you tweet us @afl-cio to continue to follow the conversation. thank you all so much for being here. [applause] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.o >> we're asking students to participate. what do you think incoming president donald trump should ?ddress students can work alone or in groups of up to three to produce a 5-7 minute documentary on the issue presented. a grand prize will go to the team with the best overall entry. overall, prizes will be awarded

and 53 teachers. for more information, go to our website studentcam.org. a discussion on how states are discussing unfunded pension liabilities. future ofu.s. medicaid. and, corporations and foreign governments. a new report from the american legislative exchange council shows that state public pension nearlyre now unfunded by $5.6 trillion. policy analysts discuss how state and local governments are discussing the rise. from the heritage foundation, this is one hour.

[applause] host: welcome a hand thank you for coming here today despite a relatively full room, i think most of us will admit the topic of public pensions is not the hottest topic of the day. i admit when i started on the hill as a young staffer, pensions was in my portfolio but whenever came up i tried to brush it aside or avoided because i felt it can it can really matter that much or that pensions as a whole were not that relevant anymore because most companies were shifting to defined contribution systems. but i was wrong. tensions matter a lot. as you will hear from bob and those amount to trillions of dollars in differences in the unfunded liabilities and those are liabilities taxpayers will pay.

it also affects not only pensioners but taxpayers across the united states. so, public pensions are actually a backdoor way for states to accumulate deficits without actually having to go out and raise new debt. reportcause they do not the 5.6 train dollars in the unfunded liabilities they have accumulated does not mean these costs will not be borne by taxpayers. today we have a wonderful panel. they bring decades worth of knowledge. i would like to start off with the maryland state senator who will give some opening remarks. be here.d to this is a topic many in my area don't have much interest in. i am in accountant by trade so i

the weeds which makes me less interesting. but anyway, we have serious problems with a defined benefit plan. around 2010, we started seeing serious problems with our pensions and that they were greatly underfunded. we mask over that because we use of assumptions that make it look at her. 7.75% rate of return amortized over 25 years, things like that that spread it out and keep us from putting in full funding. but our pensions still have to be paid. need to we have made we keep. back in 2012, we did a little bit of pension reform or so they called it. we increased the amount

employees had to pay by 2%. we shifted the funding for teacher pensions to our localities which got about the state ledger but it is still being paid. we tinkered around the edges. increase the time for investing which means we will have a harder time attracting and people to come. people aren't staying 20-30 years with the company or state. they get training and then have nothing to take with them. so we adjusted totals and one of the things about using a high rate of return is that unless inflation actually hits that level we do not have to give one percent which saves a little bit. so good news and bad news i think. found, good and bad news about pensions. people aren't living longer and people are living longer so we have higher cost and it is becoming a problem.

we are on four-year return. so for we kick the can down the road, someone else will pick it up again to that is what we did for pension reform but we need to get serious about it. be bornefunding will by the taxpayers and what happens with that is the excess money we have to put into tension could go to education, public safety, and the other needs of our community but this is beginning to crowd it out so it is a serious problem at the state level and hopefully one of these days we will get serious enough about it in maryland to do something about it. panelthe next portion, a discussion. nationalhave a recognized expert on sustainable public retirement reform. dan serves as a founder and nationalber of the

bipartisan advocacy organization focused on protecting and ensuring public retirement plans. from 2009-2011, he was a senator. championed time he groundbreaking pension reforms that have helped to ensure utah will be able to meet its retirement commitment to current providingkers while retirement security for future employees. next is jonathan williams, vice president for the center for state and local reform at the american legislative exchange council. he works with state policymakers, state leaders, and members of the private sector to solutionsscal policy for issues like unfunded pension policy -- unfunded pension obligations. he co-authors a

state competitiveness index. on the end, bob williams. alec's board and fiscal reforms committee. he works for the accountability office and evergreen foundation a washington-state-based think tank. five terms in the legislature and was the republican nominee for governor in 1988. i will start with jonathan. have an frontach of you show state and local governments across the country have accumulated $5.6 trillion in unfunded liabilities. thomas is they made to workers for work served and yet they do not have the funding to pay it.

a $9006 trillion is also c's two increase from ale years prior report. how have state government's accumulated such high liabilities and why are they growing so quickly? >> thank you for having us today. it is great to be working with so many experts and so many people i have worked beside. that is a good question. i thank i wish we had an hour to answer that. it is a multifaceted answer. e correctly it is a $900 billion increase from two years ago. some pretty massive numbers. in washington, $900 billion may be a rounding error in federal debt, but at the state level that is real money. how they got there, a

combination. this is a bipartisan problem. states did not put away the annually required contributions and suggested contributions. secondly, there has been a lot of funny accounting going on with state pensions. it allows them to get away with assuming 7%, a percent rate return this year, next return, every year for the next 30 years. we have the issue of basically crowding out issues. we have pension costs now as senator bates mentioned eating into education budgets and opening up that interactive. it is a big, growing issue. with weak economic growth and the lack of returns is not getting better anytime soon. rachel: bob, could you talk about how liabilities have

spread across the states? it is not that one state has one plan, they could have hundreds of plants. some states are better funded than others. what does the bi breakdown look like? bob: we looked at 270 plans in various states. states on the average assume a 7% return in investment. gone down. we have used 2.344% return in investment. that compares to new york state. in the last year, new york state 19%.a return of 0. .2% return on the investment. the best funded pension system in the country.

if wisconsin were a private return.it is a low that is the best one. --have states at the bottom fmp has downgraded the credit rating for the 16th and 17th time since 2009. governor christie is trying to beat them. 18th downgrade since he became governor. the next best funded plan is wisconsin which is 63.4% funded. the worst five is connecticut and kentucky, illinois, new jersey and michigan. connecticut is only 22.8% funded. what we are seeing as the problem, jonathan mentioned briefly, in chicago which is not

a state, but it is going towards bankruptcy. rachel: you were talking about the bi breakdown in the present percent funded. if we divide this across all the taxpayers in the state, what does that look like for a single individual or a household? >> for every man, woman and child in america, the average pension obligation is $1 7,247 to pay off these promises we have made but not put away the dollars to honor those promises and that is a problem. states, wes across are talking about over $40,000 for every man, woman and child

in alaska. states like in ohio is int the 20's. we are talking about significant obligations. rachel: you talked about the difference for the assumption of interest rates. the states themselves assume they have $1 trillion in $5.6ded liabilities, but trillion if we use more reasonable accounting measures. why is it those accounting measures are so much better to use and why don't the states want to use them? i recommendedago, states have to comply with the accounting principles rather tha n a do whatever you want essentially. jonathan mentioned only 21 states made the annual required contributions to pensions. that means 29 states did not

make the annual contributions. a fictitiousem assume rate, but they don't make their contribution. in washington state a few years ago, they assumed state employees work for the state longer and they returned for the first year. you can make assumptions like that. the average legislator -- i was on the washington legislator for 10 years -- only two of us really track pension. the others had no idea. don't bother. that is something we can kick the can down the street. >> as we survey these 280 plans from the report we put out, the average now is 7.37% across of those 280 plus plans. we are talking about states and

local governments betting they will beat warren buffett in the stock market. knowing that the well, they are not going to. in many cases, they don't want to put away the extra contributions. they want to spend more on their priority list and they don't want to make that enhanced pension payment. i should mention that it is a default risk free rate of return. even if you use what the agencies are saying, under 5%, that moves the needle significantly as well. bob: just to add to that, we are not the only ones saying this. was $4.8policy said it trillion. andrew said at least $5 trillion. rachel: there have been reports recently, some of the states and

local governments are considering reduction of interest rates to 7.5%. even that is difficult to achieve because it translates to a next her $100 million that -- an extra $100 million that they have to pull from answer resources. for every dollar had to go to paying pensions in chicago. only $.11 is going towards the classroom. in illinois, they instituted a temporary tax hike. 90% of the new revenue went towards paying for their pension. in illinois, they are far down the road. they have a very unfunded system. are there other states that are in a similar situation where they are already having to cut services and increased taxes? other statesy can prevent reaching that same point? bob: yes, there are other

states. the bottom five are in trouble. 10 states right now spend more money on pensions, even though they are not fully funded, than they do on higher ed. it is affecting things in terms of that. other things that could be done -- one of the thing i asked legislators, are there problems with state employee pensions? yes. problem with higher ed pensions? there is every state, no problem in higher education pensions. they have a defined contribution. they can either invest themselves or find another alternative. they know if the employer ever underfunded pensions, they can go from one institution to another. they love it. and thein a session

defined contributions is a right wing conspiracy. can you explain why the aft has defined contribution models? that is an alternate program. why don't we make it voluntary for teachers? we even have it in my state, the voterslitant, liberal that voted to go to the defined contribution model. in utah, we had a pension plan. i was a brand-new elected legislator and i was put on this committee because i had no idea what i wanted to do. the president set i will make you chairman of the retirement committee and he said don't worry, nothing will ever happen.

this was during the 2009 crash. plan administrators came. we are one of the best plans in the country. eyescame to me with wide and told me they never seen anything like this. how bad is it? we don't know, we will get back to you. i found out later that one year's worth of market loss had fund.hole in our pension it will take approximately 10% of the general fund spending for 25 years to pay off one year's worth of losses. we had no idea we were bearing that much risk. we had no idea that every new employee that was hired, we were making a 60 year commitment and discounting that commitment, assuming the stock market would grow at almost 8% a year on a smooth basis. that is what people are doing. they are making long-term commitments and assuming things

will look good going forward and not putting enough money away now. now, they are wrestling with this massive problem that has built up over decades that they are now trying to say let's lower the rates of returns. itn they bleloewer that, requires an additional contribution immediately. what that is is not an increase of either liabilities, it is a revelation of your liabilities. in alabama, they just recently lowered their rates of return from 8% to 7.5% which they will face in over a period of years. the news reports were this change added $2 billion in liability. that is not the case. liabilities are there. it revealed a $2 billion in liability.

hat, youiscount t get to a $5.6 trillion number. if you think of a balance portfolio, most pension systems invest 50% into stocks, 25% into bonds and the other 25% is real estate, fixed income and some sort of private equity. bonds are getting 2%. 2%% gives you around to risk-free bonds. it takes significantly higher to get those low returns up with stock market returns. you need to get 8%, 9%, 10% stock market returns. it trades at 16.8% times earnings. if you look at that, going forward with 40% of your portfolio at 2% return and

stocks, i have seen various reports from goldman and other groups, high end are expecting 70% in stocks over the next 10 years. if you blend that in, you are looking at 3.5% return. if you discount just the 4%, this ist fo the biggest financial crisis to hit systematically state governments in the history of this country. it is all over the place. when a pension fund hits below 40% funding, it answers enters a death spiral. your ability to generate returns collapses. if you discount liabilities

according to this report at a risk-free rate, the average funded status is 39%. the average of all the plans in the country is 39%. this is the largest financial crisis in the history of state government. the problem is the longer we go without recognizing this, the worse it is going to be. it is a systemic problem. we balance our budgets. some people use gimmicks. we have a limited borrowing capacity. i think now when we really look through the haze here, that crisis an existential for state and local governments. tohel: i would like to get some things that the state and local governments are able to do. jon,t to ask either bob or that these unfunded liabilities, there is little state and local

governments can do. a lot of them have constitutional protection. in places like illinois, supreme court ruled that not only can the state change any benefits for people who already earned them. -- it is essentially theynsation -- in chicago, have said you cannot change future benefits either. if an employee retires yesterday, never again can you change any terms over a pension agreement. you cannot increase retirement age suddenly if life expectancy goes up by five years. you cannot change anything for them. i know a lot of the states will probably not have such strict and perturbations -- interpretations. what are the limits and are there states that have actually been able to change benefits for future or current workers? jonathan: i would be happy to

take the first crack at that. i know it is all over the map. the number one goal we have talked about and we at alec at work at this since 2007, a subcommittee devoted to finding solutions. now senator bates is the chair of the subcommittee. we have put together this publication called keeping the promise. it is written by senator li ljenquist. ways we could solve the problem -- first of all, we need to honor the promises we made to current retirees and workers. sometimes the argument that you referenced get thrown out as a red herring because most of the serious policy debates around pension reform today and the big reforms that have happened deal exclusively with new hires. setting a date in the future that those hired after a date will be part of a new system that is more financially

sustainable. i would argue if some of those changes are not made, it would be difficult to honor current workers and retirees. 1997,an, my home state in one of the pioneers for the plans. more recently, alaska and oklahoma have taken that approach. we have historic reforms in utah as well. i think those of us that are serious about this, we are talking about perspective hires. that is so important to get that message across. that is the number one argument to kill reform. a lot of people say what we need is fundamental pension reform. states, there have been extra benefits added. washington state public utility workers have not taken any vacation in the last three years.

they get a boost in their pensions where it is higher than their salaries. we have seen some interesting things. worked withn arizona the police and firemen. what i found out before, when you talk to union officials, if you talk frankly and turn on the facts, they change their position. too often in the past as conservative legislators, we have demonized the public employees. it is the state legislators and union officials that create a problem. --e you show them the facts they were able to come up with a pension reform for the police and firemen. that required a constitutional amendment. the amazing thing about the amendment is the police and firemen supported a constitutional amendment -- it applied to only new employees

-- they supported because they realized if we don't do something, there will be not enough money for us. when you talk about cutting their pensions, they got worried. when you talk about cutting extra benefits that people are getting, they are ok with it. if we don't do something on pensions, not only are your pensions at risk so is public health and safety and we have to do something. when you see states -- school districts like chicago and the city of chicago's pensions, people are getting very concerned right now. rachel: dan, you have the hands-on experience of going through this reform process. can you talk about what that entails, what the changes have been in utah and what has happened to the budget? daniel: i really appreciate working with jonathan and bob and gail for for years now. really, this whole problem is

kind of like coming across a chemical spill in your backyard. it is right there. it is bubbling up out of the ground. what do you do? well, the first thing we thought about, ok, how do you fix a problem that has been 30 years in the making? frankly in utah, we felt it was completely irresponsible of us to make new 60 year commitments when we were not certain if we had another year like 2009 we be able to meet our current commitments to current employees. if you comesaid across a chemical spill in your yard, the first thing you do is count the spill and work overtime to clean it up. if you think what is the right thing to do -- the right thing to do is to meet the commitment you may, state and local governments have made to

retirees. it was the deal the state offered and people make rational decisions based on the deals in front of them. so, to argue they should not or that somehow that was wrong is inappropriate. we just started with that approach to say we will meet our commitment. now, to do that, we have to make sure we are derisking this plan person by person. we don't want to bear the same risk. that is the focus of every major pension reform over the last five years. the successful ones that have been foundational are ones that really focus on counting that liability prospectively. 4500 people protested me personally at the capital. i had colleagues come up and pat me on the head and say good luck

this one, it cannot be done. it does not quite roll off the tongue. it was an organized thing, but i got 3500 pretty critical e-mails. my favorite one was the guy who ripped on me for four paragraphs and signed his name and said p.s., you look like you are 12 years old, you turd. it was pretty emotional. when we communicated back -- our number one goal is to meet our commitment to you. to do that, we have to do things differently going forward. in utah, we lost the equivalent of 8000 schoolteachers for 25 years. that is how much this is costing the state of 3 million people. so, when we communicated that respectively, kindly and sincerely -- this is our effort and that new plan we had in utah is predictable.

it will provide adequate retirement security coming in. when that happens, people say that is fair and they went home. actually on the republican side picked up seats because the number one issue that drove undecideds into the republican camp was we tackled something hard that needed to be done. what can be done should be done. there are places where you go so far down the road where literally you can do a new plan for new workers and those benefits, the costs are so substantial now. when we worked with the public safety retirement system in arizona, credit really goes to the foundation folks who really worked with them closely, it was the police and firemen coming

forward and saying we know we have to lay off our workforce. we have this issue with our current plan that is causing us to spiral out of control and we have an idea. how about we target an amendments of the constitution and change it so we don't have to lay people off? worked with them. we also have a new plan that takes their future risks and cut it by more than half. we are able to do that and credit goes to the folks at the foundation. reality is not negotiable. when it comes down to this issue, as it becomes more real to people and the trade-offs become more real, i think you will see much more engagement and you do see more engagement from union leaders, association leaders and raking find lenders -- rank and file members.

we need to go faster than we are going because it has been too slow and there is a false sense of security that after the past few years people can say my 401k has largely recovered. in this case, it's like running a sprint. you got to run even faster to meet the right timeline. e're way far behind. rachel: you talked about tapping the spill and also brought up the fact that the plans that are closer to insolvency, it's difficult to do something they're reliant on the incoming contributions of current workers to pay immediately out the door to current retirees and touching on the risks here. i think that bob mentioned that defined contribution plans have been vilified by the unions, i think it's largely because of this fact that the reason they

probably don't want people in the defined contribution plans, they want them to be in the side benefit plans to pay the money out the door. if they stop paying the contributions into the defined benefit plans, they no longer have that money and the current retirees are the ones that are hurt. retirement in general there are risks. is the risk borne by the worker and the worker owns the money and they know what's there and plan their own retirement or is the risk borne by the employer. in the public systems, the employer is essentially taxpayers. so any of you, if you just like to talk about the inherent, the risks that are there, but also the benefits of the defined contribution plan and what that actually would offer to public employees, union employees, people currently in defined benefit plans that believe that s their safety and security. daniel: we hear about the tension problems in california,

three cities there have a defined contribution model and don't have any problem with pensions and the workers love it. in texas, we have a big problem in local government with pensions right now. big problem, the big counties, dallas and i can't say these names, they have defined contribution model and no problems at all with those systems. -- as do is conservatives is talk about the facts that have happened to employees in alabama where the pension system went bankrupt. the bankruptcy judge ruled you take care of the pensions first and then whatever is left over, no, we don't have enough money to do that, we're going to do police and firemen. as a result, the pensioners got nothing for two years. nothing. we talk about detroit, people think that the pensioners were ok. jackie, the widow of a 25-year-old firefighter, he lost his battle with cancer and

died. she has no social security. she relies on retirement. the pension was cut 6.7%. the bigger one, the bankruptcy judge went back later and found out they had the excess earnings thing to put money in and guaranteed 15% on investment. that is not in the contract. so here is david, 58, who must repay his city $75,000 in a lump sum payments while his monthly pension was cut by $216. he also has to pay $500 a month more for his health care than he did before. if he doesn't repay the city $75,000 in lump sum, then they deduct from his monthly paycheck, 6.75% interest on that. these are not the stories we're talking about, portsmouth, rhode island, illinois, we need to explain that there is a risk involved, particularly for city

and county officials, the state can't go bankrupt yet. jonathan: one thing i would add, plex vesting rules where many cases they require an employee to be with that level of government for 10 years in some cases before they quality for that full defined benefit retirement. let's face it, in the workplace, they're not going to stay with one employer for 40 years like our parents or grandparents generation did. having a portable asset they can take with them from job to job is key going forward. it's an underdiscussed element of why defined contribution is good. bob: you talked about the tips from the bankruptcy. jonathan: i like to say, if you don't trust anything that we say here today, and you're a bunch of people, conservatives here today, don't take our word for it.

take the word of the bankruptcy judge in detroit, steven rhodes, a capstone case of his 25ier decorated legal career and here was his basic three steps for detroit and how other state and localities can avoid when it comes to the pension side of thing. we don't want our city to be the next detroit and go through the extreme challenges that that city did. his three takeaways, make your pension plan contributions properly like we discussed. if you're going to make the promises, honor the promises and talk about how much the promises are costing, that's the second piece of that. secondly, recalculate the way you're thinking about pension obligations. getting away from this fictitious accounting that bob and i have talked about and assuming the rosiest scenarios and getting down to realistic scenarios, that's what detroit was guilty of. rethink the defined benefit pension model.

there is a reason that private sector employees moved to 401 k's a decade or two ago. it would be wise to rethink that on their own as well. >> you talked a little bit about, defined contribution, i think, because most of the private sector participation in defined contribution plans are more familiar. one of the things we tried to do with keeping the promise, the pension publication through alec, there is a variety of things you can do. the real thing, it goes back to what this judge said, make your payments, make the right level of your payments. everybody is underpaying. two, make sure that if you're going to do a pension structure, that you're doing it right and then meaning that you are, you really understand the risks when you move forward. what we did in utah, we don't have a straight designed

contribution. we said, ok, how much money do we have towards retirement. how much money do we feel is an appropriate contribution for the state to make. we gave people options. we gave them an option, if they want to pick a straight defined contribution model where it's not technically a 401 k but similar to a 401 k, how do we make that the best 401 k we can make it. we said there is no borrowing against it. it's going to be professionally managed with low fees. there needs to be an annuityization option at the end. we also said, look, if you want to create yourself and pool your risk with other employees and create some sort of a pension, we're going to make sure that's well designed. and very clear that this is how much the state is paying. you understand that above this, you pay for it, if the required contributions go up, you pay for it. there is literally a dozen different ways to create a new

plan that is stable and predictable. bob mentioned t.i.a. for higher ed. they have a defined contribution/defined benefit plan, a private cash balance plan for 80 years. it works exceptionally well. it's very well funded. they have a set amount contribution. it's pooled together. it's invested together so you get these scale and then they have a low guaranteed rate of return with upside sharing above that return with their employees. it protects against downside market crashes that happen right before your retirement and protects against some of the things that people have leveled criticisms on the 401 k plan. there is a variety of ways to mitigate the risks and really to blend elements of a defined element and defined benefit in an effective way. you want examples of that, look at the kentucky state plan that was passed in 201 and the kansas plan that was also passed in 2012 or 2013 that

essentially set forward a new cash balance plan for the workers that from the state's perspective, it is a defined ricks, a set predictable contribution. there are a sharing of risks among other employees and really kind of a stable structure that works, structure that had been around a long time. the challenges with the final average salary defined benefits structure and that's the one every year you work, you get 2% of your final annual salary for the rest of your life and we're not going to pay for that because we assume the market is going to take care of most of the growth. that's what we're focusing on. i guess i would sum up by saying there are a lot of different policy options that can come to the table, that can get you to predictable costs going forward for new employees and do that in a way that's fair and actually meets some of the additional public policy goals you may have. >> just as kind of a closing,

mark, here, could you list out some of your ideas, i know when you're keeping the promises, you mentioned some, there is a defined benefit portion that exists no matter what if you change it going forward. you still have a defined benefit system in place that you have to play out no matter what. similar to social security, we have the system there, there are some rather simple things you can do like retirement age, cost of living adjustments, can you just mention some of those? >> so the leverage to address costs for our current defined benefit plan for an existing final salary defined benefit plan go to making sure that your cost of living adjustments are capped at a certain level and they're simple instead of compounding and that they're reasonable. you want to make sure that people are retiring at an appropriate time. we have some plans where people can retire at 50 and live more in retirement than they worked.

you end up having to work longer, you end up having to make sure the cola is flexible. you take out spiking where people save up their vacation pay and then use that in a benefit and it balances up the pension for the rest of their life. there are some things that can be done on the margins of the current plan. if you think about this, there are three large buckets for prospectus plans there are four technically. can you have a defined benefit plan that is stable and safe and predictable? yes, you can. it should be invested at a risk-free rate of return, meaning you should have to pay the costs and invest in very safe assets. you can do that and frankly, i'm fine with that as long as people are truly addressing the cost. this might be the governor for gail so, it's the governor's

ring tone, it's not gail. >> the previous governor it might be. daniel: it's not necessarily the structure -- you can make a predictable pension plan work with a final average salary defined benefit plan with a hybrid plan which is a half d.b.d.c., with a cash balance plan and a defined contribution plan. all of them have their drawbacks, but all of them you can basically design plans that are predictable for the employer, have the retirement benefits that are adequate for the employee, that is going to provide them retirement security. the problem is we have stayed married to a structure that has been around for 40 years that is outdated and that's what's got to change. rachel: just as we're closing up here, i have been reminded by all of the comments that you're talking about just the wrong structure of this system and how when it is run at the

public level, all of the incentives are in the wrong direction. a caution with that. the department of labor has issued a new rule that effectively will allow states to set up defined benefit plans for private sector workers. the way they do that, they must mandate that employers who have a certain number of employees have a retirement plan. they can automatically natural their employees into it. it can be a defined benefit plan. that is a huge area for governments, particularly those who maybe looking to cover their public sector shortfalls to drive in money from the private sector. do the same thing with public sector funds, drive up massive unfounded liabilities started again with the private sector and effectively kick the can down the road. just a caution there. i would like to open it up to discussions now. state your name and affiliation

and ask your question in the form of a question. [laughter] >> thank you all invest. it was very informative. i was wondering if there is any level of this problem that is now investment on the state's part. who is controlling where these defined benefit plans are being invested in various states, is there a difference there? is it controlled by the legislature, is it controlled in the agencies, is there a level of cronyism involved in this. we're going to invest if my buddy's company, a great level of return. >> it's a topic of our next alec san francisco state reform report later this month. stay tuned. we do survey the state and local governments on how they go about investing. we find in many cases there

isn't a prudent investor standard in place. we find the cases in alabama where they're investigating golf courses with pension dollars. a lot of cases are playing politics with people's environment, divesting from certain industries or companies they don't like for whatever reason. moving to these plans is right. i remain more skeptical of the defined benefit model. when government is in the sacrifices pension, the long term rates of return for investors. rachel: that's the issue that is pay to play. the pension funds will vest with certain investors who give them political contributions. the s.e.c. has cracked down on this, there are still places where this has happened.

they have basically paid off their way to buy investment into their company, they have not been declared guilty. it's business as usual, everybody does it. it may not be right, but we're allowed to. it certainly is a big problem there. in the back. the government accounting standards, quasi-private body at sets standards for public pensions in 2012 requiring plans that are underfunded, i believe below 80% was the level rate, do you free believe this is justified in anymore, and if so, why or why not? rachel: you want to take that.

>> ook look, a plan that is 80% funded versus a plan that is 79% funded, there are so many factors that into that status, did they update the mortality tables. they delay that. chicago did it for a period of time. they just pretended that they're people weren't living longer. there is a dozen assumptions that you making. you can make the suning that payroll is going up 5 or 2%. there are so many factors. again, can you identify, i was speaking more theoretically, can you have a defined benefit plan that is perfectly predictable? technically, yes. is it hard to do? yes. not only governance issues when everybody shows up with their

hand out and everyone has a investor. is an assumptions that are dopely in reports and takes a lot of technical act to pull and glean that stuff out. the reason folks at pujols do this -- pugh do this, there are two tears based on funded status. it doesn't make sense at all to me. it's just so easy hide liabilities by just assuming them away. >> the bigger challenge is the incest use relationship between e plan and their own actuary ris. they hire the actuaries, they validate the assumptions they're told to validate. they said this was reasonable these are the

assumptions they gave us. there is no accountability of who actually is responsible as a fiduciary here. again, an actuarial, you drive down the road at 90 miles an hour only by looking in your veer view mirror. we have people thinking that the markets are going to do what they did in the 1980's and it's just not realistic. there should not be different standards. >> i have to won you, i'm not an accountant. did stay at a holiday inn last night. over the years i have come to realize that has been a big myth as well. market returns don't do well, we drift into the 50%, 60% ratio. states ought to be aiming for 1 huntelaar funded.

>> look, we can have everyone of these plans at 80% funded or higher right now. al you have to do is assume ou're going to get 15% returns every year. nothing to see here, move along. the fact is that reality taxes up and when the returns don't show up, you're going to say hiring her returns, you don't show up, it is massive. whether you're getting 8% returns or 15, i mean, it's there. and so there should be transparency all along the way here. it should be the same rules for everybody. >> if you assume an 8% return investment and you get in the case, you have to make up the

lost earnings on the 8%. they don't understand that. >> in maryland we had a couple of years that were down in the 20% loss range and talk about trying to make that up. you not only have to make up what you lost but the earnings that were on it. i mentioned to the championship of our budget and tax committee, i have a form to talk about our founding rates based on these assumptions. he said negotiations no, we're at 65%. i said we're assuming 7.75% rate of return. last year we got less than 2. that doesn't make any sense. because it makes it easy for them, i'll be out of the legislature before you have to deal with it so you do have to do something. announcer: i got a question, the idea that you can build so many different types of plans going forward to try to balance the need of stake holders.

you have seen that across the state. plans in wisconsin that are very well funded have a very she will risk associated with them. to up turns and down turns, plaskclask throwsed and put them in a 401 k. can you explain why they actually did what you suggested but just put new hires in a 401 k, that viability is the highest of any other state. >> i can take a crack. if you don't fund your current plan, it doesn't matter because those guys come in one at a time and so again, to make sure that your plan is stable, you got to fully fund your plan. that is the first thing. bob mentioned, 29 states aren't even doing that now. even after all of this stuff. you got to fund your play.

alaska didn't fund your plan, you can't just assume a new system for new workers is going to sve things. it's not. if you're adding risk on the other side by just assuming that you don't have to make payments, any risk benefit you can get from moving new people to a new system or even made worse by into the funding your crrnt. you got. it. you cap it and you better not glect cleaning it up and figure it out and make sure they're funding their current plan. rachel: we have one more, time for one more question down here. >> hi, i'm with the daily signal. i hoped you would be able to tell us why you think it is that defined benefit plans for

the private sector were fazed out decades ago. the private sector seems to be lagging behind. why do you think that is? >> it goes back to the famous line which is the first law of economics is there is such a thing as scarcity of resources. n law, you ignore he can normalics. -- commonics. the ability for current elected officials to get the benefit of making new promises and adding on additional thing, retroactive coal increases when times are good, things like that. they are 20, 30, year causes, maybe they'll be around. one of the biggest political incentives that face pensions. >> there is a fundamental

assumption that is being challenged with in the last 10 years with state government. that is, and i have heard it for a decade now, states can't go bankrupt. i think businesses realize with pensions, they can't go bankrupt. the original law came into place, look, you cannot have a pension plan federalcally unless you invest it in low risk assets. we're going to monitor that and follow you if you are making a commitment to your employees that you fund it. if you don't fund it, you're in trouble. that's a, they're a sovereign entity, the assumption that ecause states cannot declare bankruptcy and restructure, they make an assumption, clearly erroneous, that states cannot be bankrupt. can you be insolvent and

technically bankrupt? you can. that assumption has really plagued the focus at the table. if you go oftentimes and deal with labor leaders, they will say, hey, raise taxes. state can't go bankrupt. you need to raise taxes regardless of the effects of the common and your state. i'm protected. i don't have to go to a table. because of that, a false sense of security, we're playing the long game and witness this thing out. 70%, 65, 70% ding of the payroll for new police officers and they can't afford any cops and laying everybody off. reali is not negotiate.

you get to the point where literally it's a choice of do we offer core government functions or do we pay pensers. that tipping point is here. so i think you're going to see a continued minimum for wrong the country. rachel: thank you everybody for coming out today. give a round of applause for our panelists. [applause] >> on newsmakers, our guest is luke messer. he talks about the recent election, the legislative agenda for the new congress, and what to expect from a trump administration. important to realize what this election told us and what it did not tell us.

people are ready for change and of the status quo. i believe the call here is for a more practical approach to governing. people are disappointed in the president health care law. they expect us to do something about it. people believe we need to get our reporter secured -- our border secured. we have not talked about his approach to foreign policy. people think we need to get serious in the battle against isis. that was part of the coalition

that came together. what i take comfort in is this is that mr. trump is a businessman who was in the real estate business where he built buildings and brought a deliverable to the table. he was in the service businesses, he went to -- you went to his hotels or golf courses, you had to have a deliverable. if we had been focused on we will do just fine. >> you can watch that entire interview tomorrow at 10:00 a.m. and 6:00 p.m. eastern. lawmakers return to capitol hill next week to begin their lame-duck session that includes house leadership