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2007 Federal E-News
December 2007
New Sudan Divestment Law Signed by President
Bush
Despite serious concerns with its constitutionality, President
Bush signed into law legislation that would authorize – but
not mandate – state and local government divestiture from
targeted companies in Sudan. The new law, which would impose new
Federal reporting requirements in connection with future divestiture
measures, does not require the development of lists of such companies
by any Federal agency or department. The Bush Administration believes
that the new law could interfere with the implementation of national
foreign policy, and the President says that it will be implemented
in a manner that preserves the exclusive authority of the Federal
government to conduct foreign relations. Looking ahead, perhaps,
to other similar battles to come, the new law also expresses the
sense of Congress that divestment is appropriate in any situation
in which a State or local government has determined that an investment
poses a “financial or reputational risk.”
On New Year’s Eve, President Bush signed S. 2271, the "Sudan Accountability
and Divestment Act of 2007." The law (PL 110-174), which follows the version
of the legislation reported by the Senate Banking Committee (see October
2007 NCTR Federal e-News), was adopted unanimously by both the House and
Senate earlier in the month.
The new law specifically provides the authority to require divestment from
companies that State or local governments determine are conducting (or have
direct investments in) business operations in Sudan that include power production
activities, mineral extraction activities, oil-related activities, or the production
of military equipment. Explicit exclusions are provided for companies whose
business in Sudan only involves investments in the regional government of Southern
Sudan; legal transactions under a license from the Office of Foreign Assets
Control (OFAC) or other U.S. authorization; delivery of goods and services
for marginalized populations or internationally recognized humanitarian organizations,
and other similar investments.
Any determination that a company falls into one of the targeted groups is to
be made utilizing “credible information available to the public,” and
State or local governments must make every effort to avoid erroneously targeting
companies and must “verify” that the person conducts or has direct
investments in the targeted business operations. However, there is no requirement
for any new form of Federal assistance in developing such “credible” public
information. In fact, the new law expressly repeals language included in the
Iraq Supplemental bill (P.L. 110-28) requiring the Securities and Exchange
Commission (SEC) to develop a list of companies doing business in Sudan and
report to Congress.
As a reason for letting the Federal government off the hook in this regard,
the Senate Banking Committee specifically noted that the Department of the
Treasury, in its testimony before the Committee, “seemed to sanction
lists developed by non-governmental organizations (NGOs) produced for purposes
of divestment from Sudan,” suggesting that the Federal government would
not be able to add much value given current efforts already under way by these
organizations. Therefore, according to the Senate Banking Committee, “States,
local governments, and fund managers may rely on resources provided by internationally
recognized NGOs, and other appropriate sources, to target companies for divestment.”
It is also interesting to note that the Federal government has decided to fall
back on a “self-certification” program for Federal contractors,
who are required under the new law to certify that they are not conducting
business operations in any of the four key sectors in Sudan identified in the
measure. Is self-certification a possible approach for State and local governments
that could be used in place of reliance on non-governmental lists?
While the new Federal law’s divestiture authorization applies to past
as well as future State and local government divestment efforts, there are
a number of new requirements imposed on those that adopt divestment measures
on or after 12/31/07. First, not later than 30 days after adopting a divestment
measure, written notice must be submitted to the U.S. Attorney General describing
such measure. Then, written notice must also be provided to any target of such
divestment, with an opportunity for them to comment in writing. Finally, actual
divestment cannot take place earlier than 90 days after such written notice
is provided.
The Bush Administration has adamantly opposed authorizing State and local divestment.
In an October letter to the bipartisan leadership of the Senate, the Department
of Justice said that this aspect of the bill “raises grave constitutional
questions,” primarily because “it purports to immunize from Federal
oversight State and local divestment actions that could interfere with national
foreign policy under Supreme Court precedent.” Therefore, according to
Justice, the bill goes far beyond merely acknowledging, or even expressing
support for, the divestment activity in which most State and local governments
already engage as so-called "market participants." Instead, the letter
says, it “purports to transfer to State and local governments, in a way
that raises both constitutional separation of powers and federalism questions,
foreign policy authority that the Constitution places, for very good reasons,
with the Federal government.”
Therefore, it came as no surprise that, in signing the bill, President
Bush expressly reserved the authority to implement it consistent
with what he called the Federal government’s “exclusive
authority to conduct foreign relations.” What this will mean
in practice remains to be seen.
It is interesting to note that Congress, in adopting the legislation, attempted
to address the Constitutional concern about States' enacting legislation which
touches on international relations by addressing State or local divestment
conducted for purposes of mitigating risk. Specifically, the new law expresses
the sense of Congress that the United States Government should support the
decision of any State or local government to divest from (or to prohibit the
investment of its assets in) a “person that the State or local government
determines poses a financial or reputational risk.” However, neither
type of risk is further defined, nor is there a link to any specific geographic
location required. Therefore, this could be seen by some as a clear Congressional
endorsement of State and local divestment activities directed toward Iran.
·Sudan
Accountability and Divestment Act of 2007)
·Senate
Banking Committee Report
·Justice
Department Letter
DC Plans Not Working For Many, According
to New GAO Report
A recent report on defined contribution (DC) plans from the Government
Accountability Office (GAO) finds that a large proportion of workers
will likely not save enough in DC plans for a secure retirement.
Congressional leaders expressed strong concern with this latest
indictment of the effectiveness of DC plans in providing for adequate
retirement security, noting that the lack of savings in 401(k)-style
retirement plans is especially troubling in light of the fact that
such plans are fast replacing traditional pension plans.
The new GAO report, which was requested by Congressman George Miller (D-CA),
Chairman of the House Education and Labor Committee, analyzed data from the
Federal Reserve Board’s 2004 Survey of Consumer Finances (SCF), the latest
available, utilizing a computer simulation model to project DC plan balances
at retirement.
The GAO found that only 36 percent of workers participated in
a current DC plan, and determined that for all workers with a current
or former DC plan, including rolled-over retirement funds, the
total median account balance was $22,800. Among workers nearing
retirement – those aged 55 to 64 – with a current or
former 401(k)-style plan, the median account balance in 2004 ($50,000)
was significantly higher, but GAO reported that this would provide
an income of about $4,400 per year, replacing just 9 percent of
income, on average, for workers in this group.
Looking ahead, based on their projections of DC plan savings over
a career for workers born in 1990, DC plans could on average replace
about 22 percent of annualized career earnings at retirement for
all workers. However, projected “replacement rates” varied
widely across income groups. For example, workers in the lowest
income quartile have projected replacement rates of 10.3 percent
on average, with 63 percent of these workers having no plan savings
at retirement, while highest-income workers have average replacement
rates of 34 percent.
The GAO notes that there is little consensus about how much constitutes “enough” savings
to have going into retirement, noting that some economists and
financial advisors “consider retirement income adequate if
the ratio of retirement income to pre-retirement income—or
replacement rate—is between 65 and 85 percent.” However,
the report also points out that others believe that, due to the
uncertainties about future health care costs and future Social
Security benefit levels, a much higher replacement rate may be
needed.
For example, in 2006, the Employee Benefit Research Institute
(EBRI) released an issue brief on calculating realistic income
replacement rates. According to its analysis, low-income workers
will require significantly larger replacement rates, “since
non-health care retirement expenditures are not reduced proportionally
with retirement income nor is the health care expense typically
a function of income.” For example, the EBRI paper estimates
that a low-income
male retiring at 65 would have to replace 124 percent of his annual income
just for a 50 percent chance at having adequate retirement income, while a
75 percent chance requires a replacement rate of 229 percent. Even for higher-income
individuals, the EBRI study suggests that in order to feel really secure (i.e.,
have a 90 percent chance at not running out of money in retirement), replacement
rates of more than 100 percent will be needed.
The GAO report concludes that while their results on both current
and projected plan balances “suggest that while some workers
save significant amounts toward their retirement in DC plans, a
large proportion of workers will likely not save enough in DC plans
for a secure retirement.”
Congressman Miller and others have introduced legislation addressing
401(k) fees and other DC plan issues in 2007 (see October
2007 NCTR Federal e-News). According to press reports, Congressman
Miller would like to move his legislation to the House floor “in
the first couple of months” of 2008.
· GAO
Report on DC Plans
· EBRI
2006 Issue Brief on Replacement Rates
NCTR, NASRA File Comments on Normal
Retirement Age Regulations
NCTR and NASRA have filed joint comments with the Internal Revenue
Service (IRS) in response to their question whether normal retirement
ages based on years of service should be permitted under governmental
plans. The comment letter reiterates earlier requests from the
two associations that the Federal government should not attempt
to create standardized definitions for normal retirement age, but
instead should defer to the applicable state or local laws, regulations
and policies governing a particular plan.
In May, 2007, the IRS issued final regulations dealing with in-service distributions
after "normal retirement age." The new regulations (which, for a
governmental plan, will apply for plan years beginning on or after January
1, 2009) will now permit a pension plan (a defined benefit plan or money purchase
pension plan) to pay benefits upon an employee’s attainment of normal
retirement age, even if the employee has not yet had a severance from employment
with the employer maintaining the plan.
Of course, the new regulations raise the question of the definition
of “normal retirement age.” For the purposes of in-service
distributions, the new regulations provide that normal retirement
age under a plan must be an age that is “not earlier than
the earliest age that is reasonably representative of the typical
retirement age for the industry in which the covered workforce
is employed.”
Several safe harbors are provided. For example, a normal retirement age of
at least age 62 is deemed to meet this new “typical retirement age” standard;
for plans with normal retirement ages between ages 55 and 62, there will be
a presumption that they are acceptable based on a “good faith determination
of the typical retirement age for the industry in which the covered workforce
is employed that is made by the employer.” For a normal retirement age
that is lower than age 55, there is a presumption that it does not meet the
new standard “absent facts and circumstances that demonstrate otherwise.” (For
plans where substantially all of the participants in the plan are qualified
public safety employees, a normal retirement age of age 50 or later is deemed
to meet the new standard.)
These new regulations raise a number of worrisome issues. For example what
about plans with different normal retirement dates for different classes of
employees or different normal retirement dates for different participants in
the same class of employees? Then, in August of last year, the IRS issued Notice
2007-69, underscoring that the new regulations do not provide a safe harbor
with respect to a retirement age that is conditioned (directly or indirectly)
on the completion of a stated number of years of service. In doing so, the
IRS raised the issue of “normal retirement age” in a broader context,
and requested comments from sponsors of governmental plans and other plans
not subject to the requirements of Section 411 of the Internal Revenue Code
(IRC) on whether normal retirement age under such a plan may be based on years
of service.
NCTR and NASRA subsequently met with the IRS in November of 2007, along with
representatives of several governmental plans, to discuss problems. A number
of problem areas were identified, and the final comment letter makes a number
of specific recommendations to address them:
1. Governmental plans are not required to define normal retirement age, and
the final regulations should therefore make clear that their limitations imposed
on normal retirement age do not require a governmental pension plan to define
normal retirement age and do not limit a governmental plan’s ability
to define normal retirement age for purposes of eligibility for unreduced benefits,
eligibility for terminated-vested benefits, or for any purpose other than in-service
distributions.
2. Since governmental pension plans typically have normal retirement
ages that include a service component or are exclusively service-based,
the final regulations should make clear that a governmental pension
plan may permit in-service distributions at a time that is no earlier
than the earliest time that is reasonably representative of the
typical retirement date for the employee group. If employees typically
retire after completing 20, 25 or 30 years of service, in-service
distributions should be permitted at that point, regardless of
the employee’s age.
3. Governmental pension plans often provide multiple benefit structures
and cover multiple employee groups. Accordingly, the term “plan” under
the final regulations should be interpreted to permit treatment
as a separate “plan” (a) each benefit structure under
a governmental pension plan that results from differences in the
formula for determining the amount of retirement benefits, the
time at which retirement benefits may commence, or reductions imposed
for early retirement and (b) each classification of employees identified
under the terms of a governmental pension plan as having rights
or benefits that differ from other employees covered under the
governmental pension plan.
4. The final regulation should be revised to include additional
presumptions and safe harbors for governmental pension plans, including:
(a) the time at which an employee is qualified for an unreduced
retirement benefit under a governmental pension plan should be
presumed to satisfy the requirement that in-service distributions
be no earlier than the earliest age that is reasonably representative
of the typical retirement age in the industry in which the covered
workforce is employed; (b) for non-public safety employees, a normal
retirement age that is no earlier than age 55 or the date the participant
has earned a minimum of 25 years of service (regardless of age)
should be deemed to satisfy this requirement; (c) for public safety
employees, a normal retirement age that is no earlier than age
50 or the date the participant has earned a minimum of 20 years
of service (regardless of age) should be deemed to satisfy this
requirement; and (d) governmental pension plans that currently
define normal retirement age or normal retirement date, whether
expressed in terms of age alone, service alone, a combination of
age and service, or a series of alternate age and service combinations,
may allow in-service distributions at their earliest current normal
retirement age or date.
The NCTR/NASRA joint comment letter underscores that governmental pension plan
sponsors have, for many decades, conditioned eligibility for normal retirement
benefits on the completion of a stated number of years of service and many
have defined normal retirement age as the time the participant becomes eligible
for normal retirement. Indeed, prior to these new regulations, there was no
reason to believe that such a practice was prohibited, at least for governmental
plans. “Participants’ rights attendant on the satisfaction of service-based
normal retirement ages have become protected by constitutional guarantees” in
many cases, the comment letter stresses, and to prohibit service-based normal
retirement ages in governmental pension plans will require plan amendments
that, in many cases, will conflict with such protections.
· NCTR/NASRA
Joint Letter
SEC to Give Small Businesses New
One-Year Delay for SOX 404 Compliance
Securities and Exchange Commission (SEC) Chairman Chris Cox has recently told
Congress that he will ask his fellow Commissioners to approve a new one-year
delay in the final implementation of section 404(b) of Sarbanes-Oxley (SOX)
for small businesses. In the interim, the SEC will conduct a study of the
costs and benefits of 404 compliance under the new auditing standard and
management guidance adopted by the SEC and the Public Company Accounting
Oversight Board (PCAOB )in 2007. Some view the extension – one in a
string of similar passes provided to smaller public companies since enactment
of SOX – as amounting to a de facto exemption for those companies most
in need of sound internal controls over financial reporting, given that they
are more prone to misstatements and restatements of financial information.
Chairman Cox made his announcement in testimony before the House Small Business
Committee on December 12, 2007. Both the House and Senate Small Business Committees
have been pressing for such an extension of SOX 404 rules since the new PCAOB
auditing standard was approved last year, and several efforts have been made
to force the SEC to do so over the last year. (See July/August
2007 NCTR Federal e-News) However, until now, the SEC Chairman has opposed
such a further extension as “unwarranted.”
Currently, there are about 5,000 smaller public companies that
still are not required to provide an auditor's report on their
internal controls, as required by section 404(b) of SOX. Generally,
this is every public company with securities registered with the
SEC if it has less than $75 million in public equity. There have
been repeated delays over years since SOX was adopted, but now,
unless the SEC adopts the Chairman’s proposal, these smaller
public companies will be required to begin complying with the section
404(b) requirements for fiscal years ending after December 15,
2008.
Cox now believes that this implementation should be delayed yet
again until the Commission completes its new study and has had
time to analyze its results. The study, which will identify trends
and provide a comparison to costs under the old auditing standard,
is not expected to be completed before June 2008.
The Council of institutional Investors (CII) promptly blasted
the SEC Chairman’s announcement. Calling it “unwarranted,
unwise and unacceptable to investors,” Ann Yerger, CII’s
executive director, said that there is no compelling evidence that
small companies need more time to adjust to the internal control
rules. “These annual reprieves are starting to look like
a de facto derailing of a critical investor protection,” Yerger
warned.
· Cox
Testimony before House Small Business Committee
· CII
Press Release
Hedge Fund/Alternative Investments
Survey of NCTR, NASRA Members Provides Important Data
A new asset allocation survey of NCTR and NASRA members should prove to be
very helpful in the ongoing discussions on Capitol Hill concerning the involvement
of pension plans in hedge funds and the use of other alternative investment
options. Public plans have been heavily implicated in a number of heated
debates in this area, ranging from the tax treatment of hedge fund managers’ income
to the need for increased Federal regulation of private equity investments.
The new survey documents that current levels of participation in alternative
investments are relatively modest, and, although there is a trend toward
increased use of such investment options, the survey does not suggest a rush
to this asset class despite media concerns with “chasing returns.”
For more than a year now, pension plan investments in hedge funds and other
alternative investments has been a focus of concern on Capitol Hill. Following
the collapse in 2006 of Amaranth Advisors hedge fund, with billions of dollars
in losses for investors, key players in both the House and Senate expressed
serious concerns with the potential for significant pension fund losses due
to hedge fund investments that “could put the retirement security of
American workers in jeopardy,” in the words of the then-Chairman of the
Senate Finance Committee, Charles Grassley (R-IA).
In March of 2007, Senator Grassley was joined by the new Democratic
Chairman of the Committee, Max Baucus (D-MT), in asking the Government
Accountability Office (GAO) to investigate the scope of public
and private pension plan investments in hedge funds, and what returns
and risks are likely for workers’ retirement funds. As Senator
Baucus put it at the time, “We need to know whether hedge
funds are real asset builders or just risky business for retirement.” This
GAO report has subsequently been expanded to include all alternative
investments.
More recently, the level of governmental plan investments in hedge
funds has become a major focal point in the so-called “carried
interest” debate dealing with the manner in which private
equity/hedge fund managers’ income is taxed. Opponents of
any change in this area have argued that, due to the level of involvement
in private equity and hedge funds by governmental plans in particular,
raising taxes on these funds would have a significant impact on
these plans, with the result that plan sponsors will be forced
to make up the difference by increasing pension contributions or
allowing the unfunded liabilities of public pension plans to increase.
(See September
2007 NCTR Federal e-News.)
Therefore, the NCTR Research and Development Committee recommended
that a survey would be very helpful in providing accurate information
about actual governmental plan involvement in hedge funds and other
alternative investments. Working together with Keith Brainard,
NASRA’s Director of Research, an asset allocation study was
conducted, the results of which have been shared with the GAO and
are now available on-line.
Fifty-two funds responded to the survey, ranging in size from
$1.8 billion to $254.6 billion, and representing $1.96 trillion,
or approximately 60 percent of all public pension assets.
The survey found that 16 respondents (31 percent) have an allocation
to hedge funds totaling approximately $21.7 billion, with the average
allocation being 1.1 percent of total assets. As for private equity,
the responses showed the average allocation was 5.7 percent. The
survey found no apparent correlation between fund size and the
likelihood of investing in hedge funds. However, the results did
suggest that the larger the fund, the more likely it is to be invested
in private equity.
With regard to the future, 53 percent of respondents indicated
that they expect to make changes to their target or actual asset
allocation over the next 3-5 years, increasing diversification
primarily through alternative investments. Not a surprising response,
given the recent performance of various markets, and hardly the “mad
dash” to risky investments in a blind pursuit of needed returns
that is all too often the popular media viewpoint.
· NCTR/NASRA
Asset Allocation Survey Executive Summary
Pension Technical Amendments Package
Fails to Clear Congress before Christmas Break
Long-awaited legislation to provide technical corrections to the Pension Protection
Act of 2006 (PPA) cleared the Senate in the final hours of its December pre-holiday
session, but the House of Representatives effectively placed the legislation
on hold. The problem appears to center on the provisions of the PPA dealing
with private sector defined benefit (DB) plan funding rules, which some key
players in the House want to delay for one year. Unfortunately, the amendment
promoted by NCTR and other public plan advocates that would address potential
problems with the rates of interest credited in cases of refunds and in other
areas fell victim to the jockeying associated with the current deadlock.
With the House unlikely to take up any legislation before the middle of January,
it is hoped that lingering questions associated with this amendment can be
worked out before the disputed pension technicals package is once again in
play.
A provision of the PPA would require that the rate of interest credited by
a defined benefit plan -- whether on refunds of contributions, deferred retirement
option plans (DROPs), survivor benefits, or other optional forms of benefit – be
no greater than a “market rate of return.” Otherwise, the plan
would be deemed to be in violation of the Age Discrimination in Employment
Act (ADEA), and subject to enforcement actions by the Equal Employment Opportunity
Commission (EEOC).
NCTR, NASRA and other organizations representing public employers
and employees thought they had reached agreement with Congressional
staff on a technical amendment that would fix this problem by providing
that rates of interest used by State or local governmental plans
in accordance with a statute, ordinance, administrative procedure,
or other public process, would be treated as permissible methods
of crediting interest under the PPA provision. However, in the
waning days of the first session of the current Congress, non-specific
objections were raised with this proposed amendment. (See November
2007 NCTR Federal e-News.)
Some “tweaking” was consequently proposed at the 11th
hour that would appear to be aimed at creating a “grandfather” approach,
limiting relief only to existing plan provisions and making plan
amendments subject to the interest rate cap. Such an approach would
clearly be problematic, and efforts were made to sit down with
Congressional staff to see if whatever problems that had been identified
could be resolved. However, maneuvering in connection with the
larger issue of the rules for private sector DB plans delayed such
a meeting, and it eventually was postponed when it became clear
that the PPA technicals package was not going to advance in the
House.
The House decision not to move on the package before the end of
the year leaves many in what Senator Max Baucus (D-MT), Chairman
of the Senate Finance Committee, and his GOP counterpart, Senator
Charles Grassley (R-IA) referred to as a “tough spot.” In
a joint statement issued on December 19th when the Senate passed
its version of the PPA technicals (S. 1974), the two leaders pointed
out that in the absence of action on the legislation, “the
Department of Treasury will not have the necessary corrections
and clarifications of the original intent of the Act to sufficiently
issue the details necessary to allow the pension community to achieve
proper compliance.” They called the failure of the House
to pass a pension technical corrections bill by December 31, 2007 “irresponsible.”
Furthermore, the Finance Committee leaders warned their House
counterparts that they were not in the mood to make dramatic changes
to the 2006 reforms. “Perhaps,” the two Senators suggested, “the
House majority wants to re-negotiate the Pension Act, which could
be accomplished by delaying the effective date of the statute for
1 year.” If so, they reminded everyone that the Senate passed
the PPA by a 93 to 5 vote. “It is clear,” Baucus and
Grassley said, “that a bipartisan majority of the Senate
thinks the Pension Act is good pension policy.” Therefore,
in their view, the Senate does not and would not support delaying
the effective date of the PPA. “That is a non-starter,” they
concluded.
Another nominal victim of the failure to adopt the PPA technicals
is the legislative fix to the so-called “HELPS I” public
safety retiree $3,000 health benefit exclusion. The amendment would
provide that self-insured plans are covered under the new law,
and was included in the Senate-passed technicals package and has
also been included in the version introduced in the House. However,
in December, the Internal Revenue Service (IRS) issued Notice 2007-99,
making it clear that the exclusion also applies to self-insured
accident and health insurance. Therefore, the failure to have the
amendment adopted in time for 2007 tax returns should not present
a problem for eligible retirees.
· Description
of PPA Technicals as Passed by the Senate
EEOC Finalizes Rule Permitting
Medicare “Bridge Plans”
Almost eight years after the U.S. Court of Appeals for the Third Circuit first
ruled against so-called Medicare bridge plans in Erie County Retirees Association
v. County of Erie, the Equal Employment Opportunity Commission (EEOC) has finalized
its rule permitting employers that provide health benefits to retirees to coordinate
those benefits with Medicare without violating the Age Discrimination in Employment
Act (ADEA). The new rule, which had been previously blocked by the AARP, does
not affect the benefits that employers provide to their current employees.
In the Erie County case, the court held that if an employer provides
retiree health benefits, ADEA required that the health insurance
benefits received by Medicare-eligible retirees be the same, or
cost the same, as the health insurance benefits received by younger
retirees. Thus, for example, employers who provided retirees under
age 65 with health insurance to “bridge” the gap between
the time they retired and the time they became eligible for Medicare,
found that they were in violation of ADEA if they tried to terminate
these benefits when retirees became Medicare-eligible.
Not surprisingly, when the EEOC moved to enforce this ruling,
they found that employers, forced to ensure that Medicare-eligible
retirees received benefits identical to those of younger retirees,
intended to simply reduce or eliminate retiree health benefits
that they currently provided, rather than incur additional healthcare
costs by providing new benefits to Medicare-eligible retirees.
However, when the EEOC therefore moved to make an exception to
ADEA to avoid this result, they were blocked in court by the AARP.
Last June, this injunction was finally lifted, and the EEOC was
permitted to proceed with its original proposal. (See June
2007 NCTR Federal e-News.)
The EEOC’s rule, which took effect December 26, 2007, is
intended to permit employers to create, adopt, and maintain a wide
range of retiree health plan designs, such as Medicare bridge plans
and Medicare wrap-around plans, without fear of violating ADEA.
It does not require that retiree health benefits be cut, and it
does not require any changes to contractual agreements, including
union-negotiated collective bargaining agreements, to provide retiree
health benefits.
· New
EEOC Retiree Health Rule
· Questions
and Answers About the New EEOC Rule
Despite Some Negative Spin, New
Pew Report Echoes Recent GAO Findings on Shape of Public Plans
A new report from the Pew Charitable Trusts finds that governmental
pensions plans are “in reasonably good shape,” having
set aside 85 percent of the needed funding for pension benefits.
However, the report is ominously entitled “Promises with
a Price,” and the Pew press release lumps together the pension
obligations with those attributable to retiree health care and
other non-pension benefits, and leads with the charge that “States
Face $2.73 Trillion Bill for Retiree Benefits.”
The Pew study reports that at the end of fiscal year (FY) 2006,
states had set aside over $1.99 trillion, or about 85 percent,
of the $2.35 trillion they had made in pension promises – leaving
about $361 billion unfunded. As with the GAO report, which found
that, in general, State and local governments have set aside funds
to meet most of their future pension costs, the PEW report also
concludes that “Nationally, state pension plans are in reasonably
good shape.” However, their press release also underscores
that the Pew numbers are “conservative” and do not
include all costs for teachers and local government employees.
The Pew report also tracks the GAO conclusion that when it comes
to other post-employment benefits such as retiree health care,
the situation is dramatically different. However, unlike the GAO,
which was careful to maintain the distinction between the two,
the PEW report lumps OPEB promises together with pension obligations
to come up with a $2.73 trillion price tag – a number guaranteed
to get the attention of the media and the general public.
Furthermore, the PEW press release chooses to take the “glass-half-empty” viewpoint
and focuses on the $731 billion that is unfunded instead of the
$2 trillion the States already have set aside to meet their overall
long-term retiree obligations. For example, the first quote in
their release, attributed to Susan Urahn, managing director of
the Pew Center on the States, stresses “the magnitude of
this bill,” the fact that “paying it will require an
enormous investment of taxpayer dollars,” and the observation
that “For states that have dug themselves into a deep hole,
there are no quick and easy solutions.”
The report also provides “fact sheets” for each state,
which lay out specific numbers for both pensions and OPEB liabilities.
The fact sheets also rate how each state is doing in paying its
annual pension bill and in managing its bill for other non-pension
obligations – from “Top Performer” to “Needs
Improvement” to “Below Par.”
As expected, early media reports zeroed in on the negatives, but
on balance, the basic findings are positive. When combined with
the GAO report’s conclusion that, in general, public pensions
are well-funded and well managed, and that state and local governments
are likely to need to raise their contribution rates only slightly
to meet future pension costs, the overall news is good. But then
again, that doesn’t sell papers….
The Pew Charitable Trusts, an independent nonprofit, is the sole
beneficiary of seven individual charitable funds established between
1948 and 1979 by two sons and two daughters of Sun Oil Company
founder Joseph N. Pew and his wife, Mary Anderson Pew. Historically
a conservative organization, the Trusts has become more liberal
in recent years. The Pew Research Center, funded by the trusts,
is one of the largest think-tanks in Washington.
· Pew
Press Release on “Promises with a Price” (with links
to the full report and State fact sheets)
Congress Opts to Postpone Efforts
on Healthcare Reform Legislation
Faced with a January 1, 2008 effective date for several controversial
changes in Federally-governed healthcare, and strong opposition
from the Bush Administration to proposed reforms, Congress chose
to delay its efforts and instead passed a temporary patch to buy
time until later in 2008 on Medicare reimbursement rates and several
other health reform issues, including SCHIP. However, all of the
contentious disputes that prevented a decision on these reform
initiatives have not been resolved, only postponed. Many of the
underlying causes of deadlock – a slim Senate majority, warring
factions among Republicans, and an unyielding Administration, to
name a few – remain in place. Now faced with further election-year
foot-dragging by Congress, long-term changes in Federal healthcare
will probably have to wait until after the November elections.
In the last days before Congress went home for Christmas, the scheduled 10%
cut in physician reimbursements under Medicare that was to take effect in 2008
was postponed for six months, replaced with a half percent update in payments
that also expires June 30th of this year. The temporary fix was contained in
legislation (S. 2499) that also extended the State Children’s Health
Insurance Program (SCHIP) through March 31, 2009, postponing the fight over
expansion of the program for another day as well. (See October
2007 NCTR Federal e-News.) President Bush signed the bill into law on December
29, 2007.
The legislation contains a host of smaller healthcare provisions
to help offset the legislation’s $5.3 billion cost. For example,
it restricts Medicare Advantage special needs plans (SNPs) from
expanding and blocks new SNPs from entering Medicare. It also continues
a controversial provider quality reporting initiative; extends
abstinence-only education programs; halts entry of new long-term
acute care hospitals pending quality assurance standards; and re-ups
a program helping poor Americans pay their Medicare premiums.
The provider community had been extremely vocal in opposing the
planned Medicare reimbursement cuts. Doctors threatened that they
would be forced to refuse to see new Medicare patients or withdraw
completely from the program, in addition to making cut-backs in
staff and equipment modernization. And the President was adamant
when it came to SCHIP expansion, carrying through on his promise
to veto the “new-and-improved” SCHIP reform package
sent to him by Congressional Democrats after their effort to override
his first SCHIP veto failed.
The new law therefore simply extends the SCHIP program for one
year with enough funding for States to maintain their current enrollment
levels. It leaves unclear the effect of the policy directive announced
last August by the Administration that would not allow states to
expand SCHIP eligibility unless they had enrolled 95% of children
in families with incomes up to 250% of the federal poverty level.
While the acting Administrator of the Centers for Medicare & Medicaid
Services (CMS) is reported as having said that this would not require
states to disenroll children from the program, Democrats claim
that in the 14 states that provide SCHIP coverage to children in
families with incomes greater than 250% of the poverty level, they
will have to roll back their eligibility levels at some point before
August 2008 or else pay for such coverage with state funds.
But the failure to advance any significant healthcare reforms
was not all based on partisanship. Senator Chuck Grassley (R-IA),
the Ranking Member of the Senate Finance Committee, said of the
legislation, “We were unable to reach consensus even on the
Republican side either and, therefore, the Finance Committee was
unable to move ahead with the legislation that Senator Baucus and
I had been developing.”
According to Finance Committee Chairman Max Baucus (D-MT), the
Finance Committee will move aggressively on broader Medicare reform
in the next session of Congress, and he promised that “Work
on comprehensive Medicare
legislation will continue and see completion in the early part of 2008.” Whether
the new year can produce new results remains to be seen, however. The likelihood
is that, with the approach of the November elections, less Congressional action
in this and other areas, not more, can be expected.
· Press Release and Summary of New Medicare, Medicaid and
SCHIP Extension Act of 2007
SEC Makes Executive Compensation
Data Available On-Line
In December, the Securities and Exchange Commission (SEC) announced
the creation of a new online tool designed to help investors more
efficiently view Summary Compensation Tables and certain other
data in the proxy statements of 500 of the largest American companies.
Total annual pay as well as dollar amounts for salary, bonus, stock,
options and company perks is available, and can be compared with
those of other companies by sorting according to industry or size.
The SEC’s new tool, the “Executive Compensation Reader,” is
based on the Commission's executive compensation disclosure rules,
adopted in 2006 (see August 2006 NCTR Federal e-News), that took
effect in 2007. According to SEC Chairman Chris Cox, the new tool
eliminates the need to “hunt through financial statements,
footnotes, proxy statements, and other disclosure documents to
figure out how much a company pays its top executives."
The SEC's new Web tool provides information tagged in XBRL, which
stands for “eXtensible Business Reporting Language.” It
is being developed by an international non-profit consortium of
approximately 450 major companies, organizations and government
agencies, and provides an open standard, free of license fees.
The SEC tool includes direct links to companies' proxy statements,
including footnotes and the companies' explanation of their compensation
decisions. Comparisons can be shown in both table and graph form,
allowing shareholders to compare how executives are paid at companies
according to industry, public market cap, or revenue. According
to the SEC, the data also can be downloaded into Microsoft Excel “so
that users can further devise their own programs and tables.”
· Link
to new SEC “Executive Compensation Reader”
FAF Responds to Push for International
Accounting Standards; Proposes Changes to Oversight, Structure,
and Operations of GASB
The Financial Accounting Foundation (FAF) Board of Trustees believes
that changes need to be made in the funding and operations of the
Governmental Accounting Standards Board (GASB). It has also made
recommendations concerning its own oversight role, operations and
governance, as well as the structure and operations of the Financial
Accounting Standards Board (FASB). The FAF says that its proposals
are designed to “better position” the FAF, FASB and
GASB to “become even more effective and efficient in a changing
environment,” and that its recommendations “are of
such significance to the capital markets that they should be exposed
for public comment.” The FAF recommendations come at a time
when the SEC is moving aggressively to replace the existing U.S.
Generally Accepted Accounting Principles (GAAP) with the International
Financial Reporting System (IFRS) – a system that is moving
in sync with the views of proponents of “financial economics.”
The FAF is responsible for the oversight, funding, and appointment
of members of FASB and GASB. While its Board of Trustees does not
direct the standard-setting activities of either, the FAF trustees
have the responsibility to periodically review the structure and
governance of the organization to assess its effectiveness and
efficiency. Their new recommendations come as a result of an evaluation
of the future role of the FAF and FASB in what they refer to as “a
capital market environment moving toward a single set of global
financial reporting standards.” They are also concerned with
the future funding and continuing role of GASB, as well as FAF’s
future role in preserving the independence and promoting the effectiveness
of private sector and governmental accounting standard setting.
This accounting standards convergence and globalization is picking
up steam. For example, in November of 2007, the Securities and
Exchange Commission (SEC) ruled that financial statements from
foreign private issuers in the U.S. would be accepted without a
required reconciliation to GAAP as long as they are prepared using
IFRS. According to the SEC, the purpose of the requirement to use
the IASB-approved version is “to encourage the development
of IFRS as a uniform global standard.”
Subsequently, the Commission heard from the public on December
13 and 17 about moving U.S. companies to the IFRS standard. Witnesses
from the accounting and financial fields said that companies should
have the option of using whatever accounting system they wish.
James Schnurr of Deloitte & Touche cautioned, however, that
the SEC would need to provide guidance to prevent a “free-for-all.” He
said, “I think it would be very confusing to the marketplace” for
a given company to keep switching its accounting system from year
to year. The Council of Institutional Investors (CII) agreed that
there could be problems with unrestricted freedom to move from
system to system.
Others suggested that the SEC set a date-certain for conversion to IFRS and
stick with it. Since the rest of the world has shown no interest in GAAP, Dave
Kaplan of PricewaterhouseCoopers said that there should be a phased conversion
from 2013 to 2015 to IFRS so that the global marketplace will use the same
numbers. Others suggested a 2011 deadline for all companies to switch over. “Fix
a date and don't blink. If people think you are going to blink on mandatory
crossover, the whole thing will collapse,” Paul Cherry, the chairman
of Canada's Accounting Standards Board, advised the SEC roundtable. Canada
will convert to IFRS in 2011 from its own version of GAAP.
Apart from the impact of this convergence movement on investors,
the International Accounting Standards Board (IASB), which oversees
the IFRS process, is currently working on a fundamental review
of all aspects of post-employment benefit accounting, including
pensions, with the aim of issuing an interim standard by 2011.
Furthermore, the International Public Sector Accounting Standards
Board (IPSASB), which has a long-term objective of convergence
of its standards with those issued by the IASB where the latter’s
requirements are relevant for the public sector, also issued an
exposure draft in 2006 proposing requirements for accounting for
employee benefits, including short-term benefits, post-retirement
benefits, other long-term benefits and termination benefits.
The IPSASB standards, although not currently applicable to American
state and local governments, provide a clear view of the direction
in which the international community is moving in this area, and
it is definitely in the direction with which proponents of financial
economics agree. For example, the IPSASB’s draft would require
a governmental entity to determine the valuation discount rate
as the risk-free rate based on market yields of government bonds
in a currency consistent with the benefit obligations (or high
quality corporate bonds where there is no deep market for the government
bonds).
In short, if the U.S. moves to IFRS, how long would it take before
GASB followed the IPSASB’s lead? Don’t forget, GASB
is currently reviewing the effectiveness of Statements No. 25, “Financial
Reporting for Defined Benefit Pension Plans and Note Disclosures
for Defined Contribution Plans,” and No. 27, “Accounting
for Pensions by State and Local Governmental Employers.” The
GASB staff has substantially completed their planned research efforts,
with discussion and a decision expected by the Board at their April
2008 meeting in regard to whether to add a project to the GASB’s
current agenda “to address issues related to pension accounting
and financial reporting standards and to consider whether standards
should be amended in order to improve their effectiveness.”
With regard to GASB, the new FAF proposals are to secure a stable
mandatory funding source; retain the current size, term length,
and composition of GASB; and provide the GASB Chair with decision-making
authority to set GASB’s technical agenda. Responses from
interested parties wishing to comment on the proposed changes must
be received in writing by February 10, 2008. Comments should be
submitted by email to tspolley@f-a-f.org.
· FAF
Proposed Changes to Oversight, Structure, and Operations of the
FAF, FASB, and GASB
· SEC
Roundtable Discussions Regarding International Financial Reporting Standards
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