September 16, 2010

A THIRD WAY REFORM BOTH PARTIES CAN GET BEHIND:

How Pensions Can Get Out of the Red (RICHARD RIORDAN and ALEXANDER RUBALCAVA, 9/15/10, NY Times)

[G]iven how poorly pension funds have managed themselves, the federal government can’t simply hand out checks. Instead, borrowing a page from the Education Department’s Race for the Top initiative, which provides money to states that propose significant reforms for their public school systems, it should strike a grand bargain with city and state pension funds: in exchange for capping their liabilities and adopting better management practices, they could cover their costs through tax-free, federally guaranteed securities.

Here’s how it would work. A city, county or state facing insurmountable pension costs would appeal to the Department of Treasury for relief. As a first step, it would have to adopt standard accounting practices to accurately portray its current and expected financial health, including realistic projections of its investment returns and the discount rates on its debt.

Second, the applicant would have to take action to assure it can meet the debt service on its bonds, including placing a permanent cap on its pension liabilities. This means raising the retirement age, increasing employee contributions and preventing employees from manipulating their salaries in the last years before retirement to increase their pensions; it would also mean restructuring the fund’s health-care spending, which has been a significant drain.

Finally, the fund would have to move all new employees to 401(k) retirement plans, which have fixed employer contributions and therefore reduce future taxpayer liabilities.

In exchange, the Treasury would authorize the fund to issue tax-free “pension protection” bonds which, for a fee, would be guaranteed by the federal government. Proceeds from the bond sales would cover its liabilities, providing a quick resolution to the underfunding crisis.

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Posted by Orrin Judd at September 16, 2010 4:47 PM
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