UC Pension Solutions and the External Threats to Them

In prior posts, I have noted that while the Regents can modify the UC pension plan in response to its underfunding problem, their actions could be overridden by external forces such as a ballot initiative covering all public pensions in California.

Now comes word of another external threat, Congressional legislation that would effectively force public pensions to use a risk-free interest rate assumption in calculating their unfunded liabilities. The proposed legislation apparently would not technically force public pension authorities to do so but it would deny tax-favored status to their municipal bonds if they did not.

I was alerted to this proposal in an item today on calpensions.com which cited a Wall St. Journal article that appeared Dec. 5. Excerpt from the WSJ piece:

The new Republican House leadership, whose party benefited in November from public antipathy toward the bailout of banks, is moving to avoid a federal bailout of state and local pension funds. Congress has little authority over, or responsibility for, state and local public-employee pensions. But with pension liabilities increasingly stressing state and municipal finances, the prospect that the problem will end up in Washington's lap has some academics and politicians urging that the federal government move preemptively.

The latest wrinkle: A bill introduced last week by three prominent House Republicans to deny states and localities the ability to sell tax-exempt bonds—the lifeblood for many governments—unless they report their pension-fund liabilities to the Treasury Department. The federal tax-free status of interest on municipal bonds helps generate demand for the bonds and lowers government borrowing costs...

Full article at

http://online.wsj.com/article/SB10001424052748703350104575653290661576692.html

The above-mentioned calpensions piece identifies the congressmen involved as including Darrell Issa and Devin Nunes, both from California.

See http://calpensions.com/2010/12/13/brown-and-pensions-from-budget-relief-to-threat/

While it is unlikely that such a bill would get through the Senate and be signed by the President, even if it were passed by the House, the pressure is clearly building.

In short, our ability to control events is limited. And we may have a new problem. The Regents later today (Dec. 13) are to take up the Yudof plan for modifying the UC pension to deal with its underfunding. The item they will consider and presumably approve has lately been modified. The changes remove certain provisions of the original plan that would have effectively maintained an IRS cap on upper-income pensions. You can see the modifications directly on the Regents website. However, since items may not stay there, for the record I have preserved it elsewhere. You can therefore find the item in question at

https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0BzVLYPK7QI_4Yzk2NzAyNDAtYmVkMS00MmE2LWE3NDUtYzYyYWVlM2Q3MDE0&hl=en&authkey=CO6yxekL

This matter is a complicated issue legally. It involves certain benefits that were seemingly promised but not implemented. However, it may be less complicated politically since it involves high levels of pension payments. Stay tuned.