provided the financing that

made possible massive housing market bubbles in Ireland and

Spain, and they failed to exercise the desired disciplinary function

in the mistaken belief that this time was different and that

eurozone membership would automatically make countries in the

European periphery converge to the strong economic performance

of German economy.

The important lesson for the United States is that when markets

did finally turn on the European periphery, they did so in an abrupt and dramatic fashion. Greek and Irish governments were effectively shut out of the capital markets, they were forced to seek

bailout packages from the IMF and the EU, and, more recently,

last week, the caretaker Portugese government was also forced to

seek an EU bailout as external funding for the Portugese government totally dried up. Despite these massive bailout packages,

markets are still demanding very high interest rates now of these

countries, and these high interest rates imply that the market is

attaching a very high probability to the likelihood that these countries will actually default on their sovereign debt within the next

3 to 5 years.

As a condition for the bailout lending, the IMF and EU are requiring of Greece and Ireland massive budget adjustment of the

order of 10 percent of GDP over the next 3 years. Countries in the

European periphery are now finding that attempting to dramatically tighten their budgets without being in a position to weaken

their currencies to boost export growth is a recipe for steep economic recession in these countries. Sadly, Greece and Ireland are

already finding this out. Over the past 2 years, GDP has declined

in Greece and Ireland by 8 and 12 percent, respectively, and the

unemployment rates have both climbed beyond 14 percent.

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To sum up, Europe’s recent difficult experiences with the public

finances would seem to offer the United States the following four

cautionary lessons. First, U.S. policymakers should not take comfort from the fact that despite its very poor public finances, the

U.S. Government can still finance itself at very low interest rates.

Up until early 2010, the Greek, Irish, Portuguese governments all

were able to fund themselves at relatively low interest rates, only

to find themselves subsequently virtually shut out of the capital

market.

The second point is that when markets finally do lose confidence

in the sustainability of a government’s public finances, they tend

to do so in an abrupt and disruptive manner. This tends to be highly disruptive to financial markets and it tends to be associated with

prolonged and deep economic recessions. One also finds that once

a government loses the market’s confidence, it proves difficult to regain the market’s trust.

Third, dependence on foreign sources of financing exposes a government to the vicissitudes of foreign credit markets. It also places

a government in a position where foreigners can dictate the terms

of future lending that can be harmful to a country’s economic prospects.

Finally, disruption in a government’s bond market can have important implications for the financial system, which tends to be a

primary holder of government bonds. Experience shows that a

weakened financial system is generally associated with lower longterm growth.

Thank you.

[The prepared statement of Mr. Lachman follows:]

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Chairman ISSA. Thank you. I will yield myself 5 minutes at this

time.

Professor Novy-Marx, in some of your published studies you seem

to take issue with Vermont’s Governor’s theory that he is, first,

fully funded and then adequately funded. If we make reasonable

assumptions that today, for some reason, they chose to go to a defined contribution, how much underfunding would there be in the

legacy of Vermont’s system?

Mr. NOVY-MARX. So I don’t know if you are talking about a soft

freeze or a hard freeze. Are we talking about moving forward to DC

plans or just new hires?

Chairman ISSA. Well, if you assume that it is all workers, that

whatever they have accrued they keep, and obviously there is some

middle ground of those who are 3 or 4 or 5 years, but assuming

you phased it out very quickly——

Mr. NOVY-MARX. It would improve the position of their financial

status in the pension plan.

Chairman ISSA. It would improve that, but what would be the

shortfall in their pension? In other words, if they achieve the 81⁄2

percent starting the day that you shut it off, they would be able

to make all of their payments forever, is that correct?

Mr. NOVY-MARX. They would have a small shortfall, but not a

huge shortfall, if they made 8 percent on the assets.

Chairman ISSA. What is the reasonable belief that 81⁄2 percent

can be made, particularly considering that they have credit default

swaps——

Mr. NOVY-MARX. It is less than 50 percent that they would make

that sort of return. Essentially, they borrowed a lot of money to

speculate in the stock market. And if the stock market does better

than the cost of their borrowing, they will be in a better position.

If it does worse, they will be in a much worse position. But I view

this idea that you can achieve 81⁄2 percent by investing in the stock

market as essentially borrowing public money to speculate in the

stock market.

Chairman ISSA. And if we assume for a moment that there is

some discount for inflation in the 81⁄2 percent, let’s call it 21⁄2 percent, they are really saying they want to say 6 percent over inflation, would that be correct, roughly?

Mr. NOVY-MARX. So——

Chairman ISSA. So they are looking at making——

Mr. NOVY-MARX. In the terms of their own plans, they assume

inflation rates that are higher than the market or consensus estimates.

Chairman ISSA. If we were to use a baseline—and this may delve

into others—if we were to use a baseline, let’s say, of from any

given time until 1980, in other words, not the last 30 years, is

there any ability to achieve broadly 6 percent over inflation in

America’s 20th century? Is there any 20-year period in which you

can earn that kind of money?

Mr. NOVY-MARX. The two decades after World War II, the U.S.

market did very well and your returns would have exceeded that.

Chairman ISSA. Are there any 20 years in which you can’t?

Mr. NOVY-MARX. There certainly are, yes.

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Chairman ISSA. So what we are really doing is we are saying we

think we are going to make it, but if we don’t—and I want to get

to the next point—if we don’t make it, then what happens? And I

am a Californian, so I live this every day. During good times, good

economic times, times in which the market is performing and so is

America, the need for the social safety network generally goes

down, so the government spending, State government spending,

Medicaid and so on, typically goes down. If that is the case, then

when you have lower spending you have higher earnings within

those 10 or 20 years.

Turn it around. When the market goes to heck in a hand basket,

typically you have people laid off and greater public need. Is that

sort of universally agreed to by all the panel?

[No audible response.]

Chairman ISSA. So no matter what we are dealing with, we are

assuming that the present system is one in which you must pay in

more over a three, 5-year period—all of these plans have a certain

waiting period; typically they are trailing 3 years or something,

some of them go five—but in any really long bad time of 10 years,

for example, you are going to have to pay in more at a time in

which you are paying out more. Is that generally true?

Mr. NOVY-MARX. That is true.

Chairman ISSA. So for any of you on the panel, even forgetting

about ideological reasons that we may want to choose other systems, the Governor of Vermont said this was more efficient. Let’s

assume efficiency is as he defines. Is it better for the reliability to

the taxpayer, the people who will count on services in bad times

and who, in fact, don’t want to be misled in good times, is there

any basis to say that that system of needing more money paid into

pensions at a time when there is less to pay and more needed, and

then needing less so you look good exactly at a time when it is only

because people need less from the government?

Mr. BIGGS. I think you have put your finger on the fundamental

error in the Governor’s reasoning. The bad times for the pension,

the bad rates of return on its investments will correlate with bad

times in the rest of the economy, which means more people out of

work, lower tax revenues, higher expenditures or unemployment

benefits, things like that. So you are asking taxpayers or contributors to the plan to pay extra into the plan to make up for losses

at exactly the time they are least able to do that. So that is the

problem. When you get this correlation between the poor market

outcomes and poor outcomes in other parts of the economy, it

makes it more painful to do those things. A market valuation approach to looking at pension financing implicitly takes that into account; whereas, the current GASB rules ignore that fact.

Chairman ISSA. Anyone else have a brief—yes, doctor.

Mr. LACHMAN. I would just add to the point that you are making

that we don’t live in ordinary times, that we are living in a period

where we have had an acid price bust, where we have had real

strains in the banking system. There is plenty of economic research

that shows that those periods are followed by unusually low

growth, where you would expect to get very poor returns on equities. All you have to do is look at the Japanese experience right

now. In 1989, the NIKKEI was at 39,000; today, 23 years later, it

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is at 10,000. So we are living in a different time. To expect to get

an 8 percent return after an economic crisis like this would seem

to me to be heroic.

Chairman ISSA. Thank you.

The gentleman from Maryland.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

You know, you all heard the testimony of the two Governors, did

you not? And you heard Governor Walker, numerous times, saying

that he liked what Mitch Daniels did in Indiana. Did you all hear

that? It sounds like he may be his mentor. But let me ask about

the legislation recently introduced in Indiana. This legislation

would make it a misdemeanor for an employer to require an individual to become or remain a member of a labor organization, pay

dues, fees, or other charges to a labor organization, or pay charity

to another third party that represents dues, fees, or other charges

required of members of a labor organization. Governor Mitch Daniels originally favored this legislation and prior bills that opposed

unions. In 2005, he signed an executive order limiting collective

bargaining for State workers. As a result, according to an April

13th National Review article, the number of State union workers

shrunk from over 16,000 in 2005 to now nearly 1500.

Mr. Mix, your organization supports Indiana’s legislation, is that

right?

Mr. MIX. [Remarks made off mic.]

Mr. CUMMINGS. I can’t hear you, I am sorry.

Mr. MIX. Sorry. We oppose the statutory imposing of bargaining

rights in Indiana going back to the middle of 1990. It was imposed

by executive order by Governor Evan Bayh and then there was executive order signed by Governor Frank O’Bannon to force Indiana

employees to pay dues or fees to the union to keep their job. What

Governor Daniels did was simply repeal that executive order that

authorized bargaining in the State. There was never a statute

there.

Mr. CUMMINGS. So you——

Mr. MIX. We support what Governor Daniels did, yes.

Mr. CUMMINGS. You support what he did. And despite your organization’s support, Governor Daniels has now withdrawn support

from this legislation. Have you heard that?

Mr. MIX. He has indicated that he opposes consideration of a

right to work bill, which was the reason the 39 Democrats left the

State for 33 days and shut down the Indiana legislature. He opposes that right to work bill that is pending in the Indiana house

right now.

Mr. CUMMINGS. And on February 22nd, an article featured in Politico indicated that the Governor thought there was a better time

and place to have a debate. Is that right?

Mr. MIX. I think that is right. That is accurate.

Mr. CUMMINGS. He also stated that even the smallest minority

has ‘‘every right to express the strength of its views and I salute

those who did.’’ Do you agree with that?

Mr. MIX. Well, if Governor Daniels is talking about the fact that

39 Democrats left the State to stop this legislation, I disagree with

him.

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Mr. CUMMINGS. All right. I only have a limited amount of time.

I heard you. You disagree with him. OK.

Mr. MIX. I disagree with him praising 39 members leaving their

jobs to stop the bill, yes.

Mr. CUMMINGS. You disagree with him.

Mr. MIX. Yes, sir.

Mr. CUMMINGS. Your organization does not just support the concept of this legislation, you have financially pushed it, have you

not, your organization?

Mr. MIX. What legislation are you talking about?

Mr. CUMMINGS. I am talking about the subject matter that we

are talking about right now, that is——

Mr. MIX. The right to work bill is different than what Governor

Daniels did. We have been involved in Indiana for a while now,

yes.

Mr. CUMMINGS. So you put some money in this. And according

to an article on March 23rd in the Fort Wayne Journal Gazette,

your organization began a ‘‘$100,000 statewide media campaign to

try to get the issue back on the table.’’ Does that sound accurate?

Mr. MIX. Absolutely.

Mr. CUMMINGS. ‘‘And one newspaper tries to shame Daniels and

Bosma for bending to the unions.’’ Mr. Bosma is the Republican

speaker of the Indiana house, is that right?

Mr. MIX. Yes, sir.

Mr. CUMMINGS. And, Mr. Mix, did you organization place those

advertisements?

Mr. MIX. We did.

Mr. CUMMINGS. And staff have identified at least 10 Republican

Governors, including Governor Daniels, who have distanced themselves from Governor Walker and, in particular, his assault on collective bargaining rights for workers. But your organization continues to agree with Governor Walker’s actions, is that correct?

Mr. MIX. Yes.

Mr. CUMMINGS. I think this hearing has demonstrated that Governor Walker wildly overreached by insisting on stripping the

rights of American workers, even when such measures would have

had absolutely no impact on the State budget.

Mr. Biggs, I wanted to followup on a point that I think is extremely important. As Governor Shumlin made very clear in his

testimony earlier, the budget shortfalls that are affecting States

today were not caused by middle-class American workers, they

were not caused by these teachers and nurses, policemen, firefighters. Shumlin testified that ‘‘I would like to start by directly addressing the question of what is causing the current fiscal crisis

that most of our States are experiencing. Put simply, these crises

are the result of the greatest economic recession since the Great

Depression.’’

Dr. Biggs, do you agree with that?

Mr. BIGGS. I think that is generally correct, yes.

Mr. CUMMINGS. And, Dr. Biggs, on March 15, 2011, you testified

before this committee and you seemed to agree with Governor

Shumlin’s point. In your testimony you said this, you said the fiscal

crisis at the State and local level has many causes. The proximate

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cause is the significant economic recession, from which the U.S.

economy still struggles to recover. Did you say that?

Mr. BIGGS. That’s correct.

Mr. CUMMINGS. And in your testimony today, Mr. Biggs, you explained that different States may have different challenges based

on how the economic crisis affected them. You stated that when

looking at the financial challenges faced by States, the differences

arise from how hard the States were hit by the recession. Is that

right?

Mr. BIGGS. That is also correct, yes.

Mr. CUMMINGS. And so you are not alone, as I close, in your

views that these budget shortfalls are a result of the recession, and

let me read Ezra Klein, what he wrote in The Washington Post. He

says, ‘‘There was no sharp rise in collective bargaining in 2006 and

2007, no major reforms of the country’s labor laws, no dramatic

change in how unions organize, and yet State budgets collapsed.’’

So I say this to all of the witnesses. If you want to talk about

balancing the State budgets, then let’s talk about the budget, let’s

talk about the real reasons for shortfall, and let’s talk about the

real solutions.

I see my time has expired. Thank you.

Mr. MCHENRY [presiding]. I thank the ranking member.

Ms. Buerkle is recognized for 5 minutes.

Ms. BUERKLE. Thank you, Mr. Chairman, and thank you to our

panelists for being here today and for answering our questions.

My first question is sort of a followup to my colleague, Mr.

Cummings’s, question. Mr. Mix, in your written remarks you note

that there is a close correlation between high State debt and the

existence of public sector monopoly bargaining. Can you explain

that for me and just expound on that a little bit?

Mr. MIX. Yes, ma’am. I think the correlation between the cost of

government and the proposition that union density is something

that is becoming clear, and if you look at the numbers that I cited

from the study regarding per capita median State debt per person,

I think you see that coming clearly. I think it is important also to

understand that the idea of bargaining and the ability for a private

third party to engage themselves in the relationships between taxpayers and their elected officials is something we need to address,

and I think if you look at the States, the nine States that are running the risk of default, all those States had a union density over

60 percent in the government sector.

Ms. BUERKLE. I represent an area of New York State and actually, Professor Novy-Marx, it is close to Rochester, so we are one

of those 44 States that was spoken of this morning, that we teeter

on this delicate balance here, so I would like to just followup,

again, with my colleague, Mr. Cummings’ comment with regards to

Governor Walker. Do you feel that he overreached, Mr. Mix?

Mr. MIX. I don’t. I think the idea that allowing workers the

choice to join or financially support a labor union is a basic right.

Part of the legislation that Governor Walker talked about and was

in question here today was a provision granting Wisconsin public

employees the right to work free of union compulsion. Any member

that believes the union represents them well and wants them to

speak for them can voluntarily join that organization and have

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their voices heard, just like any other citizen can. But we should

not presume that every worker out there supports what organized

labor is doing for them and that there is a benefit conferred on

those people. What we ought to do is give them the choice. And

what union officials ought to do is represent only those workers

that want their representation, because we know that any organization that is brought together through voluntary means is inherently stronger than any organization that is cobbled together by

compulsion.

Ms. BUERKLE. Thank you.

My next question is for Dr. Lachman. You note in your written

remarks that the U.S. budget deficit has swollen, as we know, to

close to $11⁄2 trillion, about 10 percent the GDP. It is on a path to

reach, within a year or two, the levels of funding crisis that we

have seen in other countries. What common sense practical steps

can we take as a Nation to just avoid what we have seen from

some of those countries?

Mr. LACHMAN. Well, you are absolutely right that the United

States is on a path that is clearly unsustainable and that will lead

to a debt crisis going down the road. The sensible thing for the

United States to do would be to have a medium term budget program that seriously and credibly addressed those problems that

brought down the deficit progressively over time. You are seeing

that, for instance, in the United Kingdom right now, where they

have a medium term budget plan that is going to be reducing the

budget deficit by something like 1.8 percentage points of GDP a

year, bringing it down from something like 10 to 3 within a period

of time, but they are doing it in a credible way, with actual measures passed through the Parliament. It would seem that that is

what is needed if you are going to be assuring markets that you

are seriously dealing with the problem, rather than just running up

huge deficits and then have the markets fear that the Federal Reserve is going to monetize it and we are going to be off to the races

on inflation.

Ms. BUERKLE. And just in the few seconds that I have left, can

you just define or expand on that credible way that you are talking

about?

Mr. LACHMAN. Well, I think that it is important to do things in

a variety of ways. To back-load a fiscal plan isn’t really credible;

there are a lot of changes that might occur down the road, that

what one is wanting is wanting up-front concrete measures where

there is a clear congressional commitment that measures are going

to be actually implemented. It is no good just talking about we intend to do things; you have to back it up by action that markets

are going to believe that you are actually going to be delivering.

Having benchmarks, having a path on which you are going, having

concrete measures that you are going to be taking, actually passing

those measures would give those markets a lot more confidence

right now. And I think that the only point that I was really trying

to get across is not to be fooled by the fact that the U.S. Government, with its huge deficit, is able to borrow in the treasury market at, say, 3 percent on 10-year bonds. That can move in a heartbeat.

Ms. BUERKLE. Thank you very much.

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Thank you to all our panelists. I yield back.

Mr. MCHENRY. I thank my colleague. I now recognize myself for

5 minutes.

Dr. Biggs, I had this discussion before in the series of hearings

we have had about the State and municipal debt crisis. There is

a choice government has to make with the revenues it gets from

its people. So when we have pension funds, a discussion about pension funds, if it is a private sector pension fund, if it is underfunded, those that should receive the pension are the ones that are

getting harmed. If it is underfunded in the private sector, there is

another group, sort of the forgotten man, if you will, that are the

taxpayers, that are either going to pay higher taxes because these

pensions were underfunded, whether it is through union contracts

or whatever it may be. Then you have not only the taxpayers, but

those people that desire a benefit out of their government. For instance, you live in a city and they lay off half the fire department

or some of the police, or they don’t have frequent trash service.

There are services you would diminish in order to meet certain

events.

Can you talk about this in terms of what that actually means,

those choices?

Mr. BIGGS. Well, I think this plays very well into the issue of

how we measure the pension liabilities. One of the arguments for

the way current accounting rules for pensions, government is different than the private sector; government is infinity lived, it is

very big, it will go on forever, so we can ignore this risk. But when

you look at how the risk is actually allocated, government is a

pass-through entity; it doesn’t bear the risk, it distributes it to different stakeholders. So when we look around the country today, we

see individuals who are having to pay higher taxes to support pensions; we see layoffs in government work forces; we see cuts in

other programs so they can make room for their pension contributions. So it is not the government that is bearing the risk of those

market downturns, it is effectively individuals who are bearing it.

So that is why we should value these pension liabilities the way

that individuals do it.

I think one sort of troubling aspect of the way defined benefit

pensions in the private sector have worked in practice is often the

market risk is one-sided. In very good economic times part of the

money goes to help fund the pension, but there is also the temptation to raise benefits. We saw this in California, we have seen it

in New Jersey, we have seen it in Washington State. But in the

down times it is the taxpayer who takes that risk. So any time you

have one-sided bets, you are setting yourself up for some problems.

But the key issue is it is not government that is bearing the risk,

it is people in all aspects of our lives. So we want to catch that

issue there in terms of how we value these liabilities.

Mr. MCHENRY. Can you also discuss in terms of asset sales,

whether at the State or municipal level, that you have an asset

that local governments have sold in order to meet immediate expenses. These assets sales is a form of indirect bankruptcy, if you

will.

Mr. BIGGS. In a sense, I guess selling off an asset is like borrowing, because the asset, in theory, would give you value down

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the road. But if you are selling it off, you are saying we are going

to get some cash today but we are giving up all the stream of payments that we otherwise could have had. But I think the point you

make is correct. If you are having to sell off assets that you would

otherwise want to keep in order to make payments, it is a form of

partial bankruptcy; it is, in effect, eating your seek corn, because

those are assets you are going to need down the road.

Mr. MCHENRY. You mentioned the importance of getting the accounting right and, Dr. Novy-Marx, you did as well, even more specific. But, Dr. Biggs, can you talk about this in terms of accounting

and——

Mr. BIGGS. The funny thing is my father was a certified public

accountant, and I remember growing up thinking all these accounting things are so boring and why would you want to do that. What

I have discovered working in public policy is what you do about a

problem really depends on how you measure the problem. The way

we currently measure public pension financing, we learn two things

from that. The current measures tell us the problem is small and

can be solved by taking more investment risk. Using proper accounting measures we realize the opposite; the problem is large

and taking more investment risk isn’t going to solve it. So talking

about accounting sounds boring, but I think if you really measure

things correctly you get an idea how big your problem is and what

will and what won’t fix it.

Mr. MCHENRY. Dr. Novy-Marx.

Mr. NOVY-MARX. Thank you. I am not an expert on unions and

don’t have a lot to say about them, per se, but I think there is a

real danger in bargaining over things which are improperly valued.

So I think that the valuation of the pension liabilities very much

interacts with the bargaining, because if we way undervalue these

benefits, it makes it extremely hard for the government side to bargain from a fair position.

Mr. MCHENRY. So, Dr. Biggs, in terms of this, there is the GASB

versus FASB. You have the government accounting—and to you,

Dr. Novy-Marx, because I think you both can shed some light on

this. There are different accounting standards for the public sector,

as opposed to the private sector. I am interested in this difference.

And I also have a very specific question. So, if you will answer the

specific question and get to the larger point, because my time is

running short. Actually, I am over time, but with the graciousness

of my colleagues.

The SEC has designated FASB as the accounting for publicly

held companies. What about designating GASB in terms of being

able to capture—the SEC basically captures stale data at the

broker-dealer level. What about capturing that data more upstream, from the issuer? Would that be better? Would that give

more transparency and more disclosure, and can you touch on that?

So if you will answer that, then get to the larger point, I would

appreciate it.

Mr. BIGGS. Pension disclosure in the public sector I think is not

as strong as it is in the private sector, where often in the public

sector the actuarial reports come out a year or more after the

events that they are trying to date. I have written about private

sector pension accounting and I have been critical of it in ways, but

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it much more closely approximates how you should measure the liabilities. A private sector pension benefit is very secure, but it is

not guaranteed. If the sponsor goes bankrupt, the retirees can lose

some of their benefits. So those liabilities are discounted at a rate

of return derived from corporate bonds. That means it is very safe,

but it is not totally safe.

With public sector pensions, the benefits are effectively guaranteed, often by State constitutions. That means they should be discounted at a lower interest rate. Instead, they are discounted at a

higher discount rate. The GASB rules have things just precisely opposite of the way they should be.

Mr. MCHENRY. Dr. Novy-Marx.

Mr. NOVY-MARX. I have nothing to add; I agree with him completely.

Mr. MCHENRY. OK.

Finally, and then we will go to my colleague, Mrs. Maloney,

Devin Nunes has introduced a piece of legislation in terms of transparency, perhaps strikes at the heart of making sure you have accurate disclosures for public sector pensions. Dr. Biggs, can you

touch on that? Are you favorable to this perspective? What are your

thoughts on it?

Mr. BIGGS. I think the disclosure bill sponsored by Congressman

Nunes would be very helpful in that it would require every State

to disclose the market value of their pension liabilities, which

means, A, you would get the numbers that would be much more

accurate but, B, they would also be uniform between States.

I testified several weeks ago alongside several individuals from

the ratings agencies, and I got the impression they simply took the

data from the public sector pensions as they published it. But I

think it is important if you have a better measure of the liabilities

and also a measure that is truly apples to apples from State to

State. So I think that would be a very, very helpful step.

Mr. MCHENRY. Anyone have anything to add there?

Mr. NOVY-MARX. I think it would be a very helpful step as well.

I think that there is actually a lot more information they can disclose. They actually forecast expected cash-flows every year into

the future in calculating the liability, and there is no reason that

they don’t disclose that; it should be public information, they are

public entities.

Mr. MCHENRY. Thank you. Thank you.

Mrs. Maloney for 5 minutes.

Mrs. MALONEY. Thank you, and I thank all of you for your testimony. I regret I had a conflict with another meeting, but I did read

your testimony and it contributes to the debate, so thank you.

I would like to begin with Dr. Biggs, and I am going back to a

lot of the debate that we had in the panel before you. Many people

blame the poor financial condition of States on public pension systems, as if pension underfunding is the primary cause of a State’s

financial problems. In fact, the Republican staff on this committee

issued two briefing memos that made this exact argument: ‘‘The

largest threat to State and municipal fiscal security is the government-sponsored pension plans.’’

Yet, in the prior panel there were a series of editorials that I put

together for this hearing from clear across the country, and they

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were saying that it wasn’t a financial problem in those particular

editorials. So my question, Dr. Biggs, is given what we heard from

the Governors and from the editorial boards, do you agree with this

assertion that the largest threat to State municipal fiscal financial

security is government-sponsored pension plans?

Mr. BIGGS. Well, as I stated in my testimony, the drivers and the

cause of the deficits that State and local governments are suffering

from now were distinct from public pension plans, were distinct

from public employee compensation. The question you are asking,

though, is slightly different: What is the largest threat to State and

local finances? And that raises some different questions because

the pensions have shifted so heavily toward risky investments that

even a small change in the rate of return they would receive would

have significant impact on planned financing and on State budgets.

For example, recently in California the Board of CalPERS, the public plan there, rejected their actuary’s recommendation they shift

from an assumed rate of return of 7.75 percent down to 71⁄2 percent, and the argument the people made was we can’t afford the

extra payments that would be required by assuming a reduction of

one quarter percentage point in our assumed rate of return.

The problem is if you are investing in the sorts of assets they

are, which are heavy on equities, foreign investments, hedge funds,

if you can’t afford to lose 25 basis points on your rate of return,

you are in very big trouble.

Mrs. MALONEY. Well, actually, there is another hearing going on

in Financial Services I need to get to on a regulatory reform bill.

We tried to really bring some controls and safety to some of these

investments, but I would like to ask about an analysis by the National Association of State Retirement Administrators, and according to this analysis, less than 3 percent of all State and local government spending was used to fund public pension benefits. Do you

agree with this or do you dispute this data?

Mr. BIGGS. No, I agree that that figure is correct. The problem

is, first, that a lot of States, with the amount they are paying

today, are not meeting the obligations they are supposed to pay

under the more lax accounting rules from GASB and, B, if they use

more honest accounting, they would have to pay significantly more

than that. One example I looked at was Illinois, which was not

even meeting its sort of actuarially required payments. If they had

to pay the market value of their payments, it would be something

like 14 percent of their State budget. That gets very, very difficult.

Mrs. MALONEY. Well, I would like to cite another study from the

Center for Economic and Policy Research, and according to this

study, the primary cause of pension shortfalls in our country was

the economic collapse that we suffered in 2008, rather than inadequate contributions to government retirement programs.

Mr. BIGGS. I think the argument made in that paper was that

the shortfalls we are looking at now were a result of the downturn

in the assets that they held. One reason they were holding so much

risky assets was because it allows them to discount their liabilities

at a high interest rate. So, in effect, the poor state of funding we

are seeing now is a function of the investment choices they made,

and those investment choices they made were driven by the accounting.

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Mrs. MALONEY. We are trying to bring more accountability in

those investment choices, but I would like to ask Dr. Biggs isn’t it

true that while pension plan underfunding is a problem for some

States, there are more than a dozen States rated by The Pew Center as solid performers?

Mr. BIGGS. Let me put it to you this way: The Department of

Labor has standards for the health of private sector pension plans.

I believe a private sector pension plan that is under 80 percent

funded is considered endangered, and a plan that is under 60 percent funded is considered critical. If public sector plans were required to use private sector accounting methods, I don’t believe

there would be a public sector plan in the country that would be

more than 60 percent funded. They would all be considered critical.

The account is very, very important here.

Mrs. MALONEY. Well, I agree you need accurate and uniform accounting systems. We just came out of a national recession, and it

was certainly the greatest recession in my lifetime, and probably

yours. To me, it seems inaccurate and very unfair to tie the current

financial problems that some States face with public retirement

systems underfunding to a long-term pension crisis. Most economists, even from the Bureau of Labor Statistics, Dr. Hall, states

that this was the first recession that was caused by the financial

markets; it caused this deep pain and this recession. And to say

that because some States have some problems, that this is the

cause of the problem——

Mr. BIGGS. I don’t believe I have said that public pensions are

the cause of the problems. I am not really aware of anybody else

who has said that. What I would say is that the public pensions,

because they were investing so aggressively, are particularly vulnerable to the financial downturn that we had and, second, even

if the recession was caused by other factors, we can’t go back to

Wall Street or we can’t go back to the housing market and say fix

our problems. We have the problems that we have and we have to

make some decisions on how to fix our budgets going forward and

how to fix these programs so that they are more robust in future

years.

Mrs. MALONEY. If I am hearing you correctly, you said many of

the problems came from investing so aggressively. So if the managers of the pension funds are the ones that are putting them in

jeopardy, maybe we need stricter standards there and capital requirements and so forth.

Mr. BIGGS. It is not the managers. What happens in most States

is the legislature will set the discount rate that they want to use

for the pension; they will say we want to use a 8 percent discount

rate. And they tend to choose a high discount rate because that

makes the liabilities look small; that makes the annual payments

small. Then the fund itself has to go out and say, well how are we

going to get 8 percent? You can’t get 8 percent without taking a

lot of risk. So now they are shifting more and more into alternative

investments. An example I had, Wisconsin school districts were investing their pension funds in synthetic collateralized debt obligations. It is the chasing of returns that is driven by the fact that

a high return is imposed on them by legislatures who want to minimize the payments they want to make today.

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Mr. MCHENRY. Thank you.

If you have any final questions?

Mrs. MALONEY. No. Thank you very much. Really, thank you

very much.

Mr. MCHENRY. Thank you. I appreciate the gentlelady’s comments and questions and I appreciate the panel’s testimony here

today. This is certainly a critical issue, as we have heard from the

Governors and as we have heard from previous hearings on municipal and State debt crisis that they are facing, budget crisis.

Dr. Lachman, I have heard you speak before. I wanted to ask a

final question, if I might. Does the Euro survive?

Mr. LACHMAN. It depends what you mean by that. If you mean

are countries going to leave the Euro, my strong conviction is they

certainly are going to leave the Euro. If we look where the Euro

is going to be in 5 years’ time, I would be highly surprised if Ireland, Greece, Portugal, Spain, maybe Italy, whether they are part

of the Euro. But that doesn’t mean that the Euro disappears as a

currency. What you could get is you could get the Euro which is

going to have as its members the original strong countries of the

north; the Germanies, the Frances, the Finlands, the Belgiums,

and so on.

Mr. MCHENRY. Thank you, Dr. Lachman. I appreciate you indulging me on that question.

I do appreciate your testimony, and if you have further things for

the record we would certainly welcome that.

Members will have 7 legislative days to submit questions or comments for the record.

Thank you for your testimony and thank you for your hard work.

[Whereupon, at 2:22 p.m., the committee was adjourned.]

[Additional information submitted for the hearing record follows:]

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