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Federal E-NewsJanuary/February 2007
NCTR, NASRA Host Joint Washington Legislative Workshop NCTR and NASRA held their second Joint Legislative Workshop in the nation’s capital on February 4, 2008. NCTR’s Legislative Committee members once again joined with NASRA’s members attending their annual Winter Administrators' meeting for a full day of discussions with key Washington players in a number of areas of importance and concern to public retirement systems. Attendees rated the event very highly, with 100% of those submitting evaluations saying that, based on their experience, they will attend the program next year. The day began with a Federal legislative and regulatory update presented by NCTR and NASRA staff. The discussion led off with a general overview of the political climate in Washington for 2008 and the impact of the upcoming elections on the Congressional schedule. A review of a number of specific items followed, including Pension Protection Act (PPA) technical corrections; “non-Technical” PPA amendments and expansions; investment issues; DC plan concerns; upcoming GAO reports; Social Security reforms/mandatory coverage/GPO&WEP; final/expected IRS regulations and guidance; corporate governance; pension valuation reform efforts/GASB/SEC oversight; and OPEB/health care reform. Next on the agenda was a very informal discussion of the Congressional outlook for 2008, particularly with regard to issues of concern to governmental plans, presented by Kathleen Black, tax policy advisor to Congressman Sam Johnson (R-TX), the Ranking Republican on the House Ways and Means Subcommittee on Social Security, and Diane Oakley, pension policy expert to Congressman Earl Pomeroy (D-ND). Mr. Pomeroy is also a member of the Ways and Means Committee and was the recipient of the first NCTR award for outstanding service to public pensions. The two Congressional staffers, among the most well-respected for their expertise in pension matters, gave a lively view of the Congressional budget process, and its impact on tax issues. “Refreshing and realistic” was how one attendee referred to them both. The next speaker was Bill Bortz, Assistant Benefits Tax Counsel in the Office of Tax Policy at the U.S. Department of the Treasury. Mr. Bortz provided a very thorough discussion of the regulatory efforts underway and on the horizon at the Internal Revenue Service (IRS). His presentation was full of detail and very informative – as well as disturbing, particularly when it came to the IRS views on credited interest rate caps and on the new regulations dealing with normal retirement age and in-service distributions. His sometimes blunt remarks generated lively discussion, with one participant later commenting that “after hearing Bill, my system may have problems!” Former Securities and Exchange Commissioner Roel Campos closed out the morning with his views on the SEC’s upcoming agenda for 2008, particularly as it pertained to the sub-prime lending crisis and credit rating agencies. Mr. Campos also commented on the SEC’s recent actions related to corporate governance issues such as proxy access. Following a networking lunch, Anne Mathias, director of policy research for Stanford Group Company, gave her thoughts on politics and the U.S. economy. Stanford Group Company provides political, economic and industry research for institutional and corporate investors. Ms. Mathias was definitely a hit with attendees. Easy to understand and entertaining as well, she provided a very interesting commentary on the upcoming elections and their implications for a number of issues, from healthcare to tax reform. As one attendee put it, “How can one person know so much?” Ms. Mathias was followed by a very intriguing presentation involving a number of ideas being examined both in Washington, D.C., as well as at the state level for expanding pension coverage. The discussion was led by Sandy Matheson, director of the Washington State Department of Retirement Systems, and featured Mark Iwry, Senior Fellow, Economic Studies, at the Brookings Institution and former benefits tax counsel for the Treasury Department. Mr. Iwry explained his proposal to create automatic IRAs, which has been translated into Federal legislation and introduced in both the House (H.R. 2167) and the Senate (S. 1141), as well as other ideas to encourage retirement savings. The automatic IRA would feature direct payroll deposits to a low-cost, diversified IRA. Employers above a certain size (e.g., 10 employees) that have been in business for at least two years but that still do not sponsor any plan for their employees would be called upon to offer this payroll-deduction saving option. Employers would not sponsor the plan, nor make employer matching contributions, and would not be required to comply with plan qualification or fiduciary standards. As Mr. Iwry put it, “They would simply offer to act as a conduit, remitting a portion of employees' pay to an IRA, preferably by direct deposit.” Ms. Matheson discussed the efforts of the Washington State Department of Retirement Systems to design a plan for the operation of a universal voluntary retirement accounts program, and then to seek approval from the IRS to offer the plan to workers and employers in Washington State on a tax-qualified basis. The Washington legislature has requested that her Department undertake this legal and development work to determine how to implement a universal voluntary retirement accounts program, managed through the Department of Retirement Services either directly or by contract. She will be providing a report by December 1, 2008, on the program's design, and any required changes to state law that may be necessary to implement it. More and more studies – such as the recent GAO report on low defined contribution plans savings – document the failings of the 401(k) approach to retirement security. However, many in Congress and at Washington think-tanks continue to look to defined contribution models as the fundamental basis for the next generation of retirement security vehicles to be supported by the Federal government. While there is some general recognition that certain features of defined benefit plans could provide important enhancements, the overall thrust of many proposals – from universal 401(k)’s to automatic IRAs – is to continue to build on the DC plan foundation. Certain key members, such as Congressman George Miller (D-CA), Chairman of the House Education and Labor Committee, acknowledge that “401(k)-style plans were never intended to be a primary source of retirement income,” and that it is critical that Congress explore “how we can best revitalize traditional pensions.” Nevertheless, the largest, most successful proponents and operators of traditional DB pensions – namely governmental plans – are often overlooked in the debate on retirement security, and have yet to engage proactively in this national discussion. As some states also begin to explore new retirement alternatives such as so-called “State K” plans similar to that being explored in the State of Washington, the timing may be ripe for governmental plans to more fully participate in this important dialogue. Following this thought-provoking session, attendees next received an update on activities of the National Public Pension Coalition (NPPC) and the National Institute on Retirement Security (NIRS) from these two organizations’ executive directors, Gerri Madrid-Davis (NPPC) and Beth Almeida (NIRS). The NPPC was founded by the American Federation of Teachers; the AFL-CIO; the American Federation of State, County and Municipal Employees; Change to Win; the National Education Association; and the Service Employees International Union. Its purpose is to educate the public and elected officials about the economic efficiency of defined-benefit plans and the retirement security they provide, and it has already been active in a number of states where efforts to replace DB systems with DC plans or to otherwise undercut the viability of existing DB plans are underway. NIRS, a joint effort of NCTR, NASRA and the Council of Institutional Investors (CII), is a new non-profit institute that will conduct research and promote educational programs with the goal of creating a better public understanding of the role and value of traditional DB pension systems. The Institute is intended to help offset the "research" and other reports prepared by opponents of DB pensions in support of their efforts to convert public systems to a DC model. NIRS plans to produce several products on an on-going basis, including Issue/Policy Briefs, which will be 5-10 page documents intended for a non-specialist audience, such as primers, overviews of prior research on a particular topic, summaries of policy debates, or surveys of general trends. NIRS plans to release five to seven such Issue/Policy Briefs per year. NIRS will also produce Research Reports, which will be original, in-depth analyses that will be more substantive. While also intended for a non-specialist audience, they may include a technical appendix that provides additional information on the data and methodology used in the study. Until NIRS reaches a critical mass with sufficient in-house research capacity, they plan on contracting with outside academics, think tanks, or other experts to produce these Research Reports, with NIRS staff serving as co-authors on a project-by-project basis. The plan is to eventually release four to five Research Reports per year, including at least one opinion research report in 2008. One such Research Report currently in the works is “Pensions, Politics, and Public Perception.” According to Ms. Almeida, this report will examine how ideology, politics, and public misperceptions, rather than sound economic and policy analyses, are impacting public pensions. The paper will be presented to the Wharton Pension Research Council Symposium later this year and possibly published in an edited volume. The last session of the Joint Workshop was devoted to preparing attendees for Capitol Hill visits and future engagement on NCTR and NASRA issues. Practical tips on how to plan for such meetings, as well as further discussion of certain details of the two associations’ legislative agendas, were covered. Planning is already underway for a third such Joint Legislative Workshop next year, tentatively to be held on January 25, 2009. So mark your calendars now! Joint
Legislative Workshop Legislative and Regulatory Update and Resource
Material (Warning: 3.68 MB File Size!) Moving at what is considered the speed of light by Washington standards, the Congress adopted and the President signed into law the Economic Stimulus Act of 2008 on February 13, 2008. The law provides more than $152 billion for 2008 in the form of temporary tax incentives for businesses, intended to help them make investments in their companies and create new jobs this year, as well as individual tax relief in the form of tax rebates. These rebates will amount to as much as $600 for individuals and $1,200 for married couples, with additional rebates for families with children under 17, but will be phased out for higher-income taxpayers. The Internal Revenue Service (IRS) will begin sending out payments in early May after the current tax season concludes, and these will continue over several weeks during the spring and summer. In most cases, taxpayers will not have to do anything extra this year to get the economic stimulus payments beginning in May. However, some individuals, such as Social Security recipients, veterans and retired railroad workers who might not otherwise need to file a tax return must do so in order to receive the economic stimulus payment. More than 130 million taxpayers should begin receiving their economic stimulus payments beginning in May, according to the IRS. “If you are eligible for a payment, all you have to do is file a 2007 tax return and the IRS will do the rest,” according to Acting IRS Commissioner Linda Stiff. The IRS will continue sending payments until December 31, 2008, to cover those taxpayers who file tax returns later in the year. In most cases, the IRS says that the payment will equal the amount
of tax liability shown on the tax return, up to a maximum amount of
$600 for individuals ($1,200 for taxpayers who file a joint return).
Payments to higher income taxpayers will be reduced by 5 percent of
the amount of adjusted gross income above $75,000 for individuals and
$150,000 for those filing jointly. While these people may not normally be required to file a tax return because they do not meet the filing requirement, the IRS emphasizes they must nevertheless file a 2007 return in order to receive a payment. Finally, eligible taxpayers who qualify for a payment under either
approach will generally receive an additional $300 for each child under
17 who qualifies for the child tax credit. IRS
Facts About the 2008 Economic Stimulus Payments Actuaries Hold NYC Roundtable on Public Pension Plan Disclosure of Market Value of Liabilities The American Academy of Actuaries (the Academy) and the Society of Actuaries (SOA) held a roundtable meeting in New York City on February 6, 2008; the topic was “Public Pension Plan Disclosure: Who Needs to Know What – and Why.” While several NCTR members were present, the event was “by invitation only,” with approximately50 actual participants and another 60 or so audience members. The nominal topic was disclosure in general, but the focus was actually on whether or not public plans should be required to report the market value of their liabilities (MVL), sometimes referred to as a plan’s termination liability. Proponents of this view, an outgrowth of “Financial Economics” theory, argue that such disclosure is necessary to prevent the transfer of plan costs to future generations. However, NCTR believes that the reporting of liabilities in this manner is inappropriate for governmental plans that will not go out of business, and would only serve to undercut the traditional defined benefit structure by drastically and unrealistically increasing current and projected plan costs. GASB is expected to formally undertake a reassessment of current governmental accounting standards in April, and proponents of MVL for public plans would undoubtedly like to have the Academy support their position and urge GASB to adopt this additional disclosure. However, a recent PBGC decision to abandon its current investment strategy of using bonds to match assets with liabilities because it was financially unsustainable and failed to take advantage of the agency’s long-term investment horizon is a positive sign for MVL opponents. According to the invitations, the purpose of the Academy/SOA roundtable was to consider (1) how financial disclosures drive the funding, investment, and governance of current pension plans; (2) whether current financial disclosures create any biases that may influence how public plans are funded, invested, or governed; (3) if current financial disclosures serve the needs of all stakeholders in the system, including employees, taxpayers, lenders; and (4) how might changes in financial disclosure change the funding, investment, or governance of public plans. Of the “invitation-only” participants actually at the table, approximately half had some link to the public sector, and included NCTR members Laurie Hacking (Minnesota Teachers); Ronnie Jung (Texas Teachers); Gary Findlay (Missouri State Employees); Dana Bilyeu (Nevada PERS); and Mel Aaronson (UFT). Pat Robertson (Mississippi PERS) was also in the audience. Other roundtable participants representing the public sector included, among others, Leigh Snell (NCTR); Keith Brainard (NASRA); William Leighty (formerly with the Virginia Retirement System); Robert North (NYC Chief Actuary); Donald Steuer (San Diego County CFO); Michael Musuraca (NYC Employees Retirement); Richard Stensrud (Sacramento County ERS); Timothy Barrett (San Bernadino Employees Retirement Association); Beth Almeida (NIRS); and Nancy Kopp (Maryland State Treasurer). “Financial economics” refers to a financial theory that essentially argues that traditional actuarial science, as it is applied to defined benefit (DB) plans, both public and private, is outdated and no longer appropriate. Proponents of financial economics believe that actuarial training and practices therefore need to be “modernized” to reflect the new tools and techniques of this theory, the main change being to require disclosure of the “market value of liabilities.” That is, the calculation of liabilities would be based on a risk-free investment return assumption and not on that of a diversified portfolio – in short, instead of the traditional actuarial approach of using the expected return of the assets being invested as the discount rate for the liabilities, bonds would be used as matching assets for plan liabilities and their interest rate term structure as the liability discount rate. In most cases, the results would be to significantly increase a plan’s unfunded liability. And we all know what the political consequences of that can be. Private sector DB plans are already required to calculate and disclose the MVL, but this makes some sense since this valuation would be important to know should the corporate sponsor go bankrupt or be sold. However, governmental plans are permanent, independent entities, and actuarial methodologies and accounting standards that reflect realistic outcomes -- based on a range of variables using past experience and reasonable expectations for future returns for capital markets and typical public fund portfolios -- are therefore appropriate for them to use. Clearly, the results of this struggle by proponents of financial economics to change the approach used by public pension actuaries and to require the disclosure of MVL could be of the utmost significance to the future of governmental DB plans. Therefore, there was much concern that this New York roundtable was being organized more as a show to legitimize a foregone conclusion on the part of the Academy and the SOA, rather than a legitimate exercise in information-gathering. This was particularly true given the short notice, the limited time allotted for discussion at the event itself, and the restricted nature of attendance. However, on balance, the event went much better than expected in the opinion of many public sector attendees. First, Laurie Hacking did a superb job with her "table-setter" comments at the outset on behalf of public plans. She certainly put MVL proponents on notice that this attempt to apply their approach to public plans was not going to be without controversy; that many plans were very unhappy with the Academy’s process; and that potential conflicts of interest among proponents were not going unnoticed. In fact, Laurie disclosed her employer and all her professional affiliations, and invited all of the other speakers/participants to do the same. While there was a lot of discussion about the need for better-informed boards and more responsible employer/sponsor behavior, what was missing was the link between this behavior and the disclosure of MVL. Enhanced educational efforts undertaken by actuaries, accountants and other consultants to improve the understanding by boards, plan sponsors and other stakeholders of existing disclosures may be very desirable, but proponents failed to make a good case that MVL was the particular item of necessary additional information that would somehow improve the overall situation, whether it be in the areas of funding, investments or governance. For example, would the disclosure of MVL make it more likely that some plan sponsors would begin to fully fund their annual required contributions when they haven’t in the past? In fact, such additional disclosures would probably only serve to create further confusion and misunderstandings in this regard. By the end of the day, the Academy’s Pension Practice Council
was attempting to reassure people that any further steps would be part
of a more deliberate process, and that opportunities for additional
input would be considered. From this attendee’s perspective, the
public sector representatives certainly held their own, and proponents
of MVL definitely know now that it is going to be very controversial
issue. However, whether this will serve to slow down the supporters
of MVL in the Academy remains to be seen. NCTR will be sending a letter
to the Academy and the SOA concerning this issue in the near future,
urging that meaningful public accountability, and not a desire for uniformity
with either private sector accounting and financial reporting rules
or those of the international community, should be the standard by which
all governmental financial reporting objectives are measured. However, it will in all likelihood be a long process before there is any GASB Exposure Draft on this topic. GASB might issue an “Invitation to Comment,” followed by more research by their staff and the Board itself. There could then be a “Preliminary Views” document released. GASB has a history of taking its time digesting issues and typically considers all viewpoints prior to taking next steps. Thus, according to some observers, an actual draft proposal addressing MVL disclosure could take several years to produce. So there may well be time for the public sector to craft a well-thought out strategy to deal with this issue. Some suggest that the governmental plan community might consider approaching GASB with our own proposal to modify current reporting and disclosure standards that address assessments of benefit security, intergenerational equity, transparency, and provide perhaps even some degree of plan-to-plan comparisons. Of course, proponents of MVL will certainly mount an intense campaign focused on GASB as well. And in the middle of all this, the Congress and the SEC – perhaps under new management – may want to make major changes in GASB’s role and independence. (See December 2007 NCTR Federal e-News) However, there are a few bright spots on the horizon. For example, recently the Pension Benefit Guarantee Corporation (PBGC) announced that it is dropping its liability-driven investment (LDI) policy, which it has used for the last four years, and is reallocating almost $15 billion to equities and alternative investments. The new investment policy, approved February 12, 2008, would change the old asset allocation, which was 75 percent to 85 percent fixed income and 15 percent to 25 percent equities, to one with 45 percent targeted to equities, 45 percent to fixed income and 10 percent to alternative investments, including private equity and real estate. This decision is not good news for supporters of MVL. For example, both the PBGC and public plans are fundamentally different from private sector, for-profit employers in terms of goals and purposes, stakeholders, revenue streams, budgetary demands, and longevity. These differences are some of the primary reasons why public plans argue that the premises and conclusions of financial economics do not work when applied to them. The PBGC’s actions help to confirm this argument. In short, the PBGC’s decision directly contradicts one of the key principles of financial economics, which is that pension plans cannot be financially managed on a time horizon that differs from that of their shareholder, or, in the case of public plans, the taxpayer. Statements like “a pension plan is a long-term enterprise” or “pension plans can take a long-term view of risk and reward” are not supported by financial economics, according to its proponents. However, the PBGC’s experience has repudiated the investment policy promoted by financial economics of matching assets with liabilities. As its press release announcing the decision states, “Because the PBGC’s obligations are paid over many years, the new investment policy is designed to take advantage of a long-term investment horizon. The strategy of increased diversification—including use of alternative investments—aims at generating returns, while providing superior protection against ultimate downside risks over time.” According to the PBGC, their new policy was adopted after an extensive review process that began in mid-2007. This review evaluated current and alternative investment policies over 5-, 10- and 20-year periods, and showed that the new diversified portfolio would have outperformed the LDI asset mix 98 percent of the time over rolling 20-year periods. Clearly, this is a debate that is far from settled. Stay tuned – and stay informed on this complex but critically important issue. House Holds Hearing on Impact of GPO, WEP
The House Ways and Means Subcommittee on Social Security held a hearing
on January 16, 2008, regarding “Social Security Benefits for Economically
Vulnerable Beneficiaries.” The Subcommittee’s stated purpose
in holding the hearing was to “examine the needs and concerns
of low-income workers, people with disabilities, public servants and
other at-risk groups, as well as proposals to improve their economic
security, and the costs of such proposals.” Members used the occasion
to bring up H.R. 82, “The Social Security Fairness Act,”
which has 339 cosponsors in the House and would effectively repeal GPO
and WEP. However, Laura Haltzel, a specialist in social legislation at the Congressional Research Service (CRS), said that although concerns about fairness might be justified, GPO might not be the most accurate way to allocate benefits fairly. "Many agree that reducing everyone's spousal benefit by two-thirds of their government pension is an imprecise way to estimate what the spousal benefit would be had the government job been covered by Social Security," she told the Subcommittee. "This procedure has uneven results,” she continued, “and some believe it is especially disadvantageous for surviving spouses and low-paid workers." The hearing also underscored the belief of some Members that to repeal GPO and WEP without also repealing the private sector dual entitlement rules would be to give public retirees special treatment, not equal treatment. Under the dual entitlement rule, an individual cannot receive both a Social Security benefit from his/her own work and a Social Security dependent/survivor benefit. In fact, the GPO was enacted because Congress decided that someone with both a government pension and a Social Security survivor/dependent benefit effectively would be allowed to violate the dual entitlement rule. As David Rust, acting deputy commissioner for disability and income
security programs at the Social Security Administration (SSA), explained
to the House Subcommittee, "The GPO provision removed an advantage
that some government workers had” since a person who worked in
a government job that was not covered under Social Security “could
receive, in addition to a government pension based on his or her own
earnings, a full Social Security spouse's or surviving spouse's benefit."
To repeal the dual entitlement provision in the private sector, however,
would cost an additional $500 billion over 5 years, according to SSA
testimony. Ways and Means Subcommittee Hearing on GPO/WEP NCTR Urges SEC to Identify Companies Acting Contrary to U.S. Foreign Policy, Humanitarian Interests
The NCTR letter was filed in response to an SEC request for comments about whether to develop mechanisms to facilitate greater access to companies’ disclosures concerning their business activities in or with countries designated as State Sponsors of Terrorism. (See November 2007 NCTR Federal e-News) In 2007, the SEC had provided a Web tool that linked to portions of
companies' most recent annual reports describing their business activities
in any of the five countries (Cuba, Iran, North Korea, Sudan and Syria)
determined by the U.S. Secretary of State to have repeatedly provided
support for acts of international terrorism and designated as “State
Sponsors of Terrorism.” However, following a firestorm of complaints
from companies and the Congress about the accuracy of the information,
the SEC suspended use of the site less than a month after it was initiated.
At that time, the agency promised to revisit the issue of making public
company disclosure of business activities in or with a State Sponsor
of Terrorism more accessible to investors. This concept release is in
fulfillment of that pledge. The letter also calls into question the lists non-governmental organizations Instead, the Federal government is the “only credible and centralized authority to identify, monitor, and report on the nature and extent to which domestic and international companies are operating in Sudan and other states that sponsors terrorism, and thereby may be acting contrary to U.S. foreign policy and humanitarian objectives,” NCTR and the other three organizations concluded. The creation of such a Federal list, NCTR believes, is essential to any successful identification of such companies, and will enhance investors’ capability to make prudent investment decisions. But the Bush Administration has vehemently opposed the development of any lists by the Federal government, with the State Department referring to them as “blacklists” that would target U.S. allies and impair multilateral efforts to aid the Darfur peace process. (See October 2007 NCTR Federal e-News) The joint letter notes, however, that the new Sudan Accountability and Divestment Act requires that a Federal contractor must now certify to its contracting officer that the contractor does not conduct business operations in Sudan covered by the new law. “Perhaps the Commission should consider a similar approach, whereby companies filing with the SEC could similarly certify, subject to some penalty, that they do not engage in such business operations in Sudan,” the letter suggests. Not surprisingly, the business community opposes the SEC’s efforts. For example, the National Foreign Trade Council (NFTC), a trade association representing some 300 corporations, and USA*Engage, a coalition of small and large businesses, agriculture groups and trade associations, filed comments with the SEC questioning the agency’s assertion that large institutional investors such as governmental pension plans are increasingly interested in broad information to ensure that their invested funds do not directly or indirectly support terrorism. In addition, the NFTC called the concept of a web tool that begins with an SEC-generated list of companies “inherently flawed” because there is no standard by which to report the nature or extent of business on a country-by-country basis across companies. “As a result, companies with more robust reporting mechanisms would be penalized for voluntarily disclosing additional information in excess of their obligations to the Commission,” according to the NFTC filing. The U.S. Chamber of Commerce also weighed in, characterizing the SEC’s proposals as “inappropriate means” of achieving what it conceded was an “important interest” of investors to ensure that their funds do not support terrorism. “Allowing the SEC to provide special access to this type of information would result in severe and unintended consequences to U.S. registrants conducting legitimate business,” the Chamber warned. “The prejudicial cost incurred by companies would be highly disproportionate to any benefit realized,” the Chamber asserted, and, while noting the SEC’s proposed improvements over the previous system, still insisted that “any variation of this mechanism could never sufficiently mitigate its inherently negative impact on a company’s image.” The comment period on the SEC’s concept release has now closed, and there is no set timetable for the Commission’s next steps in this regard. On a related front, the SEC issued proposed regulations on February 11, 2008, to implement certain provisions of the new Sudan divestment law which provide that no person may bring any civil, criminal, or administrative action against any registered investment company, or any employee, officer, director, or investment adviser of the investment company, based solely upon the investment company divesting from securities issued by persons that the investment company determines, using credible information that is available to the public, conduct or have direct investments in certain business operations in Sudan. However, in order to enjoy this immunity from action, the investment company must make certain disclosures in accordance with regulations prescribed by the Commission. The SEC’s proposed regulations would require each registered investment company that divests securities in accordance with the Act to disclose the divestment on the next Form N-CSR or Form N-SAR (forms that registered investment companies currently use to file periodic reports) that it files following the divestment. Management investment companies would provide the disclosure on Form N-CSR, and unit investment trusts would provide it on Form N-SAR. The proposed amendments would require disclosure of the issuer's name; exchange ticker symbol; CUSIP number; total number of shares or, for debt securities, principal amount divested; and dates that the securities were divested. Comments on the proposed regulations are due on or before March 17, 2008. Such filings by investment companies could be viewed as a possible source of “credible information” available to the public concerning companies that conduct or have direct investments in certain business operations in Sudan. This would be of interest to public plans, given that this “credible information” standard is also a requirement of state and local government divestment decision-making necessary to obtain the new law’s constitutional protections. However, since the regulations do not directly pertain to governmental divestment activities, NCTR will not be filing any comments with the SEC. And speaking of the new law’s constitutional protections, the House Financial Services Committee, which was the primary committee in the House of Representatives that worked on the new Sudan divestment statute, held a hearing on February 8th concerning President Bush’s “signing statement” that he issued when approving the new law. The purpose of the hearing was to provide support for the constitutionality of State and local government divestment activity taken pursuant to the new law despite the President’s claim that he effectively could block such actions if he found them to be inconsistent with his exclusive authority to conduct foreign relations. Senator Dick Durbin (D-IL), along with Senators Dodd (D-CT), Casey (D-PA), Mikulski (D-MD), Schumer (D-NY), Leahy (D-VT), Murray (D-WA), Obama (D-IL), Sanders (D-VT), Clinton (D-NY), Brown (D-OH), Feingold (D-WI), Lautenberg (D-NJ) and Kerry (D-MA), has also recently written to President Bush on this subject. The letter states that the Senators were “deeply troubled” by the President’s signing statement, and notes that Mr. Bush’s action “could have a serious chilling effect on states and municipalities that are considering divestment.” The Senators urged him to provide a clear message “that you will respect and uphold divestment efforts as required by the Sudan Accountability and Divestment Act.” Frank T. Caprio, the General Treasurer of Rhode Island, underscored this problem in his testimony before the House hearing, pointing out that the new law was intended to create a divestment framework, end ambiguity and “galvanize” the states’ right to act in their own best interests. “It is counterintuitive,” he told the Committee, “that an Act which serves to end ambiguity on the issue of Sudan divestment would be accompanied by a Presidential statement that opens the door to the ambiguity of his potential discretion.” Nevertheless, that may well be the current situation according to Patricia Wald, former chief judge of the U.S. Court of Appeals for the District of Columbia Circuit. According to her view, “the result of the present situation is that the states are left with a nagging doubt about potential executive action under unknown circumstances despite Congressional authorization for their actions.” NCTR/NASRA/NCSL/NASACT
Joint Letter Bush Budget Proposes Biogeneric Drug Approval Process
According to the budget released by the Administration detailing its fiscal plan for FY 2009, the FDA will seek authority from Congress to create an approval process for generic versions of bio-tech drugs, often known as biogenerics. The agency will develop its own language for the proposal and hopes to submit the plan to Congress soon, but has not disclosed a specific timetable. In addition to being one of the fastest growing components of the pharmaceutical industry, bio-tech drugs are also among the most expensive, and a new biogeneric process could potentially save purchasers billions of dollars in prescription drug costs. Last year, Congress heard from public sector healthcare purchasers and others concerning the importance of a biogeneric drug process at the FDA. (See April 2007 NCTR Federal e-News) However, when legislation to expand FDA oversight of prescription drug safety and reauthorize the Prescription Drug User Fee Act was finally approved last September, disputes between House and Senate supporters of a biogeneric process concerning when and how the generic companies should be allowed to launch competing drugs served to keep the provision from being included in the final version. (See September 2007 NCTR Federal e-News) The FDA says that it will keep consumer safety paramount as it proceeds
and will seek a “predictable and public guidance process”
for approving biogenerics. The agency has been negotiating with interested
parties leading up to its proposal, focusing on data requirements and
intellectual property protection sufficient to keep incentives for research
in place. Proposals for how long a developer would retain exclusivity
over a new biotech product before a new biogeneric could be approved
– one of the major sticking points in the past -- range from the
14 years supported by the industry to the 7 years proposed by House
Democrats; compromise legislation that cleared the Senate Health, Education,
Labor and Pensions (HELP) Committee last year proposed 12 years, while
others have suggested as little as 3. Like the generic approval system
in place for chemically-derived drugs, the FDA would fund the biogeneric
approval system with user fees, although the President’s budget
proposal is silent on how much these fees should be. In any case, while the outlook for a deal on biogenerics certainly
is brighter than it has been in some time, there are still very significant
hurdles that will have to be cleared before a final deal is done. New “HELPS II” Legislation
Drafted; Would Extend $3,000 Retiree Health Benefit to All Governmental
Employees In addition to expanding the benefit, the new “Healthcare Enhancement for Local Public Servants” (HELPS II) legislation would make a number of fixes to the original HELPS I provision, which became law as part of the Pension Protection Act (PPA) of 2006: · The original law gives eligible retired public safety officers the right to exclude up to $3,000 annually in healthcare premiums from gross income so long as the payment of the premiums is made directly to the provider of their accident or health insurance plan or qualified long-term care insurance contract by deduction from a distribution from an eligible retirement plan, which includes both their primary defined benefit plan as well as supplemental 403(b) and 457 plans or a defined contribution plan. The proposed HELPS II legislation would change this exclusion to a deduction, removing the requirement that the payment to providers be made directly from plans via deductions from distributions. Instead, eligibility for public employees to take the $3,000 deduction would simply be made contingent on their “receiving distributions” from an eligible governmental plan. · Another problem that the new HELPS II legislation would address is the current requirement that, to be eligible, public safety officers must separate from service by reason of disability or attainment of “normal retirement age.” This is proving problematic for those that are eligible for a full unreduced pension based on years of service prior to reaching “normal retirement age” under their plan. The new legislation would change the wording to refer to “normal retirement date,” to be defined as the earliest date upon which the public servant may retire and receive a retirement benefit from the governmental plan which is not reduced on the basis of the public servant’s age and/or years of service. (This change would apply to all public employees, not just public safety officers.) Finally, the new legislation would also provide survivor benefits for the spouses of all eligible public servants. Originally, NCPERS, who is leading the effort to enact HELPS II, had announced its intention to expand the benefit to include only teachers. However, the latest draft would apply to all “public servants.” In addition, Federal public safety officers have been found to be eligible for the original HELPS I benefit and this eligibility would not be changed. However, the definition of public employee, as noted above, would not otherwise cover Federal workers. So what is the outlook for enactment of HELPS II? There are a number of issues to consider: · Clearly, a major factor affecting the outcome of any such legislative initiative will be its cost. While the original public safety officer benefit was scored as costing the Federal government approximately $4 billion over 10 years, there has not yet been an official Congressional scoring of the new HELPS II approach. NCPERS projects that the first year of expanding the benefit from public safety officers to all other public employees could cost about an additional $1.1 billion, but no estimates for the 10-year window used by the Congress has been developed. Others have suggested that, assuming public safety officers (including corrections) comprise 10 percent of all State and local government retirees, then one rough estimate of the 10-year cost of including the remaining 90 percent, based on the $4 billion number for public safety, would be about another $36 billion. · Then there is the issue of paying for HELPS II under the Democrats’ pay-as-you-go (PAYGO) rules. (HELPS I was passed when Republicans controlled the Congress and did not require such costs to be paid for.) No specific offsets have been suggested, and until an official score for the expansion can be obtained, it will be difficult to come up with likely possibilities. · Finally – once a sponsor has been identified, the cost determined, a way in which to satisfy the PAYGO requirements agreed upon, and the support from a sufficient number of Members of Congress willing to provide this new health benefit obtained -- there still remains the matter of getting a “vehicle” for the legislation. That is, it is virtually impossible for any such free-standing amendment to the Federal tax code to be considered unless it is made a part of a larger piece of tax legislation. (For example, the original HELPS I legislation was made a part of the much-larger PPA.) Unfortunately, the likelihood of such a tax vehicle that could be used for this purpose is not good this year. None of the above is meant to in any way dismiss the significance of healthcare costs as a major problem for all retirees, both public and private. The healthcare burden is increasingly difficult to bear for all Americans, but many retirees are disproportionately affected, and the situation is becoming more and more critical with each passing day. Many active employees – and now retired public safety officers – are allowed to pay for health benefits with pre-tax dollars. Therefore, one of NCTR’s stated goals (see NCTR’s Principles and Goals) is to support legislation that would treat both active and retired employees equitably by allowing retirees to fund health insurance premiums and other medical expenses on a pre-tax basis. NCTR believes that this policy should apply to all retirees, regardless of employer. Furthermore, at last year’s annual convention, a resolution was adopted by NCTR that reiterated this goal, and that also urged Congress to address this inequity through either an individual initiative or as part of a comprehensive reform package that reduces unsustainable health care cost trends, improves health care quality, reduces costs for individual health care plan participants and recognizes the unique characteristics of public health care providers. The NCTR resolution also committed NCTR to participate in a coalition of interested parties to introduce, pass and enact such legislation. However, the resolution also stressed that this effort must be undertaken in a manner that neither jeopardizes fundamental tax provisions which help ensure the funding of public sector defined benefit plans, nor unnecessarily complicates or potentially delays the availability of such a tax exclusion by making eligibility contingent on the premium being paid by a retiree’s pension plan. Therefore, there are still questions to be asked and further work to be done before NCTR begins to more actively engage on this issue. As previously noted, the cost of the proposal must be scored, and, depending on that number and the difficulty associated with paying for it, a further evaluation of the specifics of the legislative proposal may be in order. Then there is the possibility of dealing independently with some of the implementation issues associated with HELPS I. Some have argued that getting all the kinks worked out with that provision of law should not be delayed while the larger challenge of expanding coverage to all retirees is addressed. Finally, there is the overarching issue of healthcare reform. How would HELPS II fit into the reform plans of the various Presidential candidates of both parties? It may be more politically feasible to deal with expanding this approach to all retirees as part of a more comprehensive reform package, as opposed to trying to move it as just a public retiree benefit. In summary, no one should be under the impression that this benefit
expansion will be accomplished overnight. NCTR remains committed to
finding equitable, meaningful relief in this area, and will continue
to work with other national organizations to find the best way in which
to advance this important goal.
New Federal Report Says National Healthcare Spending Expected to Continue to Outpace Economic Growth, Increases in General Inflation According to a new report from the Centers for Medicare and Medicaid Services (CMS), the growth in healthcare spending in the United States is projected to be 6.7 percent in 2007, and average annual growth is expected to remain near that rate through 2017. Based on this analysis, annual growth in health spending is anticipated to be higher than annual growth in both the overall economy (4.9 percent) and in general inflation (2.4 percent). As a percentage of gross domestic product (GDP), healthcare spending in the United States is therefore expected to reach just over $4.3 trillion and comprise 19.5 percent of GDP by 2017 – up from 16.3 percent of GDP projected for 2007. What are the implications of these growth rates for employment-based health coverage? Despite claims that it is “melting away like a popsicle on the summer sidewalk,” a new EBRI study suggests that reports of the demise of the employment-based system of providing health benefits may be exaggerated – except when it comes to small businesses and retiree health benefits. The CMS Report, prepared by its Office of the Actuary and published online by the journal Health Affairs, was released on February 26, 2008. It shows that through 2017, growth in health spending is expected to outpace that of GDP by an annual average of 1.9 percentage points, resulting in approximately a doubling of healthcare spending over the next 10 years, from $2.2 trillion in 2007 to $4.3 trillion in 2017. Growth in private health expenditures (which includes out-of-pocket and private health insurance spending) is expected to reach 6.3 percent in 2007, up from 5.4 percent in 2006 – a slower growth rate that was related to the implementation of Medicare Part D. According to CMS, private spending growth is expected to peak in 2009 at 6.6 percent, but then decelerate through 2017 in response to projected slower economic growth. As for prescription drug spending, its growth is expected to slow to 6.7 percent in 2007, down from 8.5 percent in 2006, due to slower drug price growth. However, for 2008 through 2017, CMS predicts that prescription drug spending will accelerate. This will occur, in part, as a result of the expected leveling off of growth in the generic dispensing rate. Furthermore, CMS expects that evolving treatment guidelines that call for earlier introductions of pharmacotherapy will also contribute to this increase. Hospital spending growth, while expected to increase to 7.5 percent in 2007, due in part to higher Medicaid payment rates, is projected to decrease slightly for the next 10 years as CMS expects the growth in demand for hospital services will slow. According to the authors of the report, “The primary drivers of personal health care spending growth during the projection period are medical prices and utilization, followed by smaller impacts from population growth and the age-sex mix.” Medical price growth is the largest factor, expected to account for 3.8 percentage points of the 6.7 percent growth (57 percent) in personal health care spending over the next 10 years. In the meantime, as costs continue to increase, what does the future of the current employment-based health benefits system look like over the next decade? According to a policy forum in December of last year held by the Employee Benefit Research Institute (EBRI), large employers report that for now, at least, they are not prepared to abandon their role as “the backbone of health insurance coverage in the United States,” as EBRI puts it. However, they are clearly concerned with the rising cost of these benefits, and are pushing for healthcare reforms which could have a significant impact on the status quo. In February, 2008, EBRI released a summary of this forum, which found that, “despite claims of its demise,” employment-based healthcare coverage is “remarkably stable.” EBRI’s analysis shows that, “historically, there is general stability in terms of workers being eligible for benefits, the percentage of workers who have coverage, the share of premiums paid by workers, and the share of out-of-pocket costs paid by workers.” However, the EBRI report also notes one major exception: employer-provided retiree health benefits. As the EBRI executive summary puts it, “employers have clearly passed the ‘tipping point’ on retiree health benefits, which are in a sharp decline.” Finally, another exception to the general trend is small businesses. EBRI data also indicates that the percentage of employers with fewer than 200 employees that offer benefits is declining. Their number dropped from 68 percent in 2000 to 59 percent in 2007, which EBRI characterizes as a “remarkable downward decline.” What, then, are the implications of this doubling in healthcare spending over the next decade for the current health benefits system? Alain C. Enthoven, professor emeritus at the Stanford University graduate school of business, told the EBRI forum that “Employer-based health insurance is an anachronism in a world in which median job tenure is so short.” Is the answer, then, that as costs continue to climb, employers will simply bail out? John J. Castellani, president of the Business Roundtable, an association of chief executive officers of leading U.S. corporations, suggested that the answer is “no.” He told the EBRI forum participants that “We want to continue to play because we’re going to end up paying as employers one way or the other.” Castellani said that business also wants “to continue to play because we believe that most of the innovation comes out of the private sector, not out of the government sector.” Who is right? Is it impossible for employment-based health insurance to be compatible with an efficient, affordable, equitable health care system that covers everyone? In the face of escalating costs, how long can businesses continue to afford to play? Is real healthcare reform just over the horizon following the November elections, or will it be yet another campaign promise that goes unfulfilled, regardless of who wins the White House? One thing is certain: without viable answers to address growing healthcare costs, real retirement security will grow increasingly impossible to maintain. The implications for pension systems, benefit structures, and funding cannot be ignored. Whether we think so or not, in the end, we will all end up having a dog in this fight. CMS
Health Spending Projections
New FMLA Regulations Proposed by DOL The Department of Labor (DOL) has issued proposed revisions to its regulations implementing the Family and Medical Leave Act (FMLA). In addition, the DOL is also seeking public comment on issues to be dealt with in final regulations regarding military family leave, which will be proposed at a later date. The DOL’s Employment Standards Administration/Wage and Hour Division issued proposed revisions to certain regulations implementing the FMLA on February 11, 2008. This law provides eligible workers with important rights to job protection for absences due to the birth or adoption of a child or for a serious health condition of the worker or a qualifying family member. It applies to all public agencies, regardless of the number of employees, and to elementary and secondary schools. The proposed changes, which represent the first major update to the FMLA since its enactment in 1993, are based on two previous Department of Labor studies of the FMLA (in 1996 and 2001), several court rulings, and public comments received in response to a Request for Information issued in December of 2006 asking for input concerning experiences with the FMLA and comments on the effectiveness of the current regulations. The draft regulations are very lengthy, include both structural as well as substantive changes, and are still in the process of being reviewed by practitioners. However, some early reactions suggest that the proposed changes, while attempting to be more user-friendly, do not address all of the major concerns with existing regulations, and may even create new potential problems for employers. In any case, it is probably safe to assume that the regulations, once finalized, will require employers to make significant modifications to their employee leave policies. The DOL is also seeking public comment on a number of issues to be addressed in final regulations regarding military family leave in response to changes in the FMLA made by the National Defense Authorization Act for FY 2008. This law amended the FMLA to provide leave to eligible employees to care for injured service members, effective January 28, 2008. It also provided for FMLA leave due to a qualifying exigency arising out of a covered family member’s active duty (or call to active duty) status, which leave is not effective until the Secretary of Labor issues regulations defining “qualifying exigencies.” Therefore, the Notice for the new proposed regulations also includes a description of the relevant military family leave statutory provisions, a discussion of issues the Department has identified, and a series of questions seeking comment on subjects and issues that may be considered in the final regulations. Comments must be received by the DOL on or before April 11, 2008. DOL Notice
of Proposed FMLA Rulemaking; Request for Comments Study Finds DB/DC Conversion Efforts Linked to Politics, Not Economics A new brief produced by the Center for Retirement Research at Boston
College examines twelve states’ attempts to compel the use of
defined contribution plans in some manner for public employees over
the last decade. The study finds that the most important explanation
for this activity “turns out to be political rather than economic.”
According to the research, “States where the same political party
controlled the legislature and the governorship and that party was Republican
were the most likely to introduce a defined contribution plan.” In order to assess why some states adopted DC plans, an empirical analysis was conducted to identify the factors that might either encourage or discourage states from introducing a DC plan. These factors included the funded status of the existing DB plan, the cost of the plan, the current level of employee contributions, the extent to which participants are unionized, whether government employees are covered by Social Security, and the political climate. The results showed that the funding ratio and the accrual rate do not seem to be important factors for the introduction of a DC plan. On the other hand, if the plan includes teachers — that is, it is a highly unionized plan — or if employee contributions are high, the state is less likely to introduce a DC plan. Two results of the analysis were surprising to the authors of the brief: first, states with a large percentage of workers not covered by Social Security had a higher probability of having a DC plan introduced; and second, the impact of Republican control was “larger and more robust than any of the other factors.” Indeed, having a Republican governor and a Republican legislature increases the probability of introducing some type of DC plan by 6 percentage points, according to the results of their analysis. The brief concludes that the twelve states examined introduced a DC plan in some form or another over the last decade in large part due to political philosophy. “Republicans value the control over investments and portability offered by DC plans and when they have dominated the political scene they have often changed the nature of public pensions,” according to the brief’s authors. Boston
College Brief: Why Have Some States Introduced Defined Contribution
Plans?
New Report on 2007 Securities Fraud Class Action Filings: Despite Flurry of Recent Suits, Activity Remains Below Historical Averages The annual report produced by Stanford Law School and Cornerstone Research
on securities fraud class actions found that while the number of companies
sued rose 43 percent between 2006 and 2007, (from116 to 166), litigation
activity for 2007 as a whole was 14 percent below the ten-year historical
average (covering 1997–2006) of 194 companies sued per year. According
to the report, activity jumped in the second half of 2007 due in large
part to the subprime mortgage crisis and increasing stock market price
volatility. For example, the report found that the Finance sector led the way in securities class action activity in 2007, with 47 companies sued, more than quadrupling 2006’s 11 filings. Furthermore, according to the study, the subprime fallout accounted for this spike, with 25 of the Finance sector filings associated with subprime market disclosure issues. The U.S. Second Circuit (New York) had the most securities class action filings in 2007 with 58, followed by the Ninth Circuit (California) with 39, and the Eleventh Circuit (Florida/Georgia/Alabama) with 18. These three circuits were also the busiest in 2006. According to the report, of the 2,218 securities class action cases filed since 1996, 19 percent are continuing. Among the 81 percent of cases that have been resolved, 41 percent were dismissed and 59 percent settled. For the 1996–2001 cases, almost all of which have been resolved, the median time to resolution was 33 months, with 36 months for settled cases and 25 months for dismissed cases. Securities
Class Action Case Filings—2007: A Year in Review
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