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Detroit's Woes Put New Spotlight on Pension Overhaul Proposals

Douglas Graham/CQ Roll Call File Photo
Hatch and other conservatives point to the case of Detroit and a spate of similar, if smaller, bankruptcy filings as harbingers of wider trouble.

Soon after Detroit filed for protection under Chapter 9 of the bankruptcy code, the Obama administration made clear it would not seek a bailout similar to the $2.5 billion New York City loan package enacted in 1975. But the White House also signaled it would try to find other ways to assist Detroit and its residents.

While keeping an eye out for potential fallout in Detroit, key players such as Senate Finance Chairman Max Baucus, D-Mont., say they have not decided whether to move public-pension-related legislation in the 113th Congress. “To do this and tax reform would be hard,“ he said.

Like his Senate counterpart, House Ways and Means Chairman Dave Camp, R-Mich., has focused on moving a tax overhaul. He also said he has not decided whether to take action on public pension legislation.

But both top tax writers could face pressure in coming weeks to take a closer look at measures that deal with public pensions. For now, no one is calling for sweeping legislation like the 1974 law, which established the Pension Benefit Guaranty Corp. as a backstop for private plans.

But Hatch has pushed his proposal to give state and local officials a way out of the pension business by allowing them to hire life insurers to offer annuities for new state and municipal employees in lieu of defined-benefit pensions.

Many conservatives would like to go farther.

A proposal (HR 1628) by Rep. Devin Nunes, R-Calif., and a companion Senate bill (S 779) sponsored by Richard M. Burr, R-N.C., would exempt the federal government from liability. Both bills require each public pension sponsor to report annually to the Treasury Department. The measures would deny municipal bond tax breaks if such reports omit higher estimates of unfunded liabilities based on a new formula.

Burr said the bailout ban and disclosure mandate would help “local authorities to make their own reforms by rejecting the illusory notion that problems can be ignored or hidden and later dumped on taxpayers.”

But public employee unions oppose such mandates and back more traditional pensions. They have joined pension managers to oppose new federal laws, while stressing new state requirements for bigger employee contributions, tougher eligibility standards based on age and service, and smaller inflation upgrades.

“There is little likelihood of a pension plan ever coming to the federal government and asking for a bailout,” said Hank H. Kim, executive director of the National Conference on Public Employee Retirement Systems, which represents pension funds. Kim said Nunes’ reporting mandate would ignite “artificially inflamed passions” and run counter to proponents of states’ rights.

In addition to possible infrastructure and first-responder grants, Steve Kreisberg, collective bargaining director of the American Federation of State, County and Municipal Employees, said cities should be eligible for Federal Reserve help. “Why can’t Detroit go to the discount window of the Fed? JPMorgan [Chase] and Citibank do,” he said.

David Skeel, a law professor at the University of Pennsylvania and an expert in public pensions, says he doubts consensus will form for expansive changes or a ban on bailouts. But Skeel believes proposals for more disclosure and state and local flexibility could get traction if there are more big municipal bankruptcy filings or rating downgrades.

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