Political pressure to shift to deferred compensation may be distorting the current discussions about public employee retirement plans, according to officials at the Congressional Budget Office (CBO).

State and local governments face severe pension funding pressure because of the recent financial crisis and the economic crisis, Frank Russek, a CBO analyst, writes in a pension finance brief summarizing current CBO views.

One frequently discussed response to concerns about underfunding – a shift to a fair-value based approach to pension plan reporting – could make reported underfunding value and force state and local governments to set aside more than they really need to contribute to fund pension liabilities, Russek says.

“Although the amount of underfunding of state and local pensions is substantial, it is not necessarily in the best interests of taxpayers for states and localities to completely prefund their pension liabilities,” Russek says. “Ultimately, judgments about the amount and timing of additional funding that should be provided for underfunded plans depend on many factors, including competing budget priorities, views about intergenerational fairness, and the amount of risk the sponsors are prepared to take that they (and their taxpayers) might have to bear substantial costs at some point in the future in order to pay promised benefits.”

But “employee compensation packages currently may be substantially distorted by political pressures to favor deferred compensation–to raise pension benefits and postpone the associated costs to taxpayers until some future time,” Russek says.

- Allison Bell

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