By Dan Walters
Major corporations that still maintain traditional defined-benefit pension plans are asking Congress to lower their pension trust fund contributions because, they say, extraordinarily low interest rates force them to sock away too much.
Therein lie two tales.
Corporations are required by law to periodically adjust their "discount rates" ― in effect, their assumptions of future pension fund earnings ― by tying them to corporate bond interest.
Discount rates vary a bit, but currently are in the 4 percent to 5 percent range and have been dropping because the Federal Reserve System has kept interest rates low as an economic stimulus.
When discount rates decline, the assumed values of pension funds also drop, thus requiring companies to put in more cash to maintain their capacity to pay future pensions.
General Electric, the Wall Street Journal reported, had to pump $7.4 billion more into its pension fund when its discount rate dropped from 5.3 percent in 2010 to 4.2 percent in 2011.
Corporations want to change the formula, thus allowing them to contribute less to pensions, but it's uncertain whether they will succeed, in part because unions whose members depend on corporate pensions are skeptical.
Shift 2,377 miles westward from the U.S. Capitol to the California Capitol, and it's a much different story.
California's big public pension funds also use discount rates, but they are in the 7.5 percent to 8 percent range. Unlike their corporate cousins, the public funds are not required by law to adjust them. Pension boards and public employee unions, not surprisingly, trumpet the fiction that high discount rates are realistic ― exactly the opposite of the positions taken by private company unions in Washington, D.C.
The California Public Employees' Retirement System earned just 1.1 percent on investments in 2011, and its board has balked at suggestions from its own staff that it lower its discount rate by a quarter-point to 7.5 percent.
Studies by a Stanford University group concluded that if the California Public Employees' Retirement System and other public pension funds were to use discount rates like those of corporate plans, it would increase their unfunded liabilities by hundreds of billions of dollars.
That would upset politicians, who would then feel compelled to increase pension fund contributions by many billions of dollars or enact reforms that either would reduce benefits or require employees to pay more. The unions labor mightily to kill even the mild reforms offered by the man they helped elect governor, Jerry Brown.
Underlying that posture is this simple, if disturbing, fact: Public pension systems can maintain artificially high discount rates only because they know that should real earnings fall short, taxpayers will be on the hook for the difference, without any recourse.
That's a big hammer.
Dan Walters is a columnist for Sacramento Bee. Reach him at dwalters@sacbee.com. For back columns, visit www.sacbee.com/walters.