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January 13, 2013 12:40 PM UTC

The Solution: Federally-Subsidized Public Pension Funding Bonds.

  • by: PolDancer

The habitual underfunding of public pension obligations by state and local governments has resulted in significant declines in public pension funding ratios in the last decade. Although most public pension funded ratios have not reached the 50 percent funded “neighborhood” common in the United States fifty years ago, a few state legislatures have reacted to declining pension funding ratios with attempts to breach public pension contractual obligations (notably, Colorado, New Jersey and Rhode Island.)

Recognizing that vested public pension benefits are contractual obligations of their governmental plan sponsors it is clear that state attempts to escape their pension obligations will not survive court muster. Accordingly, in coming years, states will seek alternative means of reducing the burden of their accumulated public pension debt. In addition to the adoption of legal, prospective pension reforms, states should have access to federal assistance in meeting their public pension obligations. Federal policies to suppress interest rates in the United States have hindered the recovery of state and local public pension plan funded ratios. Federal public pension bonding authority would ensure that state governments receive some benefit from this federally-created low interest rate environment.

Colorado legislators and members of Congress should lead the effort to make available federally-subsidized public pension funding bonding authority for state governments. Here are a few immediate steps that the Colorado Legislature and the Colorado congressional delegation should take to address state public pension debt:

(1) The Colorado Legislature should adopt resolutions in the House and Senate encouraging Congress, the President and the Colorado congressional delegation to support the issuance of federally tax-subsidized public pension funding bonds to meet state contractual pension obligations. This bonding authority should be made available to states while the United States remains in a period of historically low interest rates. As an example, the federally subsidized Build America Bonds issued a few years ago provided federal government reimbursement of 35 percent of all coupon payments directly to the state. “The Direct Payment BABs provide a federal subsidy of 35% of the interest paid on the bonds to the issuer.” “According to the United States Department of the Treasury, the savings for a . . . 30 year bond are estimated to be 112 basis points versus traditional tax-exempt financing.”


(2) The Colorado congressional delegation should champion federal legislation creating this state public pension bonding authority. If Congress can provide direct transfers of cash to major U.S. banks to alleviate the fiscal pain of the Great Recession, Congress can surely provide bonding authority to our states to relieve the financial stress of this recession (of course, much of this stress was self-imposed by the states through their irresponsible failure to meet actuarially required public pension contributions.)

(3) The Colorado Legislature should commence planning efforts to reform the Colorado PERA public pension plan PROSPECTIVELY, i.e., legally. Unconstitutional pension reforms, such as SB10-001, simply delay true reform. The Colorado Legislature should find new revenues to meet its contractual pension obligations: closing corporate tax loopholes, consideration of levies on natural resource extraction, consideration of lotteries as a source of revenue to meet contractual pension obligations, funding Colorado PERA contractual obligations in lieu of discretionary transfers of state resources to meet Colorado local government pension obligations, termination of annual discretionary property tax relief until the State of Colorado is no longer in breach of public pension contracts, etc.

It is clear that under the Colorado and U.S. constitutions, contracted public pension benefits are inviolate. In 1977, the U.S. Supreme Court (in U.S. Trust Co, 431 U.S.) clarified that state attempts to impair their own contracts, ESPECIALLY FINANCIAL OBLIGATIONS, were subject to greater scrutiny and very little deference because the STATE’S SELF-INTEREST IS AT STAKE. As the court bluntly stated:

“A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all . . . Thus, a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors.”

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