Public Worker Groups Fire Warning Shot to GAO over Pension Study

The letter , signed by the public worker groups, was in response to a request from two prominent US Senators to the Government Accountability Office (GAO) for the public pension study. The groups asserted that any GAO examination would have to take into account the fact that public and private pension plans aren’t alike.

The letter was addressed to Senators Chuck Grassley (R-Iowa) and Max Baucus (D-Montana), the chairman and ranking member of the Senate Finance Committee, and to GAO Comptroller General David Walker.

“There are fundamental differences between governments and businesses that result in critical distinctions between plans in each sector and the way in which they are accounted for and measured,” the letter said. “These distinctions are often unknown or misunderstood. A factual study into the health of public plans must ensure appropriate metrics are used and must not employ a private plan yardstick to measure government retirement systems.”

At the outset, the public groups contended, any GAO study had to take into account the fact that “state and local laws, and public accountability and scrutiny, provide rigorous and transparent regulation of public plans and have resulted in strong funding rules and levels.”

“Public plans are backed by the full faith and credit of state and local governments.” t he letter continued. “Additionally, a public plan participant’s accrued level of benefits and future accruals typically are protected by state constitutions, statutes, or case law that prohibits the elimination or diminution of a retirement benefit, providing far greater protections that what is provided by ERISA and the PBGC (Pension Benefit Guaranty Corporation).”

The groups said GAO researchers needed to keep in mind that:

• public pension plans are in “good financial condition.” As a group, public pension plans have funded 86% of their liabilities.
• the bulk of public pension funding is not shouldered by taxpayers.The majority of public plan funding comes from investment income. In 2004, investment earnings accounted for 77% of all public pension revenue; employer contributions were 15%.
• state and local retirement plan assets are professionally managed, providing long-term capital for the nation’s financial markets.
• state and local pension plans fuel national, state and local economies.
• public plans are subject to comprehensive oversight. “State and local government plans are creatures of state constitutional, statutory and case law and must comply with a vast landscape of state and local requirements, as well as industry accounting standards,” said the letter.
• public retirement plans attract and retain the workforce that provides essential public services.

The public worker groups’ letter concluded: “We believe many public sector systems indeed are innovative models that could be emulated to ensure responsible and prudent pension funding and management of assets. We welcome the opportunity to work closely with the committee and the GAO as you examine state and local government defined benefit plans, and hope you will consult with us as this study moves forward.”

A recent Standard & Poor’s study of public pension plans found that some US cities are not faring well when it comes to funding their employees’ pensions, with the average pension funding level in the 20 largest US cities falling from 99.8% to 84% in five years (See  S&P: Pension Funding Levels Dip for 20 Largest Cities ).