State and Municipal Debt: The Coming Crisis? Part II

Read the full testimony and graphs as an Adobe Acrobat PDF

Chairman McHenry, Ranking Member Quigley and Members of the Committee. Thank you for offering me the opportunity to testify with regard to state and municipal debt.

My name is Andrew Biggs and I am a resident scholar at the American Enterprise Institute. However, the views I express today are my own and do not represent those of AEI or any other institution.

The fiscal crisis at the state and local level has many causes. The proximate cause is the significant economic recession from which the U.S. economy still struggles to recover. However, the recession has revealed a number of underlying trends which pose dangers to the future of state and local finance and, in the most extreme cases, may cause these governments to turn to Washington, D.C. for assistance.

The focus of my work has been on financing for public sector pensions, that is, pensions provided to employees of state and local governments. Unlike in the private sector, where the traditional defined benefit pension has been overtaken by defined contribution 401(k)-type plans, in the public sector defined benefit pensions are, if not going strong, at least the predominant form of retirement income provision for government employees.

The accounting standards applied to public sector pensions are far more forgiving than those required for use by private sector pensions or those that economic theory and the financial markets would recommend. Public sector pensions are allowed to discount future benefits, which are guaranteed for workers, using the high expected rates of return on risky portfolios containing stocks, international investments, private equity and hedge funds. Private pension accounting, economic theory, and the practice of financial markets dictate that the appropriate discount rate applied to a given liability is based upon the risk characteristics of the liability, not of funds that may be set aside to fund that liability.

Put simply, public pension accounting standards encourage state and local governments to promise too much, fund too little and take too much risk with their investments. Adequate disclosure of the true state of pension financing will provide markets the opportunity to impose discipline on municipal governments and give policymakers the incentive to act responsibly with regard to these obligations.

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About the Author

 

Andrew G.
Biggs
  • Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

    Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President's Commission to Strengthen Social Security. Biggs has been interviewed on radio and television as an expert on retirement issues and on public vs. private sector compensation. He has published widely in academic publications as well as in daily newspapers such as The New York Times, The Wall Street Journal, and The Washington Post. He has also testified before Congress on numerous occasions. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future.

    Biggs holds a bachelor’s degree from Queen's University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

  • Phone: 202-862-5841
    Email: andrew.biggs@aei.org
  • Assistant Info

    Name: Kelly Funderburk
    Phone: 202-862-5920
    Email: kelly.funderburk@aei.org

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