WASHINGTON -- The recession is driving more and more strapped state and local governments to dip into cash-rich public pension funds, with assets estimated at over $800 billion, to help balance their budgets, state and union officials told Congress yesterday.
Perversely, the growing practice could increase the burden on states by prompting Congress to enact more "unfunded mandates" requiring them to stand behind their retirement plans, the officials said.
More immediately, they said, if the borrowed money is not replaced, the raids could cause the Internal Revenue Service to revoke the tax exemption of the funds. These are tax-free so long as they are used only to pay retirement benefits, placing their status at risk if the IRS determines they are being used regularly to finance operating deficits.
"The stakes in this struggle to protect savings are high. Public pension funds have grown eightfold since 1975 and are a tempting source of funds for state and local governments," said Richard Cordtz, secretary of the Service Employees International Union, before a joint hearing of the House Select Committee on Aging and the Joint Economic Committee.
"Legislators faced with the alternative of immediate tax increases have been prone to acquiesce to raids upon the pension systems as a more expedient political solution," said Anthony Solomom, Rhode Island's general treasurer, who has been fighting efforts in his state in the last two years to reduce and defer contributions to the state pension fund.
The most visible and controversial example recently of a state tapping its pension funds was California's move to withdraw $1.6 billion from the state employees' retirement funds to help close a $14.3 billion budget gap. Gov. Lowell Weicker of Connecticut this week also recommencded postponing the state's $70 million contribution to the teachers' pension fund, but the officials said these actions represent only the tip of the iceberg.
"Many systems are approaching something akin to bankruptcy if there's not a turnaround," said Dawn Clark Netsch, comptroller of Illinois. "The systems just aren't funded adequately, that is what the trouble is."
Olivia Mitchell, a labor economist at Cornell University, gave a somewhat less gloomy assessment, estimating that public pension funds are on average underfunded by about 10%. She nevertheless called that "troubling," since it represents their financial condition after a decade of strong earnings performance in the capital markets during the 1980s.
Gerald McEntee, international president of the American Federation of State, County, and Municipal Employees, singled out California's action as the most "inexcusable" and "blatant" grab from public employees' pockets. But he added that, "the most troubling thing is that nothing prevents raids on such funds to alleviate a budgetary crisis" by nearly any local government.
The union officials and several committee members called on Congress to tighten federal regulation and mandates on the states to prevent further incursions into the pension funds.
One suggestion was to extend the federal Employee Retirement Income Security Act, which governs private pension plans, to public pension plans. Rep. Pete Stark, D-Calif., noted that doing so would have prevented California from tapping into its pension funds.
Rep. Stark and Rep. Edward Roybal, D-Calif., said they hope to "lay the groundwork for strong legislation to prevent future pension raids."
Ms. Netsch cautioned them against trying to force anything on the states, however. "I doubt there is anything constitutionally that can pass to compel a certain funding level," she said.
Mr. Cordtz added that Congress should not attempt to solve the states' pension problems without contributing money itself. "We must reverse the decline in federal aid to states and localities," he said.
"Unless we repair the fiscal foundations of federal-state relations, governments will continue to be forced into making impossible choices among cutting essential services, raising taxes in a recession, or reneging on a pension promise to their employees," he said.