Monday, December 06, 2010

House Legislation Would Require State and Local Governments to Report on Pension Plans or Lose Ability to Sell Federally Tax Exempt Bonds

Legislation introduced by three prominent Republican House members would require state and local governments to report their pension liabilities to Treasury using a uniform accounting standard providing realistic rates of return and tying assets to more reasonable fair market valuations or risk losing their ability to market federally tax exempt bonds. Compliance with the reporting and disclosure obligations is linked to retaining all federal tax-exempt bonding authority for their jurisdictions under the federal tax code. The Public Employee Pension Transparency Act, HR 6484, is sponsored by Rep. Paul Ryan (R-WI). incoming Budget Committee Chair, Rep. Darrell Issa (R-CA), incoming Chair of the Committee on Oversight and Government Reform, and Rep. Devin Nunes (R-CA).

The legislation is designed to ensure that state and local governments are accurate in detailing their financial liabilities, including the cost of pension plans for public employees. The Act would require that state and local government pension plans report to Treasury the funded status of those plans and that Treasury post such information on a public website with searchable capability. The legislation is supported by the US Chamber of Commerce.

Most state and local governments offer their employees defined benefit pension plans. These plans currently promise retirement pensions to about 20 million active employees, while another seven million retirees and their dependants are receiving benefits today.

Congress has the authority to condition the continuation of specified federal tax benefits upon the provision of meaningful disclosure by state or local government employee pension plans under section 4980J of the Internal Revenue Code. The legislation finds that state or local government employee pension plans are substantially facilitated by the favorable tax treatment of participants and beneficiaries, investment earnings, and employee contributions with respect to such plans provided by the Code. Moreover, the financial status of state or local government employee pension plans also has a direct impact on the national markets for the trading of securities.

The legislation would add Section 4980J to the Internal Revenue Code as a vehicle to require the reporting of information on the pension plans. Specifically, state and local governments would have to disclose a schedule of funding status, which must include a statement as to the current liability of the plan, the amount of plan assets available to meet that liability, the amount of any net unfunded liability, and the funding percentage of the plan. Also disclosed would be a schedule of contributions by the plan sponsor for the plan year, indicating which are or are not taken into account.

There must also be reported alternative projections to be specified in Treasury regulations for each of the next 20 plan years following the plan year relating to the amount of annual contributions, the fair market value of plan assets, current liability, the funding percentage, and such other matters as the Secretary may specify in regulations, together with a statement of the assumptions and methods used in connection with such projections, including assumptions related to funding policy, plan changes, future workforce projections, and future investment returns.

The Act also requires a statement of the actuarial assumptions used for the plan year, including the rate of return on investment of plan assets and assumptions as to such other matters as the regulation may prescribe. A statement of the plan’s investment returns, including the rate of return, for the plan year and the five preceding plan years must also be disclosed. Importantly, there must also be a statement on how the plan sponsor expects to eliminate any unfunded current liability that may exist for the plan year and the extent to which the plan sponsor has followed the plan’s funding policy for each of the preceding five plan years.