Senate Report Argues Defined Benefit Pension Plans are Inappropriate for Local Govts

U.S. Senator Orin Hatch has released a report on state and local public pensions that calls for greater involvement of the federal government due to fears about the impact of pension obligations on the nation’s credit rating and federal budget. Hatch is the ranking Republican on the U.S. Senate Finance Committee. The report argues it would be a mistake to blame the pension crisis on the recession or expect the issue to be resolved over time.

Hatch’s report states, “Unfunded public pension liabilities are a longstanding problem that existed well before the current economic downturn.” With respect to the debt facing state and local officials, the report notes that “This crushing debt load is ravaging state and local government budgets, and there are few options available to them for addressing this crisis – cuts in services, reductions in benefits, higher taxes, or some combination of the three.”

It is particularly notable that the report concludes that defined benefit plans are inappropriate for state and local governments. It states: “It is becoming increasingly apparent that defined benefit pension plans will never be financially sound enough over the long term for use by state and local governments. The financial risk associated with the defined benefit pension structure may be appropriate in the corporate setting, but it is inherently flawed in the state and local government setting.”

The report also blames poor fiscal discipline, overly generous benefits, and a lack of sufficient annual contributions as contributing factors for the pension crisis and posits that action is needed now and calls for a new public pension plan structure that is affordable and more transparent. The report concludes that “A legislative solution for consideration by Congress will be introduced in the senate in the near future.” You can read the full report here.

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