The chief of research for the National Association of State Retirement Administrators (NASRA) used his remarks before a U.S. House Subcommittee meeting in Washington D.C. Monday to sharply criticize a Northwestern University professor whose research has claimed, among other points, that public pension systems are no longer sustainable.
Keith Brainard told members of the House Judiciary Subcommittee on Courts, Commercial and Administrative Law that “on the whole, state and local government pension systems are weathering the storm and making changes needed without federal intervention.” Brainard went on to say that comments by Joshua Rauh, an Associate Professor of Finance with the Kellogg School of Management , that federal intervention is needed to keep public pension systems from draining government resources are “implausible, attention grabbing and reckless, causing alarm among the public and financial markets.” Brainard also stated that predictions of widespread insolvency are inaccurate.
Brainard went on to say that government pension systems cost an average of less than 3 percent of state and local budgets. Rauh, who had also been called to testify, countered that NASRA is using “misleading statistics” and is an organization that “is at odds with the taxpayer.”
Bankruptcy expert James Spiotto testified that suggestions that states and local municipalities be given an option to file bankruptcy to discharge pension debts raised many practical problems. Spiotto added that the move would create many constitutional issues that “would be difficult to navigate.” Spiotto pointed out that state retirement systems “weathered through the Great Depression.” He went on to say that many of the current fiscal challenges have been addressed by state retirement systems through significant adjustments to plan benefits and contributions.
Municipal bond analyst Matt Fabian told lawmakers that “state bankruptcy would undermine investor confidence and upset the bond market.” He added “that while the impact would be greatest on an individual state, all states would suffer by paying a penalty when going to the bond market.” Fabian stated that “legislating state bankruptcy would not be good” considering that states have a strong track record of repaying their bonds.
Representative Mike Quigley (D-IL) told the subcommittee “There’s not going to be a bailout. Bankruptcy, I’ve heard often from the bond market how serious the ramifications of that would be.”
Brainard was also questioned about current Governmental Accounting Standards Board (GASB) reforms. He referred to the fact that GASB is considering modifications to the investment return assumptions, and how public pensions recognize gains and losses. He told the panel even if systems earned a modest return on investments in the current environment, costs would be covered.