[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




                               BEFORE THE

                         AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                           FEBRUARY 14, 2011


                           Serial No. 112-25


         Printed for the use of the Committee on the Judiciary

      Available via the World Wide Web: http://judiciary.house.gov

64-585                    WASHINGTON : 2011
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                       COMMITTEE ON THE JUDICIARY

                      LAMAR SMITH, Texas, Chairman
    Wisconsin                        HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT, 
BOB GOODLATTE, Virginia                  Virginia
DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana                  MAXINE WATERS, California
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TOM REED, New York                   LINDA T. SANCHEZ, California
TIM GRIFFIN, Arkansas                DEBBIE WASSERMAN SCHULTZ, Florida
TOM MARINO, Pennsylvania
TREY GOWDY, South Carolina

      Sean McLaughlin, Majority Chief of Staff and General Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel

       Subcommittee on Courts, Commercial and Administrative Law

                 HOWARD COBLE, North Carolina, Chairman

               TREY GOWDY, South Carolina, Vice-Chairman

ELTON GALLEGLY, California           STEVE COHEN, Tennessee
TRENT FRANKS, Arizona                HENRY C. ``HANK'' JOHNSON, Jr.,
TOM REED, New York                     Georgia
DENNIS ROSS, Florida                 MELVIN L. WATT, North Carolina
                                     MIKE QUIGLEY, Illinois

                      Daniel Flores, Chief Counsel

                      James Park, Minority Counsel

                            C O N T E N T S


                           FEBRUARY 14, 2011


                           OPENING STATEMENTS

The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Chairman, Subcommittee on Courts, 
  Commercial and Administrative Law..............................     1

The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Member, Subcommittee on 
  Courts, Commercial and Administrative Law......................    33

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Michigan, and Chairman, Committee on the Judiciary....    35

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................    36


Joshua Rauh, Ph.D., Associate Professor of Finance, Kellogg 
  School of Management, Northwestern University, Evanston, IL
  Oral Testimony.................................................    41
  Prepared Statement.............................................    43

James E. Spiotto, Esq., Partner, Chapman and Cutler, LLP, 
  Chicago, IL
  Oral Testimony.................................................    54
  Prepared Statement.............................................    56

Matt Fabian, Managing Director, Municipal Market Advisors, 
  Westport, CT
  Oral Testimony.................................................    96
  Prepared Statement.............................................    98

Keith Brainard, Research Director, National Association of State 
  Retirement Administrators, Georgetown, TX
  Oral Testimony.................................................   105
  Prepared Statement.............................................   108


Material submitted by the Honorable Howard Coble, a 
  Representative in Congress from the State of North Carolina, 
  and Chairman, Subcommittee on Courts, Commercial and 
  Administrative Law.............................................     2

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Ranking Member, Committee on the Judiciary.....................    38

               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from Joshua Rauh, Ph.D., 
  Associate Professor of Finance, Kellogg School of Management, 
  Northwestern University, Evanston, IL..........................   138

Response to Post-Hearing Questions from James E. Spiotto, Esq., 
  Partner, Chapman and Cutler, LLP, Chicago, IL..................   144
Response to Post-Hearing Questions from Matt Fabian, Managing 
  Director, Municipal Market Advisors, Westport, CT..............   161

Response to Post-Hearing Questions from Keith Brainard, Research 
  Director, National Association of State Retirement 
  Administrators, Georgetown, TX.................................   163



                       MONDAY, FEBRUARY 14, 2011

              House of Representatives,    
                    Subcommittee on Courts,
                 Commercial and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 4:02 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Howard 
Coble (Chairman of the Subcommittee) presiding.
    Present: Representatives Coble, Smith, Gowdy, Gallegly, 
Reed, Ross, Johnson, Quigley, and Conyers.
    Staff Present: (Majority) Daniel Flores, Subcommittee Chief 
Counsel; Travis Norton, Counsel; Allison Rose, Professional 
Staff Member; and Ashley Lewis, Clerk.
    Mr. Coble. Good afternoon, ladies and gentlemen. The 
Subcommittee will come to order.
    And before we give our opening statements, I have some 
unanimous consent requests to have introduced in and made part 
of the record: a Bureau of Labor Statistics from the U.S. 
Department of Labor news release, dated December 8; a San 
Francisco Chronicle op-ed, dated February 13; the National 
Governors Association, January 24 of this year; a second Nation 
Governors Association letter, dated February the 4th of 2011. 
And I would like to have these made part of the record, without 
    [The information referred to follows:]





    Mr. Coble. Folks, to begin with, I want to apologize for my 
raspy voice. I have been nursing this cold for about a week 
that seems like a month. So it doesn't sound very pleasant, so 
bear with me.
    And I am going to try to be as objective in my opening 
statement as I can, but if we, in fact, create a bankruptcy--
strike that--a State bankruptcy chapter, I see all sorts of 
snakes coming out of that pit. But I will have an open mind as 
we go along.
    Many States are currently suffering a severe budget crisis, 
as we all know. High unemployment and depressed property values 
have resulted in less tax revenue for States. But despite 
taking in less revenue, many States continue to spend as if the 
recession never occurred.
    In particular, States continue to offer defined benefit 
pension plans to their public employees. Defined benefit, as we 
all know, means that the employee is entitled to the pension 
without contributing or contributing a very small amount. 
Making their budget problems worse, States are underfunding 
their pension obligations to the tune of $3 trillion. And we 
will hear that from one of the witnesses today.
    Public employee unions need to realize that they should not 
be entitled to be recession-proof. American workers in the 
private sector have had their wages frozen during the 
recession. The 401(k) retirement plans to which they have 
contributed hard-earned dollars have lost significant value.
    Some people fear the States will eventually go broke and 
ask Congress for a bailout. We all know that bailouts have 
consequences. Oftentimes, a bailout merely kicks the current 
problem down the road even farther, and they generally don't 
encourage fiscal discipline.
    Neither should Congress permit States to file bankruptcy, 
in my opinion. Though States would have powerful tools in 
bankruptcy, like the power to break pension contracts with 
unions, States are sovereign entities that must handle their 
financial problems themselves, it seems to me.
    Bankruptcy for States would cripple the bond markets. 
States, as we all know, issue bonds for capital projects like 
building roads and universities. Permitting States to break 
their promises to bondholders would decrease investor 
confidence and damage States' ability to invest in much-needed 
    Instead, Congress should encourage States to use the tools 
they already have to bring public employee unions to the 
negotiating table and restructure pension contracts. My home 
State of North Carolina is a right-to-work State. Public 
employees are not unionized. Rather than demand defined benefit 
pension plans, North Carolina's public employees contribute to 
a 401(k) administered by the State treasurer.
    I am eager to learn more from our witnesses about how 
underfunded public employee pension liabilities are 
contributing to various State insolvencies. I am also 
interested in how bankruptcy for States would impact States' 
ability to borrow for capital projects in the bond market. 
While I disfavor the approach that lets States go into 
bankruptcy, I will be open to suggestions from the witnesses on 
alternatives that help States get their fiscal houses in order.
    I am now pleased to recognize the distinguished gentleman 
from Georgia, Mr. Johnson, for his opening statement.
    Mr. Johnson. I thank the Ranking Member. And this is my 
first hearing serving with you as Chairman, and I look forward 
to our service together on this Committee in the future.
    Mr. Coble. Thank you, Mr. Johnson. I appreciate that.
    Mr. Johnson. Now, with all due respect to my friends on the 
other side of the aisle, I must wonder aloud, why is it that we 
are holding this hearing today? Ostensibly, it is about whether 
States should be permitted to file bankruptcy. But, from what I 
can tell, none of the witnesses claims that bankruptcy is a 
panacea for a State's financial troubles.
    We seem to agree that allowing States to file for 
bankruptcy would result in increased interest rates, making it 
more expensive for States to address their financial needs. 
Moreover, a State bankruptcy option would create greater 
instability in the financial market. There also seems to be 
some shared concern about respect for State sovereignty, in 
that Federal bankruptcy law could be used to override State 
constitutions and laws prohibiting an impairment of contractual 
    Finally, States already have the tools at their disposal to 
address any financial troubles they face, as Majority Leader 
Eric Cantor has noted. States have the ability to adjust 
revenues and spending and to renegotiate their financial 
obligations with creditors.
    Indeed, I get the strong sense that State bankruptcy may be 
a solution in search of a problem. Why are we wasting time on 
what promises to be something of an esoteric discussion about a 
proposal that few, if anyone, in Congress, including those on 
this Committee, appear to accept?
    Instead, we should be talking about what Congress will do 
to accelerate economic recovery and create jobs, which, in 
turn, will help States recover financially. We should be 
talking about the continuing mortgage foreclose crisis and how 
Congress will help hardworking American families stay in their 
homes. We should be talking about crushing private student loan 
debt that threatens to stifle educational opportunities for 
people of modest means. We should be talking about how to 
improve the bankruptcy process so that it can better help 
honest but unfortunate debtors who have fallen upon hard times 
because of the lingering effects of the 2008 financial crisis, 
a crisis brought about by Wall Street's reckless behavior.
    Unfortunately, I suspect we are here talking about State 
bankruptcy because of a cynical attempt by the likes of a 
future President Jeb Bush or future President Newt Gingrich, 
actually, with Jeb Bush being the Vice President, or Jeb Bush 
being President, Newt Gingrich being Vice President. I don't 
know how they are going to work it out. But they, along with 
the infamous Dick Morris and Grover Norquist, they are in an 
unholy combination to demonize public employees for political 
    Let's call this what it is. It is an attack on a group of 
workers including State troopers, police officers, firemen, 
prosecutors, and teachers. And these proponents of State 
bankruptcy simply don't like those groups, and they want to do 
whatever they can to help them, so they figure that allowing 
States to go into a bankruptcy court and then avoid contracts 
that they have signed through collective bargaining, a fair 
process, that protect their employees, they want to be able to 
get out of those. And they also want to be able to avoid their 
obligations to innocent pensioners, elderly people on pensions, 
who have worked all their lives and expected to be able to 
retire in comfort with health benefits. And they want to 
abrogate the terms of those agreements and leave those people 
up the road, or up the lake with no paddle in a boat, subject 
to the harsh waves of Wall Street.
    That is what they want to do, because they want to also 
protect bond holders, State bond holders. They want to protect 
them in that chapter, or in that bankruptcy process. Can you 
imagine that? Trying to balance the budget on the backs of 
working men and women, trying to protect Wall Street. This is 
    And we are talking about public pensions that barely have 
an impact on a State's financial health. Less than 3 percent of 
all State and local government funding is spent on pension 
benefits, as most such benefits are paid out of trusts funded 
by employees and their employers. But why let the facts get in 
the way of political opportunism?
    The proponents of State bankruptcy don't even bother to 
hide their true intent. For instance, in a Los Angeles Times 
op-ed piece published last month, Mr. Gingrich and Mr. Bush, 
Bush III, pointed to the ``stranglehold government employee 
unions have on State and Federal budgets,'' end quote, rather 
than the severe economic recession of the last few years as the 
reasons for the States' fiscal problems.
    Even more crassly, Mr. Morris wrote a piece in The Hill 
arguing in favor of State bankruptcy because it would, quote, 
``break the political power of public employee unions and 
undermine the labor-Democratic Party coalition.''
    Hopefully, sensible minds on both sides of the aisle, 
including Majority Leader Cantor, Judiciary Committee Chairman 
Lamar Smith, and Subcommittee Chairman Howard Coble, will carry 
the day on the issue of State bankruptcy and not allow naked 
political calculations to answer serious constitutional and 
policy questions.
    And, with that, I will yield back.
    Mr. Coble. I thank the gentleman.
    The Chair recognizes the distinguish Chairman of the 
Judiciary Committee, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    A famous tale by Hans Christian Andersen depicts an emperor 
who cares only about his wardrobe. His weavers fashioned him a 
garment made from fine fabric they say is invisible only to 
those who are unfit to see it. The emperor cannot see the suit, 
but he fears being deemed unfit to being king. So he dons his 
invisible garment and parades around town. Finally, a small 
child calls out from the crowd, ``The emperor has no clothes.''
    Much like the weavers in this story, many States have 
promised their public employees the finest pension benefits but 
have funded their pension obligations with invisible money. In 
the private sector, employees generally contribute to their own 
retirement and IRAs and withdraw their savings later in life. 
In contrast, States have promised fixed payouts to their 
retired public employees without requiring any employee 
contribution. States are therefore on the hook to pay 100 
percent of public employee pensions, in addition to other 
retirement benefits like health insurance.
    Despite the high cost of these pensions, it is not for 
Congress to admonish States for spending their money as their 
elected leaders see fit. States are sovereign in our system of 
federalism and are free to make even very expensive decisions.
    What is cause for Federal concern is that States have so 
consistently underfunded public employee pensions that, 
cumulatively, they face pension deficits of approximately $3 
trillion. Some fear that States will eventually default.
    Voters in spendthrift States should demand collective 
sacrifice from public employees. Someone must say the emperor 
has no clothes.
    Notwithstanding States' fiscal woes, the era of Federal 
bailouts is over. Congress should not take money from taxpayers 
in fiscally healthy States to give to public employee unions in 
a handful of spendthrift States.
    And while bankruptcy for States may seem like an attractive 
alternative to State bailouts, there are constitutional and 
policy concerns with this approach.
    First, I am unsure whether Congress has the constitutional 
authority under Article I to allow a state to seek bankruptcy 
relief. States are co-sovereigns in our system of federalism 
and have authority to tax and spend.
    Even if Congress could enact a State bankruptcy chapter, it 
is also highly unlikely that any State would ever take 
advantage of it. The National Governors Association and the 
National Conference of State Legislatures have announced that 
States do not want bankruptcy relief and would not use it.
    States currently have ways to put their fiscal houses in 
order. Even the Governors in traditionally union-friendly 
States already have taken steps to reduce State spending and 
reform their public employee pension systems.
    I am also concerned that a State bankruptcy option may 
actually encourage States to borrow more money, knowing that 
they could later restructure their debt in bankruptcy. Future 
borrowing levels would thus increase even in spendthrift 
States. And borrowing would be at higher interest rates for all 
States because lenders would justifiably charge a price for the 
risk of State bankruptcy.
    Congress should not hinder restructuring efforts at the 
State level by passing laws that make it more expensive for 
States to access capital in the bond market during a recession, 
and it should not pass laws that unfairly punish prudent States 
with higher interest rates.
    Finally, in a State bankruptcy case, it would be difficult 
to prevent the sort of political favoritism of unions over 
bondholders seen in the Chrysler and General Motors 
bankruptcies. Public employee unions have exerted influence 
over State officials to obtain substantial pension benefits. 
Why should Congress believe that this same political influence 
will not cause State debtors to protect public employee 
pensions in bankruptcy?
    Still, I remain open to exploring how Congress may play a 
role in helping States restore fiscal sanity to their budgets. 
And, Mr. Chairman, I look forward to working with my colleagues 
to talk about and explore these alternative solutions.
    And I yield back the balance of my time.
    Mr. Coble. I thank the gentleman.
    The Chair recognizes the distinguished gentleman from 
Michigan, the Chairman emeritus of the Judiciary Committee, Mr. 
    Mr. Conyers. Thanks, Chairman Howard Coble and Members of 
the Committee.
    We welcome the four witnesses today.
    And I am impressed with Chairman Coble's description of the 
problem, particularly as it relates to bankruptcy. And he was 
kind enough to let me see his statement since I didn't quite 
understand his presentation.
    ``Neither should Congress permit States to file bankruptcy. 
Though States would have powerful tools in bankruptcy, like the 
power to break pension contracts with unions, States are 
sovereign entities and must handle their financial problems 
    ``Bankruptcy for States would cripple bond markets. States 
issue bonds for capital projects like building roads and 
universities. Permitting States to break their promises to 
bondholders would decrease investor confidence and hurt States' 
ability to invest in much-needed infrastructure.''
    And so, Chairman Coble, I agree with you.
    And I must say, Hank Johnson's statement was one that I am 
in agreement totally with.
    And we find ourselves in unusual circumstances.
    And my voice is getting like the Chairman's, so maybe I 
should give him a written copy of my statement so he can 
understand what I actually said, as well.
    States aren't in particularly in good shape. A lot of them 
are not in the black, but none of them are seeking or going 
into bankruptcy. None are in bankruptcy. So wherein does the 
urging from Members of the Federal legislature come from that 
encourage bankruptcy?
    Now, before bankruptcy, there could be bailout. And from 
the Detroit perspective, both automobile companies that sought 
bailout are--one has paid off, and the other one is paying off 
pretty well. The reason I know they are doing so well is that 
they are declaring bonuses for the leaders. So if they aren't 
in bankruptcy, this is a hearing that would encourage them, at 
least some of the members, to go into bankruptcy.
    And I want to thank the witnesses. All of their statements, 
except our lead witness, from the professor, have indicated 
some need for caution in this area. And I think that is good.
    Now, you will never catch me quarreling with why a 
Subcommittee or the full Committee called a hearing, because no 
one has called more hearings that were quarrelsome by the other 
side than me. And so, now it is my turn to listen to hearings 
that I may not have--would have called myself. But still, maybe 
we can think about this a little bit.
    Well, look, there are so many conservatives that agree with 
my position of going slow that I am re-examining my own 
position. I mean, when the gentleman--where is Mr. Cantor from? 
Virginia? The gentleman from Virginia and I find ourselves in 
agreement. Other leaders are--the only people that I can prove 
are urging bankruptcy is Newt Gingrich, the former Speaker of 
the House; and Jeb Bush, the former Governor from Florida. Now, 
what is motivating them, outside of further busting public 
unions, I don't know. But maybe this hearing will shed some 
light on it, because that is what I would like to find out 
    And so, Mr. Chairman, I thank you for your time. And I am 
willing to make a copy of my statement available to you.
    [The prepared statement of Mr. Conyers follows:]

    Mr. Coble. I thank you, sir.
    Without objection, other Members' opening statements will 
be made a part of the record.
    We are glad to have a distinguished panel with us today, 
and I will introduce them at this time.
    Mr. Joshua Rauh is associate professor of finance at the 
Kellogg School of Management at Northwestern University and 
NBER faculty research fellow in the corporate finance and 
public economics programs. He studies corporate investment and 
financial structure, with an emphasis on the ways in which 
corporations respond to incentives that are put in place by 
government policies.
    Dr. Rauh received his Ph.D. in 2004 from the Massachusetts 
Institute of Technology with his dissertation, ``Pensions, 
Corporate Finance, and Public Policy,'' which won him the 2004 
National Tax Association Dissertation Award. Prior to joining 
Kellogg, he held a faculty position at the University of 
Chicago Booth School of Business. And he is a former associate 
economist for Goldman Sachs International in London.
    Mr. James E. Spiotto is a partner in the law firm of 
Chapman and Cutler, LLP. He graduated from the University of 
Chicago Law School and has represented banks, indenture 
trustees, bondholders, or governmental bodies in litigation 
over workouts of over 400 troubled debt finances in over 35 
different States and in 3 foreign countries.
    He is also the author of a chapter on sovereign debt, 
defaults, and debt resolution mechanisms for an upcoming book 
entitled, ``The Oxford Handbook of State and Local Government 
Debt,'' to be published by Oxford University Press. In 1995, 
Mr. Spiotto won an award for his presentation on municipal 
defaults and bankruptcy at a United States House of 
Representatives Subcommittee hearing on the Orange County 
    Mr. Fabian is the senior analyst--Mr. Matt Fabian--for 
Municipal Market Advisors, MMA, an independent research and 
strategy provider specializing in municipal bonds. Mr. Fabian 
has been a municipal analyst for 13 years and is the author of 
a widely read bond publication. He has been the senior analyst 
with Municipal Market Advisors since July of 2006.
    Prior to his current position, Mr. Fabian spent 2\1/2\ 
years as the lead municipal research analyst for UBS and headed 
up an award-winning group within UBS Wealth Management 
Research. Mr. Fabian was the primary source on municipal bond 
research for the UBS network of nearly 7,500 U.S. financial 
advisors, also advising the company's institutional training 
and investment banking clients.
    Mr. Keith Brainard is currently serving as research 
director for the National Association of State Retirement 
Administrators and has held that position since 2002. 
Previously, he served as manager of budget and planning for the 
Arizona State Retirement System, and he also provided fiscal 
research and analysis for the Texas and Arizona legislatures.
    He is coauthor of the second edition of the ``Governmental 
Plans Answer Book,'' and created and maintains the Public Fund 
Survey, an online compendium of public pension data. He has a 
master's degree from the LBJ School of Public Affairs at the 
University of Texas in Austin.
    Good to have you with us, gentlemen. If you will, we try to 
apply the 5-minute rule to you all and to us. When the amber 
light appears, you will know that the red light is imminent. So 
when the red light appears, that will be your warning that it 
is time to wrap up. If you could do that, we would appreciate 
    Mr. Rauh, I will start with you.

                          EVANSTON, IL

    Mr. Rauh. Thank you very much, Chairman Coble, Members of 
the Subcommittee.
    The condition of State and local pension systems and the 
risks that these systems pose for Federal taxpayers is a 
critical aspect of our Nation's fiscal challenges. Pensions 
have become more than a means by which State and local 
governments provide retirement income for public employees. 
They have become a pervasive tool for circumventing balanced-
budget requirements.
    The mechanism is simple: State and local governments have 
promised pensions without setting aside adequate funds. The 
bill is then left to future taxpayers when the employees 
retire. By that time, the politicians who made the promises are 
out of office. In some cases, the bills will be so large that 
State and local governments will likely seek substantial 
Federal assistance.
    The Government Accounting Standards Board, GASB, has been 
complicit in this hidden borrowing by allowing a flawed 
accounting of these promises. Under GASB rules, State and local 
governments have around $1 trillion of unfunded pension 
liability. Using valuations consistent with financial 
economics, Professor Robert Novy-Marx and I have calculated 
that the already-promised part of these unfunded liabilities 
amounts to over $3 trillion.
    GASB treats the returns on risky assets as though they were 
riskless and certain. The government assumes that the actual 
return will be identical to the targeted return, most commonly 
8 percent, ignoring the fact that if the assets do not return 8 
percent, the taxpayers are on the hook for the downside. GASB 
confounds the measurement of the amount of debt with the 
government's risky plans for repaying the debt.
    Consider how this would work if you could apply it to a 
Federal bond issue. Suppose you issued $1 trillion of 10-year 
bonds. And suppose further that you spent half the proceeds 
immediately and put the other half in a fund invested in stocks 
and bonds, hoping that it would grow to repay the debt in 10 
    Well, obviously, the government has a new debt of $1 
trillion and new unfunded liabilities of half a trillion 
dollars. But under GASB logic, the government could claim that, 
since the expected return on their portfolio is 8 percent, 
there was actually no unfunded liability. This would be a way 
to deal with the $1.65 trillion budget deficit at the Federal 
level. You would just borrow another $1.65 trillion, invest it 
in stocks and bonds, claim it will have an expected return of 8 
percent. And, under GASB rules, that would be okay.
    This is hidden debt, debt that will eventually force 
governments to choose among a group of unpalatable options: 
slashing public services, dramatically raising taxes, 
attempting to cut benefits, defaulting on debt, or seeking a 
Federal bailout.
    Many pension systems are approaching a day of reckoning. 
Even assuming 8 percent returns, the assets of the systems in 
seven States and six big cities would be insufficient to pay 
for today's already-promised benefits past 2020. And what this 
means is that substantial contributions to the funds will be 
needed over the next decade to pay for legacy liabilities.
    Some State governments are taking steps to address the 
issue, but many are going in the opposite direction. So, for 
example, by statute or by contract, many major public pension 
funds in Illinois do not contribute anywhere near the amount 
required to pay new costs and to begin to pay down unfunded 
liabilities. The California State Teachers' Retirement System 
contributed only 55 percent of the recommended amount in 2010, 
even by GASB standards. And New Jersey made only 5 percent of 
the recommended contributions to its State police and teachers 
    Now, if States perceive implicit Federal backing, they may 
lack the incentive to undertake reforms of these systems. So I 
would argue that Congress should limit the liability of Federal 
taxpayers by providing States with those incentives. It should 
condition the availability of Federal money on pension reforms 
that limit off-balance-sheet borrowing.
    In particular, the Public Employee Pension Transparency 
Act, H.R. 567, would be a very useful step. It would condition 
Federal tax benefits on disclosure by the States of the true 
financial value of these unfunded public pension promises. The 
bill establishes an incentive. If States want Federal 
subsidies, then they may not engage in off-balance-sheet 
borrowing through improperly valued pension liabilities.
    Congress should consider further incentives-based 
approaches, both carrots and sticks, particularly if the idea 
of a State bankruptcy code is not going to be pursued. One 
approach would relate to the tax treatment of bonds that could 
be used to fund pensions. In a plan I developed with Professor 
Novy-Marx, a State would be allowed to issue tax-subsidized 
bonds for the purposes of pension funding if, and only if, it 
agreed to specific austerity measures, including closing its 
defined benefit plans to new workers, enrolling all employees 
in a defined contribution plan, plus Social Security. The cost 
savings from the new Social Security enrollment would offset a 
large portion of the costs from the debt subsidy.
    So, in sum, I would say that urgent action at the Federal 
level is required to ensure the Federal taxpayers will not be 
the ultimate underwriters of State debts. The most useful 
action would be the establishment of financial incentives that 
encourage States not to gamble with the money of Federal 
taxpayers. This is a $3 trillion problem, and the question is 
just simply how that $3 trillion is going to be divided up 
among State taxpayers and Federal taxpayers and other 
    Thank you.
    [The prepared statement of Mr. Rauh follows:]

    Mr. Coble. Thank you, Mr. Rauh. And you beat the red 
    Mr. Rauh. I sure did.
    Mr. Coble [continuing]. Putting pressure your colleagues.
    Mr. Spiotto, good to have you with us. You are recognized 
for 5 minutes.


    Mr. Spiotto. Thank you, Mr. Chairman Coble. It is my 
pleasure to address you today.
    Obviously, you all, in framing your statement, have clearly 
outlined the problem that is facing States and even local 
governments with regard to how do you meet all of your debt 
obligations, all of your financial obligations in challenging 
times, especially economic downturn.
    The question posed is, given underfunding of pension 
obligations for State governments, should there be a chapter 
for a State bankruptcy? This question sounds like an easy 
solution to a difficult problem, but there are many practical 
problems to that. And what I would like to explore with you 
today is some of those practical problems and concerns that 
need to be addressed and, I think, in considering those, lead 
to the conclusion that bankruptcy is obviously, just like it is 
for municipalities, the last last resort. And, certainly, there 
are many other options available that should be used and can be 
used to solve the problem.
    First of all, let's look at Chapter IX. Chapter IX was 
passed during the depression of the 1930's. Since 1937, when it 
was passed, only 620 municipalities have used Chapter IX, 
mainly small special tax districts and small municipalities. 
There have been a few exceptions. But, by and large, most 
municipalities, because of the stigma, because of the cloud, 
because they desire to be able to manage their own affairs, 
have chosen not to use Chapter IX.
    You need to be authorized by your State to file Chapter IX. 
There are only 15 States that have unconditionally authorized 
their municipalities to file Chapter IX. So all the other 
States have either put a condition on it or do not authorize, 
presently, their municipalities to file.
    You may ask yourself, is there the same demand and cry for 
a bankruptcy provision for States that there was during the 
Depression? The answer to that is ``no.'' At the time that 
Chapter IX was adopted, there were over 4,000 local defaults by 
municipalities; there were over a thousand municipalities 
desirous of having Chapter IX adopted. As your opening 
statements have indicated, States and local governments are not 
asking for this at this time, and for good reason.
    One of the questions raised is, what about the dual 
sovereignty of the Federal Government and the States? And does 
this really interfere with the ability of States to deal with 
their sovereign issues?
    I think the simple fact is, and as we saw from the 
development of Chapter IX, any type of bankruptcy application 
to the States will cause various constitutional problems, which 
will need to be addressed and are not easily done. If you will 
recall, back in 1934, when they passed the first version for 
municipal bankruptcy, it took Congress and a few Supreme Court 
decisions to, by 1937, have something that passed the muster of 
constitutional scrutiny.
    The Bivens case and the Ashton case by the Supreme Court 
outlined that a Federal judge of a dual sovereign, the Federal 
Government, cannot interfere with the revenues, with the 
property, with the government, with the affairs of a 
municipality. That municipality is a subsovereign of the State. 
When you take it on the State level, and given our 
constitutional background and the 10th Amendment and Supreme 
Court decisions, it will be very difficult to have a Federal 
judge be able to navigate those waters. And that difficulty 
will cost time, money, and effort and an inability to really 
address the problems.
    So, on the constitutional basis, it seems that it would be 
very difficult to really solve that problem. Chapter IX, in the 
passage of that, outlines in the Bivens and the Ashton case 
those problems.
    Are there solutions? Yes. States have for a long history 
solved their problems. Their general obligations have been paid 
since the 1800's. They have done almost anything to make sure 
they dealt with their problem. Yes, we have an economic 
downturn, but that does not mean that they will not be able to 
address it.
    Are there solutions? We have, in the materials, talked 
about a public pension authority that might be established by 
the State to deal with these issues. We have talked about 
possibly a Federal independent court to deal issues that relate 
to unaffordable and sustainable obligations. There are also the 
ability to possibly facilitate with issuing bonds.
    While there are many different ways of solving it, it 
really is the States and their proud history of meeting their 
obligations that has to be recognized. They may have difficult 
times. They have weathered through it in the past. And they 
clearly have done it through the Depression without any need of 
bankruptcy or additional help. And I think, with a little 
foresight and a little work on their part, they will come up, 
as they have in the past, with solutions that will address the 
    Thank you.
    [The prepared statement of Mr. Spiotto follows:]


    Mr. Coble. Mr. Fabian, you are recognized for 5 minutes.

                     ADVISORS, WESTPORT, CT

    Mr. Fabian. Thank you very much, Mr. Chairman and the 
Committee, for inviting me here to speak.
    I will skip over the details of my bio in the first 
paragraph. But just to emphasize, Municipal Market Advisors, 
the company for which I work, is a pure independent research 
company, so we don't buy or sell any bonds or securities. We 
don't advise in that. We are just--the near entirety of our 
revenues come from the sale of research and subscriptions to 
    Legislating State bankruptcy would certainly disrupt the 
current municipal bond market and undermine investor confidence 
going forward. We strongly believe that the municipal bond 
prices would fall, yields would rise, were States made able to 
file for bankruptcy. For longer-maturity bonds, interest rates 
could easily rise by 10 to 20 percent versus current levels. 
Shorter-maturity bonds should weaken somewhat less.
    In large part, the yield increase belies the municipal 
industry's already highly conservative practice in assessing 
credit and default risk. The prospect of State bankruptcy, 
however remote, requires a much more corporate-like measure of 
risk and reward. This is because bankruptcy within a Federal 
court makes vulnerable the robust protections for bondholders--
for example, first payment priorities and senior liens on tax 
revenues now provided by State bond laws and State 
    The adjustment in yields could happen quickly, but any 
increase in rates, and thus increases in the cost of new 
infrastructure, would persist in the long term. From a policy 
perspective, this means upward pressure on State and local 
taxes, downward pressure on spending and State employment.
    While the impact would be greatest on States perceived to 
be most likely to file for protection, like Illinois and 
California, all States, including those who have well-managed 
pensions and budgets, would reasonably pay a substantive 
penalty while coming to market for new loans. In effect, all 
States would suffer for the perceived faults of a few.
    And because States and local governments are deeply 
intertwined with management of tax collections, spending and 
mandates, the impact would not be confined to just States but, 
rather, to all local governments. In addition, we would expect 
that school districts, which are essentially creatures of the 
States, rural issuers, and poor urban governments are those 
entities most dependent on State aid for revenue, would feel 
the brunt of investor rejection.
    It is difficult to isolate the threat of State bankruptcy 
as a variable amid the recent losses in the municipal bond 
market. It is also contesting with a weaker Treasury market, 
the pervasive headlines of looming collapse, and the poor 
communication between the industry professionals and our 
investors. But keep in mind that, despite these adverse 
vectors, long-term municipal yields, as described by the Bond 
Buyer 20 yield index of high-grade, general obligation credits, 
are still 125 basis points below their average over the last 30 
years. So, in other words, while market participants are 
following the current debate extremely closely, they are not 
yet penalizing issuers to the extent that might be required 
should State bankruptcy become law.
    And while some observers have defined many States as 
already insolvent, professional market consensus does not 
support this view. Rather, the majority of institutional 
investors, municipal credit analysts, and issuer groups appear 
to be believe that States already retain sufficient abilities 
to manage their short- and long-term liabilities without need 
of bankruptcy or other potential forms of Federal bailout. 
Thus, the immense economic and political costs of a 
hypothetical State bankruptcy filing reasonably outweigh the 
need for such an extreme remedy. We agree with this view.
    Proponents of the bankruptcy legislation might argue that 
this law would simply add to the State managers' toolbox as a 
strategy of last resort. Thus, investors who are more bullish 
over States' economic or financial prospects could disregard 
the risk of any future filing. But this disregards the 
municipal credit analyst's duty to focus on worst-case 
scenarios and to protect their portfolios, their investors, and 
issuers themselves from default.
    And, in practice, investors could not expect all elected 
officials within a State legislature to not at least discuss or 
threaten the use of bankruptcy while outside observers, 
political pundits, dedicated academics, journalists, and the 
like could be counted upon to remind the broader markets of the 
tool and its potential implications for various stakeholders. 
Thus, even an unused bankruptcy law would amplify related 
headline risk that has already been highly disruptive to normal 
capital market functions, exacerbating systemic illiquidity and 
pushing yields and spreads higher.
    Thank you very much.
    [The prepared statement of Mr. Fabian follows:]
                   Prepared Statement of Matt Fabian


    Mr. Coble. Thank you, Mr. Fabian.
    Mr. Brainard?


    Mr. Brainard. Chairman Coble, Representative Johnson, 
Members of the Subcommittee, I would like to wish each of you a 
Happy Valentine's Day.
    Mr. Coble. Thank you.
    Mr. Brainard. Thank you for inviting me to testify today on 
this important matter.
    Given the unprecedented fiscal challenges facing all levels 
of government, the accuracy and integrity of information is 
vital. So I appreciate the opportunity to explain to the 
Committee how State and local pensions work. Unfortunately, 
much of the reporting on these retirement system seems drawn to 
those who lack this understanding or who use inappropriate 
methods and assumptions regarding their operation.
    On the whole, State and local government pensions are 
weathering the financial crisis and making measured changes to 
ensure long-term sustainability. Only a generation ago, most 
plans operated primarily on a pay-as-you-go basis. Since then, 
States and cities have worked to advance fund pension benefits 
by required employees and employers to contribute enough to a 
pension trust during their working years to pay for their 
pension benefit. This was done without Federal intervention and 
has largely been a success. By 2000, the assets in most public 
pension trusts equaled or exceeded expected pension payments.
    Public pension trusts are designed to weather market 
volatility, and have done so repeatedly over their history. 
Even at the market low of the most recent and unprecedented 
financial downturn, there was still over $2 trillion in public 
pension trusts. Since then, values have rebounded sharply, 
researching $2.8 trillion at the end of last year.
    The assertion that public employee pensions are 
contributing in a meaningful way to State insolvency is simply 
not supported by the facts. Spending on public pensions has 
consistently been a relatively small amount of State and local 
government budgets, slightly less than 3 percent, on average. 
Although this percentage varies by State, for all States but 
three the spending on pensions was less than 4 percent of 
budgets. For half of the States, it was less than 2\1/2\ 
    Similarly, reports citing pension-fund exhaustion dates for 
nearly every State are unfounded. The $2.8 trillion that State 
and local retirement systems hold in trust is roughly 14 times 
the amount these funds distribute annually. Public employees 
and employers contribute to these trusts. Even if they earned a 
relatively modest annual return of 6 percent, investment 
earnings alone would be enough to pay most of the benefits 
distributed each year.
    Predictions of widespread insolvency are inconsistent with 
findings of the professional actuaries who are certified to 
analyze these plans, as well as the findings of the Government 
Accountability Office, Center for Retirement Research at Boston 
College, Center for State and Local Government Excellence, 
bond-rating agencies, and others.
    Such predictions are also at odds with my own analysis 
that, using even conservative estimates, the typical fund can 
continue to pay benefits for 25 years--enough time for States 
to make necessary adjustments to restore their plan's 
sustainability. Assuming a rate of asset growth consistent with 
historic market norms, most funds never run out of money.
    Joshua Rauh's calculation uses historically low interest 
rates and depressed asset values following the financial 
meltdown, and combines these factors with the unlikely 
assumption that States and cities will violate their own 
constitutional and statutory pension funding requirements. The 
outcome of his approach is implausible but attention-getting.
    Misrepresenting the true condition of the public pension 
community is, in my view, reckless and irresponsible and has 
caused needless confusion and turmoil among the public, 
policymakers, pensioners, and municipal bond markets. State and 
local retirement systems are highly transparent entities that 
publish audited annual financial reports in compliance with 
generally accepted accounting principles set forth by the 
Governmental Accounting Standards Board, with financial 
reporting standards set forth by the Government Finance 
Officers Association, in addition to sunshine laws in every 
    Pension benefits and financing structures are being 
examined by States and cities across the Nation. A different 
range of solutions will be required for each, and a factual 
assessment is critical. State and local government retirement 
systems do not require, nor are they seeking, Federal 
intervention in this process.
    Joshua Rauh is the only individual I know of who is calling 
for Federal financial assistance for public pensions. His $75 
billion estimate of the cost of Federal intervention ignores 
the cost to State and local governments, which would be far 
more significant. Predictions made on the basis of selective 
use of data, inapplicable methods and assumptions, and 
calculations in conflict with financial and pension fund 
history are unhelpful. They distract from the important 
businesses of discerning and responding appropriately to the 
    Mr. Chairman, thank you. I am happy to answer any 
    [The prepared statement of Mr. Brainard follows:]

    Mr. Coble. Thank you, gentlemen, and appreciate you all 
being with us today. We will now examine you all from our 
podium here.
    Professor Rauh, how much fiscal difficulty or trouble would 
there be if States--regarding the all new public employees--
starting today were forced to have defined contribution as 
opposed to defined benefit plans?
    Mr. Rauh. Well, thank you very much, Chairman Coble.
    I just want to start off by saying that the witness Mr. 
Brainard presents some very misleading statistics. And perhaps 
this is not surprising given that he represents State 
retirement administrators, whose interests in this issue are at 
odds with those of the taxpayers.
    For example, it was claimed that pension contributions are 
a small share of State budgets. Three percent was the number 
that was thrown out. First of all, States are not making the 
contributions that they ought to be, even under their own 
accounting. So this is a bit analogous to looking at--it is 
like looking at a sample of households who have stopped paying 
principle on their mortgages and concluding that mortgages 
aren't a problem for household finance because their principle 
payments are a low fraction of their spending.
    Second, a figure was cited as the fraction of spending. 
Well, that counts the deficits that the States are running. So 
it is like saying that someone who is living way beyond their 
means and running up a large credit card debt has a relatively 
small cash-flow problem because their actual credit card 
payments are small.
    And, finally, one-third of the revenue that he is counting 
on in that calculation is coming from you, actually, the 
Federal Government. So the assumption is that you are 
completely willing to pick up the pro-rata share of this tab 
based on the amount that the Federal Government has been 
sending to the States.
    So I would say, looking at all owned revenue, excluding 
transfers from the government, the contribution share is around 
10 percent already, and it is going to have to grow 
substantially to pay down this debt.
    Mr. Coble. Mr. Spiotto, I mispronounced your name earlier. 
I apologize for that.
    We saw recently in the Vallejo, California, case that, even 
in Chapter IX, the city was unwilling to reject its pension 
contract. Would a State be more likely to reject collective 
bargaining agreements in bankruptcy?
    Mr. Spiotto. The problem you have with trying to reject 
your collective bargaining agreements in bankruptcy is, the 
next day, you need an agreement with your workers as to what is 
fair and affordable to pay them going forward. And the problem 
with bankruptcy and the dynamics is that, in rejecting it, you 
create an equal issue of how do you pay for it going forward 
and what do you pay. And that is a significant problem.
    Vallejo filed in 2008. They went through a significant 
period of time, tried to negotiate a resolution of their labor 
issues, and it took them a long time. They are still in 
bankruptcy. They have a plan pending. The time, money, expense, 
confusion, and difficulties to the city was significant.
    Mr. Coble. Thank you, sir.
    Professor, I didn't follow you, whether you responded 
directly to my question.
    Mr. Rauh. Perhaps I did not.
    The answer to your question, which my understanding is, 
even if State and local governments froze all promises today, 
how deep of a hole would we be in, the answer is $3 trillion. 
The number that we calculate is assuming that all future 
benefits are going to be fully funded and secured.
    So, even if all plans were frozen today and all future work 
were put on a defined-contribution-type plan, the number would 
still be $3 trillion.
    Mr. Coble. Mr. Fabian, who holds most of the State and 
municipal paper currently? Or, in other words, if bond holders 
are crammed down, who is most likely to suffer?
    Mr. Fabian. Well, households--in general, households own 
about a third of the municipal bond market directly and about 
another third of the municipal bond market through mutual 
funds. So, in general, it is individuals who own about two-
thirds of the market. So they would, in theory, be the ones the 
most subject to a cramdown.
    Mr. Coble. I got you. Thank you, sir.
    Mr. Brainard, do you believe any reforms are needed to the 
GASB rules to require States to accurately report their pension 
liability? Because I am told, oftentimes some of these have 
been laced generously with inaccuracy.
    Mr. Brainard. GASB has been--Mr. Chairman, GASB has, for 
the last few years, been considering a range of changes to 
State and local pension reporting requirements. And among the 
reforms that they are seriously considering at this point is a 
modification to the investment return assumption the plans use 
to discount their future liabilities. That modification appears 
sound to me.
    There are some other adjustments that they are considering 
with regard to how quickly public pension plans recognize 
investment gains and losses that, generally, we are not 
uncomfortable with. And very quickly you get into the range of 
GASB reforms that becomes eye-glazing material. I am not quite 
sure what level of detail you would like me to get into.
    Mr. Coble. I thank you. My red light has appeared, so I 
will have to terminate.
    The gentleman from Georgia.
    Mr. Johnson. Thank you, Mr. Chairman.
    Professor Rauh--it is also Dr. Rauh, correct?
    Mr. Rauh. That is correct.
    Mr. Johnson. And, Doctor, in addition to your duties and 
responsibilities as an associate professor, you have some other 
professional responsibilities that you tend to. Isn't that 
    Mr. Rauh. I don't know what you are referring to.
    Mr. Johnson. Well, I mean, you do some consulting on the 
side, and you write papers for various groups.
    Mr. Rauh. For various groups? No, I have never written a 
paper that has been commissioned by a group, no.
    Mr. Johnson. Uh-huh. Well, who have you written--tell us 
some of the folks you have written papers for.
    Mr. Rauh. No, I don't write papers for anyone. I write 
papers under my own name, and I present them at conferences, 
and that is all. I will occasionally----
    Mr. Johnson. Well, let me ask you this. You make a little 
outside money in addition to your salary as a professor, isn't 
that true?
    Mr. Rauh. I receive--I have a small amount of consulting 
income. That is correct.
    Mr. Johnson. And you have your own consulting company?
    Mr. Rauh. No, I do not have my consulting company, no.
    Mr. Johnson. Now, who do you consult for? What companies 
pay you to consult?
    Mr. Rauh. I have not actually taken money from--I mean, 
okay, so--I am not sure whether this is an allowable line of 
questioning, but I can----
    Mr. Johnson. Well, you inferred that Mr. Brainard had an 
interest in preserving the status quo, and I just wanted to 
explore what your interest is.
    Mr. Rauh. I have never worked for an organization that has 
any kind of stake in this particular--this matter, none 
    Mr. Johnson. Well, what about politicians? Have you been 
working with any politicians on this issue? Members of 
    Mr. Rauh. I was invited by Governor Schwarzenegger to go to 
Sacramento and present at a roundtable.
    Mr. Johnson. What about Members of Congress? Who have you 
been working for here?
    Mr. Rauh. I have not worked for any Members of Congress.
    Mr. Johnson. You have not consulted with any Members of 
    Mr. Rauh. I received some e-mailed questions about the 
Public Employee Pension Transparency Act----
    Mr. Johnson. Yes.
    Mr. Rauh [continuing]. From Congressman Nunes' office. I 
answered those questions----
    Mr. Johnson. Devin Nunes from California?
    Mr. Rauh [continuing]. For no fee. Yeah, I mean, I was e-
mailed questions, and I answered the questions.
    Mr. Johnson. And these questions concerned the fiscal 
health of the State of California in so far as its pension 
liabilities are concerned. Isn't that correct?
    Mr. Rauh. No. The questions that Congressman Nunes' office 
e-mailed me were about simply my calculations that the unfunded 
liability was $3 trillion and just some explanations about how 
I arrived at that number. That was all. There was no money that 
was exchanged hands.
    Mr. Johnson. Now, you are of the opinion that the State of 
California is in big trouble with its pension obligations.
    Mr. Rauh. When one discounts the----
    Mr. Johnson. Yes or no.
    Mr. Rauh. I don't like to put the word ``big trouble'' on 
    Mr. Johnson. Okay, but they have some issues.
    Mr. Rauh. Five hundred billion dollars of unfunded 
liabilities for the State of California. I think that is not a 
trivial amount.
    Mr. Johnson. And you believe that the Federal taxpayers may 
be asked to bail out California because of its unfunded pension 
    Mr. Rauh. I think there are a number of States around the 
    Mr. Johnson. Is that true or is that false?
    Mr. Rauh. California in particular? I think there is a 
chance that the Federal Government will be liable--will be 
asked to come to the assistance of California. And I think that 
part of the issue is that they have borrowed from public 
employees to the tune of $500 billion above and beyond the 
assets that they have set aside to pay for those promises.
    Mr. Johnson. But now they also have--so your concern, you 
want to tie the States' hands insofar as its relationship with 
its recipients of pensions and with its employees by allowing 
them to get out of trouble through a bankruptcy. Is that what 
you want to do?
    Mr. Rauh. Through a bankruptcy, no, no. I have said nothing 
of the kind.
    Mr. Johnson. You support California if it decided to avoid 
having to pay pensions because they have not funded their--they 
have borrowed money from their pension fund?
    Mr. Rauh. I have said nothing of the kind. In fact, I want 
to be clear. I do not call for cuts in benefits that have 
already been promised. All of the proposals that I have made 
have been----
    Mr. Johnson. You are just trying to keep the States from 
borrowing from their pension funds. Is that what your 
motivation is?
    Mr. Rauh. I am trying to stop the States from borrowing 
from public employees in a way that is not transparent to 
    Mr. Johnson. And you figure the best way to do that is to 
allow States to avoid the pension obligation.
    Mr. Rauh. No, no. Avoid their pension obligations, no. I 
have never----
    Mr. Johnson. That is what a bankruptcy would do, wouldn't 
    Mr. Coble. The gentleman's time has expired.
    Did you have one more question for him?
    Mr. Johnson. You know, I don't understand, you are coming 
here to testify about allowing States to have an opportunity to 
file bankruptcy so that they can eliminate their pension 
obligations and thus won't have to come to the Federal 
Government for bailouts.
    Mr. Rauh. With all due respect, sir, I think you are 
putting words in my mouth. I did not--my testimony was not 
about that. It was about how we got the situation we are in. 
The fact that States owe $3 trillion to public employees is a 
    Mr. Coble. The gentleman's time has expired.
    The gentleman from South Carolina, Mr. Gowdy, is recognized 
for 5 minutes.
    Mr. Gowdy. Thank you, Mr. Chairman.
    Mr. Brainard, I also want to thank you for reminding us it 
is Valentine's Day. And in the long run, you saved us more 
money than all of the States cumulatively owe by that reminder. 
So thank you. If you saw a lot of people visually texting, it 
was because of your reminder. So thank you for that.
    Mr. Spiotto, you mentioned Bekins. You are concerned about 
the constitutionality of Federal involvement in State 
bankruptcies. Extrapolate on that for us.
    Mr. Spiotto. Yes. The big problem with the Federal 
Government setting up a bankruptcy court for the States or a 
State is, one, it could only be voluntary because given the 
10th Amendment, the Federal Government cannot mandate that. 
Asked in Bevins, it is very clear on that from the Supreme 
    Second, there will be very limited power of any Federal 
bankruptcy court to really deal with any problem that the State 
    And third, States probably, if they had to define their 
problems and put it into a hierarchy, they may have a small 
number of real problems in their creditor relations. And many 
issues they don't want to overturn, they don't want to tip over 
that relationship. And it is working quite well.
    And what bankruptcy does is throw them all up in the air 
and you have to find a solution to them. And it puts the State 
in a situation where it has to work through these problems in a 
system that doesn't provide any additional funding to them, no 
additional tax source, and puts them in jeopardy and puts them 
with a cloud, which normally they have worked hard the last 
hundred-plus years to avoid; i.e., that they have met their 
obligations when they have had to and they have not failed to 
do so.
    And therefore, it puts a cloud without a mechanism to solve 
    Mr. Gowdy. Mr. Brainard, if I am missummarizing your 
testimony, correct me. I thought I heard you say that you think 
that there is a sufficient amount of money available for the 
next 25 years so long as changes are made in that quarter 
century to correct what I assume you would agree are some 
structural defects.
    What kind of changes would you like to see States make, and 
what has taken them so long?
    Mr. Brainard. Representative Gowdy, in any number of States 
some degree of reform is required. It is going to vary by State 
and indeed by individual pension plan.
    The National Conference on State Legislatures recently 
reported that in 2010, last year, an unprecedented number of 
States took action to modify their pension plans. This includes 
reducing benefit levels and increasing contributions either 
from employers but also from employees.
    So the solution is going to be unique, depending on the 
unique pension plan but generally it is a reduction in benefits 
and an increase in contributions from employees, employers or 
    Mr. Gowdy. But you don't disagree even with the professor 
that some systemic structural changes must be made.
    Mr. Brainard. In many cases. Not all.
    Mr. Gowdy. Professor, are there any trends among the States 
that are in the most serious trouble with respect to right-to-
work status versus union status, Tax Code, regulatory code? Are 
there any trends with respect to the States that are in the 
most amount of trouble fiscally?
    Mr. Rauh. Well, the trend that I am seeing is that there is 
a serial correlation, if you will, where the States that have 
been in bad shape are kind of getting worse, particularly with 
we respect to Illinois which, you know, has simply not been 
addressing their pension problems, as well as New Jersey which 
simply has not been contributing.
    You know, I have observed--it was pointed out that North 
Carolina does not have unionized public employees at the State 
level. North Carolina is a State that is in reasonable shape 
with regards to these matters. But I haven't done a systematic 
study across all 50 States to see whether you would find that 
    Mr. Gowdy. What is ``smoothing?'' Is that a term that is 
used as people evaluate their pensions plans, and what is it?
    Mr. Rauh. ``Smoothing'' is the idea that instead of having 
to look at how much your assets are worth today when declaring 
your unfounded liabilities to the public, you can take an 
average over a certain number of years. And as a result, in 
times when the market is going up very quickly, the value of 
the assets that is being reported is understating the market 
value of the assets and in times when assets are going down 
very quickly it is overstating the value of the assets.
    Mr. Gowdy. I am out of time. Thank you.
    Mr. Coble. I thank the gentleman. The Chair recognizes the 
distinguished gentleman from Michigan, Mr. Conyers.
    Mr. Conyers. Thank you, sir.
    Point of order before the clock starts running.
    As the Chair knows, the PATRIOT Act is on the floor, the 
first thing up. And as has been our policy, we do not hold 
hearings in any of the Subcommittees when one of our bills is 
on the floor.
    Mr. Coble. Well, I was told to be here at 4 o'clock, Mr. 
Chairman. That is why I was here.
    Mr. Conyers. Yeah. But what are you going to do when the 
PATRIOT Act comes up on the floor?
    Mr. Coble. Well, 5:30 I think is when it convenes, at 5:30.
    Mr. Conyers. Oh, okay.
    But you agree with the principle that we do not have bills 
of the Judiciary Committee on the floor at the same time the 
Subcommittees are holding hearings.
    Mr. Coble. I am not sure about it. I will take your word 
for it.
    Mr. Conyers. But you have been here almost as long as me. I 
mean, Lamar Smith had that rule, Henry Hyde had that rule, Jim 
Sensenbrenner had that rule, and now you are not sure.
    Mr. Coble. Well, I will state to you, if the gentleman will 
yield, I didn't call the hearing. So hold me harmless for that.
    I think it has been a good hearing, by the way.
    Mr. Conyers. It has been. I quite agree, sir.
    But we are starting not at 5:30 but in 10 minutes on the 
floor of the House. We just called and checked.
    So I don't want you to get in trouble because you weren't 
sure. I am here to help.
    Mr. Coble. I stay in trouble, Mr. Conyers.
    Mr. Conyers. Yeah. But I think we ought to summon the 
Chairman of the full Committee here to help us straighten this 
up, because I am the floor manager for the minority on the 
PATRIOT Act. Hank Johnson has already requested time to speak 
on the PATRIOT Act. And you are suggesting that we just stay 
here because you are not sure.
    Mr. Coble. We are planning to adjourn at 5:20. But we need 
to get moving.
    Mr. Conyers. No, that is unacceptable.
    I would make a point of order and ask someone to call in 
Lamar Smith because I don't have an obligation to choose 
between this important Subcommittee of yours and my managerial 
responsibilities on the House floor. Would you help me with 
    Mr. Coble. I am not sure. I can't help you with it.
    Mr. Conyers. You mean I just make a choice. Since I can 
only do one or the other, it is on me and not on the Committee.
    Don't we have this in the rules somewhere, Chairman Coble?
    Mr. Coble. Well, the Judiciary Committee is on the floor at 
5:30, I am told, Mr. Conyers.
    Mr. Conyers. Who told me 10 minutes from now?
    Counsel. The Intel Committee is up first. The Judiciary 
Committee is at 5:30.
    Mr. Conyers. Okay. That is good enough for me. And I always 
take the counsel for the Judiciary's word for it. We have never 
had a disagreement yet. And I thank you, Mr. Chairman.
    Mr. Coble. Thank you.
    Mr. Conyers. Now, let's begin to see if we can thread 
together where we have areas of agreement here.
    Here is the Manhattan Institute. More than half of all 
State expenditures go to Medicaid, K-12 public school aid, and 
other transfer payments. These are the areas, not current 
pension bills or debt service, that have been the prime source 
of unsustainable and unaffordable spending growth in State 
budgets. True or false.
    Mr. Brainard?
    Mr. Brainard. Representative Conyers, I am not an expert on 
State finance but that is my understanding, is that K-12, 
higher Ed and Medicaid make up the bulk of State and local 
    Mr. Conyers. Matt Fabian, true or false?
    Mr. Fabian. I say true to that.
    Mr. Conyers. Thank you. Attorney Spiotto, true or false?
    Mr. Spiotto. That is my understanding.
    Mr. Conyers. Right.
    Professor Rauh, true or false?
    Mr. Rauh. On spending, yes, States have spent more on those 
things than on other things. But you can't look at this like 
spending. This is debt, and it is like debt that is not being 
    Mr. Conyers. True or false?
    Mr. Rauh. I think I didn't understand the question.
    Mr. Conyers. You can say ``false.'' It is okay.
    Mr. Rauh. I mean, I think if I understand the question.
    Mr. Conyers. Well, then why don't you agree with everybody 
else and say ``true''?
    Mr. Rauh. Have they spent more on that than on pensions? 
True. Will they have to spend more on pensions than on this? 
Yes, they will have to spend more on pensions in the future.
    Mr. Conyers. But you didn't answer my question, sir. My 
question is true or false.
    Mr. Rauh. I will give you true.
    Mr. Conyers. Well, thank you. Thanks for your cooperation.
    Because the Manhattan Institute is a--have you heard of the 
Manhattan Institute?
    Mr. Rauh. [Nods head.]
    Mr. Conyers. Do you acknowledge that they are a pretty 
conservative think tank organization?
    Mr. Rauh. I don't understand why their politics would have 
any bearing on this.
    Mr. Conyers. I didn't say it was political. I said that 
they were conservative.
    Mr. Rauh. Is that so? I didn't know.
    Mr. Conyers. I see. All right.
    Let me ask you this: Have you heard of attorney Joe--the 
late attorney Joseph Rauh.
    Mr. Rauh. Yes, I have.
    Mr. Conyers. And your name is Rauh.
    Mr. Rauh. Yes, it is.
    Mr. Conyers. Are you two related?
    Mr. Rauh. Not that I know of.
    Mr. Conyers. Well, wait a minute. Everybody commonly knows 
all Rauhs are related. I mean whether they know it or not.
    Do you realize that he might be turning over in his grave 
now to be hearing your testimony?
    Mr. Rauh. I don't know why that is here or there.
    Mr. Conyers. No. It isn't here, it is irrelevant. But don't 
you think that the late Joe--who used to testify before this 
    Mr. Rauh. I think the late Joseph Rauh would actually care 
about the fact that what we have all--all the promises, the 
unfunded promises that have been made are going to have to be 
paid back in the future and that that is going to crowd out 
spending on essential public services like schools and 
    Mr. Conyers. Perhaps he would.
    But I am happy--do you acknowledge any possible 
relationship between you, the late Joe Rauh that I knew pretty 
well, and my pleasure in meeting you this afternoon, between 
you and him?
    Mr. Rauh. Do I--I have never met him. I know of his name. I 
am not quite sure what you are asking, sir. I don't know of any 
relationship between us.
    Mr. Conyers. I will explain it to you.
    When I meet people named Conyers, and some I don't know, 
guess what. They ask are we related. I don't say I don't know. 
I say all Conyers are related. They didn't go into probate 
court and change their name to ``Conyers'' and neither did you. 
So I think it is fair to assume that there is some 
relationship, don't you?
    Mr. Rauh. Sir, genealogy is not my area of expertise. I 
really don't know if we are related or not.
    Mr. Conyers. Would you be interested in finding out?
    Mr. Rauh. Sure.
    Mr. Conyers. Well, thank you. I want to help you in that 
respect, if I can.
    I thank you, Mr. Chairman.
    Mr. Coble. The gentleman's time has expired.
    The gentleman from New York, Mr. Reed, is recognized for 5 
    Mr. Reed. Thank you very much, Mr. Chairman.
    I am not going to inquire about anybody's familial 
relations with anyone else. I am really concerned about the 
issue that we are facing with the unfunded liabilities that are 
facing our Nation.
    As a city mayor, I saw this issue firsthand. I saw GASB 45 
and its requirement that we disclose our unfunded liabilities 
and try to quantify that. And when I did that as a mayor, I 
tell you my eyes popped out of my head because I said shame on 
my predecessors who never dealt with this issue and who now are 
saddling me plus the children of my community with these debts.
    So I am very comfortable in coming to the conclusion that 
we have a serious problem when it comes to this issue. Even Mr. 
Brainard, you indicated in your written testimony even today 
that even under conservative estimates the median State pension 
fund is able to pay benefits until 2030. You said 25 years 
today. So 2035 I guess is your verbal testimony.
    So my question is, and I do recognize the concern about--I 
do recognize the concern about bankruptcy. And I want to make a 
note. I believe the State of California issued IOUs. A great 
State of our Union had to go to IOUs to meet its monetary 
obligations. That is very scary to me. And as a freshman Member 
of this Congress, that puts generations of children in jeopardy 
that America will not be here because States such as California 
are coming up with different types of currency to cover their 
    So I don't want to make light of this issue. This is a 
serious issue. And it is part of a bigger problem that we are 
facing in this Nation.
    So I recognize the issue with bankruptcy, and I recognize 
the issue that that will send, reviewing your written 
testimony, to the municipal bond markets and the fact that 
people may look at that investment as something where 
historically it has always been looked at as a secured 
investment, something that is going to keep the rates low 
because they are going to fulfill their obligations.
    So I am interested in talking to any of you. I guess I will 
start with Mr. Spiotto.
    H.R. 567 appears to be a solution that is on the table 
about requiring transparency on the issue of unfunded 
    Do you have any comments on H.R. 567?
    Mr. Spiotto. Thank you.
    I think transparency is always a good thing. And one of the 
things that the municipal market has striven for over the years 
is more and more transparency. One of the questions is what is 
the price or the cost of it. And as you mentioned, GASB 45 was 
helpful in bringing to the forefront that issue. And I think 
that municipal issuers have, over a long period of time, tried 
to make sure that the investors understood what the costs are. 
And so I think that bill is an interesting bill from the 
standpoint of providing some impetus for more disclosure.
    Mr. Reed. I appreciate that.
    Professor Rauh, do you want to comment on that?
    Mr. Rauh. Yes. Well, I mean to comment on the bill, the 
Public Employee Pension Transparency Act, I think this is a 
critical step forward because, you know, if States are going to 
be running large hidden budget deficits and subjecting Federal 
taxpayers to the risk that in the future there will be requests 
for bailouts, then it is very important for the Federal 
Government and Federal taxpayers to understand just the size of 
the unfunded liabilities. And I think that the Public Employee 
Pension Transparency Act, H.R. 567, is a very critical step 
forward toward doing that, and it would calculate the 
liabilities the way that we calculate them.
    Mr. Reed. I appreciate that input.
    Mr. Brainard, you said that one way that you would look 
forward to the States dealing with this issue is that they 
would renegotiate their relationships with their employees and 
employers with reduction of benefits, increases in 
contributions. That would be a contractual renegotiation, would 
it not?
    Mr. Brainard. Representative, with respect, I don't think I 
used the word ``renegotiate.''
    Mr. Reed. How do you get to reduction of benefits, 
increases in contribution to deal with the problem that you are 
proposing to us as a solution that would deal with the issue?
    Mr. Brainard. The levels of protection, benefit levels and 
contribution rates vary by State. And in some States those 
levels of protections are more lax, and in other States they 
are more ironclad. So to this point I am not aware of a State 
that has modified their benefit structure or financing 
arrangement that is in contravention to the State constitution 
or statutes. Those States in which that is permitted, some have 
taken advantage of it.
    Mr. Reed. So what you are referring to is the State 
legislative makeup that allows the benefits to be redesigned 
    Mr. Brainard. Yes, sir.
    Mr. Reed. Okay. But in the collective negotiation contracts 
with employees, that would have to be reopened up, would it 
    Mr. Brainard. Well, in cases where employees have the right 
to bargain collectively; for example, California, public 
employee groups, my understanding is last year a number of them 
provided concessions.
    Mr. Reed. So voluntary concessions that they would have to 
come to the table to deal with the issue.
    Mr. Brainard. Yes, sir.
    Mr. Reed. Okay. I see my time has expired.
    Thank you, Mr. Chairman.
    Mr. Coble. I thank the gentleman from New York.
    The Chair recognizes the distinguished gentleman from 
Illinois for 5 minutes.
    Mr. Quigley. Thank you, Mr. Chairman.
    Mr. Chairman, I sure don't need to be convinced that this 
is a serious problem. I come from Illinois, which seems to 
compete with California to dive off the cliff like lemmings in 
not recognizing this as a serious problem. And I see it as, you 
know, years of neglect. And in Illinois, it is 20, 30 years of 
underfunding and having ridiculous rules about what people 
think they can do in providing, in some cases with all due 
respect, sweetheart deals to some folks that put this system in 
this vein.
    It wasn't until the economic downturn that this really came 
to light. The economic downturn is blamed for this, but in 
reality that is only part of it. I mean, the symptoms were 
there and we weren't paying attention. The economic downturn 
just made it so much more dramatic.
    And as part of the larger picture, State and local 
governments as a whole in terms of financial management or 
forgetting the story of Jacob in Genesis that during the 7 good 
years, you should save for the 7 lean years. So we know how we 
got there.
    But there is some nuance here. This is my second hearing on 
this in less than a week. One more and I get a set of steak 
knives, I am told. But everyone seems to be kind of in the 
middle. There is not going to be a bailout and States need to 
recognize that and act accordingly. They need to reinvent 
themselves, streamline, consolidate, and reform, including 
their pension plans.
    But to bankruptcy, I have just heard so many concerns 
within the bond market and among many others about the 
ramifications on that.
    So if I could start briefly with you, Mr. Fabian, you seem 
to speak of what is almost a contagion if there is not just 
bankruptcy but do you also see that potential if pension funds 
had something more than a big hiccup in terms of affecting the 
bond market not just in the 8 to 10 States that are problematic 
but beyond?
    Mr. Fabian. So the question is about an event happening 
within the pension funds?
    Mr. Quigley. Short of a bankruptcy.
    Mr. Fabian. Sure.
    Well, the municipal market right now--the issue of 
bankruptcy, the issue of a collapse is something that would 
affect the market regardless. The municipal market right now is 
particularly vulnerable because we have been under a fairly 
intense media assault, a warning of a looming collapse of the 
market. So this fear of bankruptcy is for sure attracting the 
attention of everyone in the market. Certainly all of our 
subscribers and probably many more.
    The idea of something outside of bankruptcy, I am not 
exactly sure what that might be but I am thinking of----
    Mr. Quigley. Defaults?
    Mr. Fabian. On the pensions?
    Mr. Quigley. Well, some major financial hiccup in that 
    Mr. Fabian. The one thing--there is a study on----
    Mr. Quigley. Payments on loans for those bonds.
    Mr. Fabian. The way that most States are set up--actually 
Illinois is an excellent example. For Illinois to actually--
what Illinois does is they actually sequester cash about a year 
ahead for the debt service that is due over the coming year. 
And they have the access, the first access to all revenues of 
the State regardless of where they came from to fill up that 
fund. And that fund can't be used for any other purpose. And it 
is a monthly set-aside. So and just in case the legislature 
doesn't actually appropriate or the governor doesn't 
appropriate, there are mechanisms to do it for them.
    So the risk of them actually defaulting on their bonds is 
extremely low. It is hard actually to see the scenario in which 
they would.
    With Illinois, there is a study by the Boston College 
Center for Retirement Research which shows that, you know, were 
Illinois to just continue to underfund its pension, in 2022 to 
2027, I believe, their cost of converting from a pension fund, 
which is a simply PAYGO system of pension funding, would 
increase the--it would cost about an additional 12 percent of 
the State's budget.
    Mr. Quigley. I don't mean disrespect. I am just short on 
time. We are all leaving.
    To put that to you, Professor, the problem that Mr. Fabian 
talked about earlier to the bond market of bankruptcy and 
affecting all the States, not just the 8 to 10 who have been 
bad apples.
    Mr. Rauh. I think the risk is that we are referring to if 
there is no bankruptcy code introduced then the risk that one 
is looking at at that point is you know what happens if a few 
years down the line, you know, when some States have been 
relying even more on borrowing to fund pensions if the muni 
markets at that point say you know what, we have had enough of 
this and we are not interested in buying the new bonds at an 
    And just to give a perspective, I mean if you look at bonds 
on Greek debt, you know, a month before the Greek crisis that 
erupted in Europe and the European debt crisis, the spreads 
were really small over German bonds. Those bonds were trading 
very close to looking like German bonds. And then all it really 
took was a couple auctions where investors weren't interested. 
And all of a sudden the rates spiked and then there was 
    So I think the risk of contagion is there a bankruptcy code 
or not.
    Mr. Quigley. Thank you.
    Mr. Coble. The gentleman's time has expired.
    The distinguished gentleman from Florida, Mr. Ross, is 
recognized for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Professor Rauh, from tone of what I have heard, I 
appreciate Mr. Brainard wishing us a Happy Valentine's Day, I 
can just about bet, though, you are not on his Christmas card 
    But more importantly, as I have read some of his reports, 
he indicates that on the whole State and local pensions are 
weathering the financial crisis and making measured changes to 
ensure their long-term sustainability. It goes on to refer to a 
study authored by you saying it promotes confusion by mixing 
apples with oranges. And then goes on further to also say that 
the method used to determine future pension liabilities of 
States and localities is not recognized by governmental 
accounting standards.
    How do you respond to that, Professor?
    Mr. Rauh. Well, those governmental accounting standards are 
flawed in the perspective of finance, economics, and, frankly, 
common sense.
    Mr. Ross. I guess what I am concerned about is that we are 
talking about government pensions. But yet on the private side, 
is there more uniformity for regulating or evaluating private 
    Mr. Rauh. There is more uniformity and that is because 
there is also more Federal involvement. I mean of course the 
Federal Government explicitly insures defined benefit pension 
plans that are sponsored by corporations. And you know part of 
the 1974 ERISA legislation that introduced that insurance was 
that a regulatory layer was also applied where companies had to 
calculate their liabilities using certain assumptions and they 
also had to contribute to the funds under certain pre-specified 
    With State and local pension plans, we are kind of 
operating under the idea that the States are on their own and 
therefore they haven't been regulated up until now. And I think 
that the Public Employee Pension Transparency Act recognizes 
that there is some systemic risk.
    Mr. Ross. So presently under the GASB, is there any 
statement of actuarial assumptions that must be made or 
disclosed by anybody who is accounting for the pension funds?
    Mr. Rauh. To be sure, there are some standards of practice 
that have to be followed. But there is also wide leeway. And in 
particular, I think the biggest problem is the expected return 
on planned assets and being able to assume that because your 
portfolio made 8 percent in the past it is going to make 8 
percent in the future and then to write down, reduce the value 
of your debts as a function of that.
    If I go to a bank and try to take out a second mortgage and 
the bank rejects my application, I can't go back the next day 
and say, look, I rebalanced my assets and now I am holding more 
equities which are going to have a higher expected return in 
the future, you know, will you reconsider.
    Whereas for State and local governments, the fact that they 
can assume 8 percent returns in their portfolios allows them to 
reduce the value of the debts that they are stating to the 
public, and these standards misrepresent the value of the 
liabilities. They misrepresent how much State and local 
taxpayers owe to public employees. It is often beyond what is 
being set aside.
    Mr. Ross. As I understand it, there is no uniformity 
between States in terms of their accounting practices of their 
    Mr. Rauh. Well, there are some frameworks that all of the 
States follow because they are voluntarily following the GASB 
recommendations. But I mean to give you an example, I mean 
there is something under GASB called the actuarially required 
contribution. But of course you know the State of New Jersey 
contributed 5 percent to the actuarially required contribution 
to its teacher and police fund. So in what sense is that 
required. It isn't really required.
    Mr. Ross. It is a relative term.
    Mr. Rauh. I like to call it a recommended contribution.
    Mr. Ross. Mr. Brainard, the Public Employee Pension 
Transparency Act that we have talked about, you shouldn't have 
any objection to that, should you, or your members?
    Mr. Brainard. Representative Ross, we do object to it.
    Mr. Ross. I mean why? If it is going to make it more 
uniform, more accountable and, more importantly so that the 
pension recipients are going to have some idea of what is being 
done with their plan and the posting of 20-year plan of the 
actuarial assumptions made, what would be wrong with that?
    Mr. Brainard. Representative, I understand the appeal on 
the surface. However, if you dig down a little deeper you will 
recognize that we believe, as has happened on the corporate 
pension side, the use of current interest rates, which is what 
this legislation proposes to measure public pension funding 
liabilities, introduces extreme volatility.
    Mr. Ross. More so than the discount rate now being used?
    Mr. Brainard. Yes, sir, absolutely. The purpose for the 
discount rate currently in place as promulgated by GASB is to 
promote--to oppose volatility and promote consistency in the 
funding level. And we believe that the introduction of current 
interest rates makes the condition of the pension funds a 
condition more of current bond yields than the underlying 
dynamics of the plan itself.
    Mr. Ross. So you would assume then that the accountability 
of the government pension plan should remain status quo?
    Mr. Brainard. I think that government pension plans are 
accountable to the taxpayers in each of the States, sir.
    Mr. Ross. And not to a board.
    Mr. Brainard. Well, those----
    Mr. Ross. An appointed board.
    Mr. Brainard. Representative, those boards are appointed by 
governors and legislative members and elected by--appointed by 
legislators and they work within a statutory framework that is 
approved of course by every legislature.
    Mr. Ross. Would you recommend that any of your pension 
plans purchase any of the bonds issued by your States?
    Mr. Brainard. Representative, that is a very broad 
question. But there are many--my understanding of the municipal 
bond market is that there would be many prudent investment 
opportunities, yes, sir.
    Mr. Ross. Thank you.
    Mr. Coble. I thank the gentleman from Florida. And I thank 
the Members for staying with us to the last doll is hanged. I 
would be remiss if I did not extend Happy Valentine's greetings 
to each of you. Thank you for your testimony.
    Without objection, all Members will have 5 legislative days 
to submit to the Chair additional written questions for the 
witnesses which we will forward and ask the witnesses to 
respond as promptly as they can do so, so that their answers 
may be made a part of the record.
    Without objection, all Members will have 5 legislative days 
to submit any additional materials for inclusion in the record.
    With that, again, I thank the witnesses and those in the 
audience, and this hearing is adjourned.
    [Whereupon, at 5:30 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X


               Material Submitted for the Hearing Record

 Response to Post-Hearing Questions from Joshua Rauh, Ph.D., Associate 
   Professor of Finance, Kellogg School of Management, Northwestern 
                        University, Evanston, IL


    Response to Post-Hearing Questions from James E. Spiotto, Esq., 
                  Chapman and Cutler, LLP, Chicago, IL

                               EXHIBIT A

                               EXHIBIT B

                               EXHIBIT C


Response to Post-Hearing Questions from Matt Fabian, Managing Director, 
                Municipal Market Advisors, Westport, CT


   Response to Post-Hearing Questions from Keith Brainard, Research 
  Director, National Association of State Retirement Administrators, 
                             Georgetown, TX