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Pension Woes Legacy of GOP Convention

— Pointing to his hometown's dismal experience, San Diegan Carl DeMaio is urging members of Congress to pass legislation imposing federal standards on government pension programs. Others hoot at such a notion: they note that federal pension laws covering the private sector have produced disastrous results. Why push similar laws on plans for government employees?

DeMaio would cherry-pick ideas from two federal laws: the Employee Retirement Income Security Act of 1974, commonly known as Erisa, and the Sarbanes-Oxley Act of 2002, which was meant to prevent further Enrons in the private sector.

The Employee Retirement Income Security Act does not now apply to government pension plans. The act sets minimum standards for participation, accrual of benefits, and the like. It is supposed to require accountability of the people who run the plans, but many say that's a joke.

In this 1974 legislation, the government set up an insurer that would pay off employees if their pension plan fails. It's called the Pension Benefit Guaranty Corporation (PBGC), and it has a critical flaw: it actually encourages companies to reorganize in bankruptcy and shuck their ailing pension plans off on the government. When they emerge from bankruptcy, they have a leg up on competitors, who feel pressure to do the same thing. It's happening in the airline industry: one goes bankrupt and sheds its pension obligations; others feel they must follow.

Sarbanes-Oxley forces companies to establish tough auditing standards. It also imposes tighter accountability requirements on directors and officers and makes companies vouch for their own internal financial controls.

"I've had a lot of dialogue with members of Congress," says DeMaio, who heads San Diego's Performance Institute, an organization set up to encourage productivity in government. Congress has to do something: private-sector plans are believed to be underfunded by about $600 billion. Public-sector ones are $700 billion in the hole. The Pension Benefit Guaranty Corporation by year's end will be $30 billion in the red.

"We should modify Sarbanes-Oxley and apply it to state and local government. There must be an audit committee with independence from the decision-making structures. In San Diego, [former auditor] Ed Ryan was a lapdog, not a watchdog," says DeMaio. If an auditor is appointed, he should take personal responsibility for the financial reports: sanctions could include going to the slammer. If the auditor is elected, the punishment would be getting defeated in the next election.

"The monkey business in San Diego would have been illegal under Erisa," says DeMaio. His proposal "would provide an iron-clad requirement that pension systems be fully funded." Government pension plans would have to discuss their status honestly with people who are covered. There would be national accounting standards for public pension funds.

However, he would not favor an insurance program such as the Pension Benefit Guaranty Corporation. "If you give politicians an insurance policy, they will act irresponsibly, knowing the Feds will bail them out," he says.

At least initially, he would not try to impose uniform federal standards such as how long an employee must work before qualifying for the pension program. "I would like to see that, but politically I am not sure it will happen," he says.

Pension lawyer Rob Butterfield, who was on the San Diego pension reform committee, heaps contumely on DeMaio's ideas. "The guys that say Erisa is a panacea should get more education," he says. "I know companies that are under Erisa that are more underfunded than the City of San Diego. The PBGC has more potential debt than assets; the government is trying to bail it out."

Most unbiased observers agree that companies have screwed employees out of pensions through numerous deceitful maneuvers, and the federal government's 1974 pension legislation, along with members of Congress, permitted it to happen.

Butterfield can't see uniform standards for government pension programs. State and city pension plans "would be giving away sovereignty. Imposing federal standards on states and municipalities would create lots of resistance," he says.

It's unrealistic to expect city auditors and mayors to take personal responsibility for a financial report's accuracy. "The Fortune 500 guys are getting paid $10 million a year and have insurance programs and other protections," he says. By contrast, an auditor or mayor may make $120,000. "The president of the pension board is an unpaid position." No one would take the job if a huge fine or jail would be possibilities.

"Somebody may be cooking the books two or three levels below you, and you may not find out," says Butterfield. To expect moderately paid bureaucrats to put their wealth on the line or risk prison to swear to a financial report's validity is a fantasy.

Michael Conger, the lawyer who successfully sued the city over its pension deficiencies, generally agrees with DeMaio. A government pension fund "is a cookie jar, too tempting for politicians to resist. As a government looks to balance its budget, it can't resist raiding the pension fund," says Conger. To cover up the mischief, just as in San Diego, a city engages in actuarial and accounting gymnastics "that a Rumanian gymnast would be proud of."

Like DeMaio, he would not favor an insurance pool. The best protection would be "mandatory prison terms for breach of fiduciary duty," says Conger. And he would like to see uniformity in accounting standards: "These plans are structured so they can fail -- similar to Wall Street shenanigans. They are so complicated that people [in pension administration] get away with it. There has to be a tightening of the rules."

It would be a mistake to mandate fully funded plans. They are prone to becoming unfunded "because of the vagaries of the market," says Conger. At the same time, we can't have runaway, permanent underfunding, such as there is in San Diego and other cities and states, as well as at many companies.

Scott Ehrlich, professor of law at California Western School of Law, wants federal standards: "It's the kind of thing pension board officials should have been doing all along," says Ehrlich. "In a financial statement issued by corporations, there is a burden on executive officers to say it is accurate. We should do the same thing in government. Somebody should be on the hook to make sure that the information that goes to the public is accurate."

San Diego is an example. "The troubles we are having now would not have happened if there had been full disclosure in 1996" when the city raided the pension system to support the Republican convention.

Mary Jo Wiggins, professor of law at the University of San Diego, also favors the DeMaio approach. "The government as an employer has grown in scope and dimension at the state, federal, and local level," she says. "It would be good to have some kind of uniformity. Sarbanes-Oxley would serve as a very useful template for how we might set up monitoring and regulatory procedures for government pensions." That's particularly true of accounting standards, she says.

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— Pointing to his hometown's dismal experience, San Diegan Carl DeMaio is urging members of Congress to pass legislation imposing federal standards on government pension programs. Others hoot at such a notion: they note that federal pension laws covering the private sector have produced disastrous results. Why push similar laws on plans for government employees?

DeMaio would cherry-pick ideas from two federal laws: the Employee Retirement Income Security Act of 1974, commonly known as Erisa, and the Sarbanes-Oxley Act of 2002, which was meant to prevent further Enrons in the private sector.

The Employee Retirement Income Security Act does not now apply to government pension plans. The act sets minimum standards for participation, accrual of benefits, and the like. It is supposed to require accountability of the people who run the plans, but many say that's a joke.

In this 1974 legislation, the government set up an insurer that would pay off employees if their pension plan fails. It's called the Pension Benefit Guaranty Corporation (PBGC), and it has a critical flaw: it actually encourages companies to reorganize in bankruptcy and shuck their ailing pension plans off on the government. When they emerge from bankruptcy, they have a leg up on competitors, who feel pressure to do the same thing. It's happening in the airline industry: one goes bankrupt and sheds its pension obligations; others feel they must follow.

Sarbanes-Oxley forces companies to establish tough auditing standards. It also imposes tighter accountability requirements on directors and officers and makes companies vouch for their own internal financial controls.

"I've had a lot of dialogue with members of Congress," says DeMaio, who heads San Diego's Performance Institute, an organization set up to encourage productivity in government. Congress has to do something: private-sector plans are believed to be underfunded by about $600 billion. Public-sector ones are $700 billion in the hole. The Pension Benefit Guaranty Corporation by year's end will be $30 billion in the red.

"We should modify Sarbanes-Oxley and apply it to state and local government. There must be an audit committee with independence from the decision-making structures. In San Diego, [former auditor] Ed Ryan was a lapdog, not a watchdog," says DeMaio. If an auditor is appointed, he should take personal responsibility for the financial reports: sanctions could include going to the slammer. If the auditor is elected, the punishment would be getting defeated in the next election.

"The monkey business in San Diego would have been illegal under Erisa," says DeMaio. His proposal "would provide an iron-clad requirement that pension systems be fully funded." Government pension plans would have to discuss their status honestly with people who are covered. There would be national accounting standards for public pension funds.

However, he would not favor an insurance program such as the Pension Benefit Guaranty Corporation. "If you give politicians an insurance policy, they will act irresponsibly, knowing the Feds will bail them out," he says.

At least initially, he would not try to impose uniform federal standards such as how long an employee must work before qualifying for the pension program. "I would like to see that, but politically I am not sure it will happen," he says.

Pension lawyer Rob Butterfield, who was on the San Diego pension reform committee, heaps contumely on DeMaio's ideas. "The guys that say Erisa is a panacea should get more education," he says. "I know companies that are under Erisa that are more underfunded than the City of San Diego. The PBGC has more potential debt than assets; the government is trying to bail it out."

Most unbiased observers agree that companies have screwed employees out of pensions through numerous deceitful maneuvers, and the federal government's 1974 pension legislation, along with members of Congress, permitted it to happen.

Butterfield can't see uniform standards for government pension programs. State and city pension plans "would be giving away sovereignty. Imposing federal standards on states and municipalities would create lots of resistance," he says.

It's unrealistic to expect city auditors and mayors to take personal responsibility for a financial report's accuracy. "The Fortune 500 guys are getting paid $10 million a year and have insurance programs and other protections," he says. By contrast, an auditor or mayor may make $120,000. "The president of the pension board is an unpaid position." No one would take the job if a huge fine or jail would be possibilities.

"Somebody may be cooking the books two or three levels below you, and you may not find out," says Butterfield. To expect moderately paid bureaucrats to put their wealth on the line or risk prison to swear to a financial report's validity is a fantasy.

Michael Conger, the lawyer who successfully sued the city over its pension deficiencies, generally agrees with DeMaio. A government pension fund "is a cookie jar, too tempting for politicians to resist. As a government looks to balance its budget, it can't resist raiding the pension fund," says Conger. To cover up the mischief, just as in San Diego, a city engages in actuarial and accounting gymnastics "that a Rumanian gymnast would be proud of."

Like DeMaio, he would not favor an insurance pool. The best protection would be "mandatory prison terms for breach of fiduciary duty," says Conger. And he would like to see uniformity in accounting standards: "These plans are structured so they can fail -- similar to Wall Street shenanigans. They are so complicated that people [in pension administration] get away with it. There has to be a tightening of the rules."

It would be a mistake to mandate fully funded plans. They are prone to becoming unfunded "because of the vagaries of the market," says Conger. At the same time, we can't have runaway, permanent underfunding, such as there is in San Diego and other cities and states, as well as at many companies.

Scott Ehrlich, professor of law at California Western School of Law, wants federal standards: "It's the kind of thing pension board officials should have been doing all along," says Ehrlich. "In a financial statement issued by corporations, there is a burden on executive officers to say it is accurate. We should do the same thing in government. Somebody should be on the hook to make sure that the information that goes to the public is accurate."

San Diego is an example. "The troubles we are having now would not have happened if there had been full disclosure in 1996" when the city raided the pension system to support the Republican convention.

Mary Jo Wiggins, professor of law at the University of San Diego, also favors the DeMaio approach. "The government as an employer has grown in scope and dimension at the state, federal, and local level," she says. "It would be good to have some kind of uniformity. Sarbanes-Oxley would serve as a very useful template for how we might set up monitoring and regulatory procedures for government pensions." That's particularly true of accounting standards, she says.

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