The Bond Buyer
Hatch Offers Pension Reform Bill; Experts Say It Wouldn't Work
Tuesday, July 9, 2013
Warning of a growing public pension debt crisis, Sen. Orrin Hatch introduced
reform legislation on Tuesday that would allow state and local governments to
invest in annuity contracts with private life insurance companies for employee
retirement benefits. But a number of pension experts questioned whether the
proposal would work and at least one charged it is an effort to allow private
insurance companies to raid public assets.
The senator from Utah, the top Republican on the Senate Finance Committee,
introduced The Secure Annuities for Employee (SAFE) Retirement Act of 2013 in a
speech before the Senate, warning, gAmerica cannot continue sleepwalking into
the financial disaster that awaits us if we do not get the public pension debt
crisis under control.h
Hatch said two years ago he warned that state and local pensions had a
shortfall of as much as a $4.4 trillion in their collective public pension
systems, gmore than the total amount of municipal bond debt nationwide.h
gDespite numerous legislative initiatives enacted at the state and local
level, the public pension debt crisis has gotten worse, not better,h he told
fellow lawmakers. gAs usual, governments have been slow to innovate, slow to
adapt, and, when they have acted, their actions have been too limited to solve
the problem.h
He pointed to the financial crises of Vallejo, San Jose, Stockton, and San
Bernardino, Calif., as well as Central Falls, R.I. and Detroit, Mich, saying,
gDoes anyone doubt that a state could be next? How many times does the
credit rating of Illinois have to be downgraded before we act?h
Hatch said his bill would solve these problems by allowing governments to
purchase annuity contracts for each worker every year during their career.
gWith a SAFE Retirement Plan, employees receive a secure pension at
retirement for life that is 100% vested, fully portable and cannot be
underfunded,h he said. gEmployers and taxpayers receive stable, predictable and
affordable pension costs. Underfunding is not possible. The life insurance
industry pays the pensions and bears all of the investment risk.h
SAFE plans gwill be protected by a robust and multi-faceted state insurance
regulatory system built to ensure financial strength and solvency, and backed up
by a state-law based consumer safety net,h Hatch added.
But Hank Kim, executive director of the National Conference on Public
Employees Retirement Systems, was left scratching his head. gPublic pension
plans are already self-annuitized,h he said. gTo say the private sector would do
it more efficiently, I just donft understand that rationale.h
gAt first blush, our feeling is this is a bill looking for a problem, he
said, rejecting the claim that public pension systems have gotten worse. gNo
pension plan has ever gone bankrupt, but there are a slew of private insurance
companies that have gone bankrupt,h he said.
Earl Pomeroy, senior counsel at Alston & Bird here, a former congressman
from North Dakota and North Dakota Insurance Commissioner, said, gThis bill
fundamentally doesnft work.h
With current public pension systems, governments take the risk and gyou have
permanent entities with which to deal with,h he said, noting 46 states have
adopted pension reforms in recent years. But private insurance companies can
fail and have failed, he said.
Pomeroy pointed to First Executive Life Insurance Company, the largest
insurance company in California, which went bust in April 1991, shocking its
policyholders and the financial world, after investing in junk bonds. gThere
have been a lot more insolvencies of insurance companies over the years,h he
said. A 1991 report by the then-General Accounting Office found life insurance
company failures hurt many pension plans and retirees.
gI canft get past my suspicions that this really is about private sector
interests in billions of dollars of assets held by public pension funds,h
Pomeroy said.
Hatch claimed his bill is not a gift to the life insurance industry, but is
rather an opportunity for the industry to help solve a serious problem. He
released several letters from groups and companies that he said support his
legislation, including the National Association of Insurance Commissioners. A
NAIC spokesperson said the group has no position on the bill and simply offered
to work with Hatch on it. The bill was lauded by the U.S. Chamber of Commerce
and life insurance companies and groups.
Dustin McDonald, director of the Government Finance Officers Associationfs
federal liaison center, said GFOA will look closely at the bill and other tax
reform ideas and how they will affect state and local governments. gWhile we
have not fully evaluated Sen. Hatchfs legislation, an obvious concern may be how
governments could lose control over the funds and the important policymaking
decisions made by the plans and participating governments and ensuring that
defined benefit plans continue in this sector,h he said.
William gFlickh Fornia, president of Denver-based Pension
Trustee Advisors, an actuarial consultant to state and local pension plans, said
the bill is unworkable. gI donft think itfs going to work because the capital
requirements for insurance companies are much more stringent that the
requirements that the states put on themselves for their pension funds. Public
pension fund earnings tend to be higher than insurance companiesf [earnings]
would be because of their investment flexibility and therefore the costs would
go up quite a bit to try to have public employees insured.h
California State Treasurer Bill Lockyer declined to comment on the bill, his
press secretary Bill Ainsworth said.
Jeannine Markoe-Raymond, director of federal relations, for the National
Association of State Retirement Administrators, said she and other NASRA staff
plan to meet with Hatchfs staff later this week and would rather not comment on
the bill until after that meeting.