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Federal E-NewsJanuary/Febuary 2009
NCTR's Federal e-News provides important information on the issues and events in Washington, D.C. that may impact NCTR members. For more information, contact Leigh Snell, NCTR's Director of Federal Relations, at (703) 684-5236 or Leigh Snell. The
American Recovery and Reinvestment Act of 2009 (ARRA), the cornerstone
of President Obama’s new economic stimulus efforts, is now
law. The massive measure, totaling more than three-quarters of
a trillion dollars, includes approximately $100 billion targeted
for education, with a substantial share aimed at elementary and
secondary education programs. New tax-exempt and tax-credit bonds
are also authorized. Finally, several provisions of the new law
are of particular interest to governmental plans, dealing with
refundable tax credits for public sector retirees; the new “Making
Work Pay” tax credit and associated withholding requirements;
COBRA premium assistance; and non-wage withholding. States must submit applications to the U.S. Department of Education for the SFSF monies, and each must provide assurances that it will fund education at least at the level that it was funded in FY 2006. The monies a state receives from the SFSF are to be divided, with about 80 percent to be used to maintain support at fiscal year 2008 or 2009 levels (whichever is greater) for school districts and public institutions of higher education, and the remainder going to support “government services,” such as public safety programs and modernization, renovation, and repair of public school facilities. The bulk of the remaining education appropriations are directed to Education for the Disadvantaged grants ($13 billion) and Special Education ($12.2 billion).
New “Recovery Zone Bonds” are also authorized as a new category of tax-exempt private activity bonds for use in “recovery zones,” which are designated areas with significant unemployment, poverty, and home foreclosure rates. Taxable bonds called “Recovery Zone Economic Development Bonds” are also authorized to be used to promote economic development in a Recovery Zone, and the state or local government would receive a 45 percent reimbursement of interest paid, with no option to apply the credit to investors. There are also several provisions in the massive legislation of
particular interest to public plans: Initially, this benefit would not have been available to public employees who were not covered by Social Security. However, during the conference on the legislation, Senator John Kerry (D-MA) and others succeeded in adding a section providing a one-time refundable tax credit of $250 in 2009 for such non-covered government retirees ($500 in the case of a joint return where both spouses are eligible individuals). Any such credit must be deducted from any allowable “Making Work Pay” credit (see below).
Subsequently, following discussions with the IRS, the Treasury
officials effectively reversed themselves, saying that pension
plans are supposed to use the new tables; the new Publication
15-T released on March 3rd makes it clear: “For the calculation
of income tax withholding on pensions, the new withholding tables
also apply.” Reportedly, the IRS believes that providing
multiple withholding tables would be “confusing,” and
apparently this outweighs any potential adverse consequences for
retirees. Premium Assistance for COBRA Continuation Coverage. The new law provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families, so long as the worker’s same year income is not expected to exceed $125,000 ($250,000 for families). The new premium assistance subsidy program applies to all private and public sector group health plans currently subject to COBRA, and to continuation coverage under similar Federal and state laws, and is effective almost immediately, beginning with the first period of coverage after February 17, 2009. (Under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as “COBRA,” employers with at least 20 employees must allow those employees and their dependents to continue coverage under the employer’s health plan if the employee is discharged, an employee’s hours are reduced, or there is a change in family status. Typically, COBRA enrollees are required to pay up to 100 percent of their premiums and an additional two percent fee to cover administrative costs,) To qualify for the new premium assistance, a worker must be involuntarily
terminated between September 1, 2008 and December 31, 2009, and
the subsidy would end if the individual became eligible for any
new employer-sponsored health care coverage or for Medicare.
For individuals who had been involuntarily terminated between
September
1, 2008 and enactment, but failed to initially elect COBRA, they
would be given an additional 60 days to elect COBRA and receive
the subsidy. Initially, there was some concern that this would only apply to FICA taxes, which could once again create problems in cases of non-Social Security coverage. However, the legislation clearly includes wage withholding as also eligible for the offsetting credit. This new benefit has substantial notice requirements that must be met in a very short period of time, and the reimbursement provisions could create administrative issues. Therefore, for plans affected by this new provision, it should be quickly reviewed for compliance purposes so that there are no problems when reimbursement is sought from the Federal government. For example, the group health plan will have the responsibility for determining who is eligible for the premium, and not the individual. Furthermore, since individuals who may otherwise be eligible for COBRA due to a reduction in hours, retirement or voluntary separation from service are not eligible for the subsidy, a new identification process may therefore need to be implemented. Also, the subsidy is available to those who were involuntarily terminated after August 31, 2008, including those who did not elect COBRA, and they will therefore need to be notified about the new election and subsidy options. 3% Non-Wage Withholding. Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA,” P.L. 109-222), as originally enacted, would require Federal and State governments, including any agencies thereof, to withhold three percent on payments made for most goods and services beginning in 2011, regardless of the amount spent. Local governments and subdivisions that spend more than $100 illion annually on goods and services will also be subject to this withholding. (This provision was included in TIPRA at the last minute, in conference, without any hearings or initial review by the House and Senate, in order to raise $7 billion.) Section 511 has the potential to impose substantial administrative costs on pension plans covered by such a mandate in connection with consultant contracts, fees paid to money managers and other payments to providers. Furthermore, private sector vendors are likely to simply add three percent to their bids or products for their government clients to deal with this requirement, creating even more problems. NCTR has therefore been working with a coalition of other concerned public sector organizations to obtain the repeal of this measure, and succeeded in getting such a full repeal included in the House-passed version of the stimulus bill. However, the Senate bill only included a one-year delay in the application of Section 511. Despite strong efforts to keep the House approach in the final compromise, including letters from NCTR and other public sector groups to the conferees, and a direct plea to Senate Finance Committee Chairman Max Baucus (D-MT) from both Montana retirement systems, only the one-year extension is in the final law. Senior Hill staff reported that there was very strong support for full repeal, but it was too costly to include in the final deal due to serious pressure to keep the overall cost under $800 billion. Nevertheless, there is a commitment from many fronts in Congress to make repeal happen. The score (how much it will cost the Federal government in lost revenue if the provision is repealed) has always been the big obstacle. However, proposed IRS regulations dealing with the implementation of the withholding requirement contain an exemption for any payment that is less than $10,000. The Treasury Department and IRS say they are proposing this payment threshold “because the burden of withholding on smaller transactions is likely to be substantial and outweigh the benefits of increased withholding.” This threshold corresponds to a minimum withholding of $300. (For once, the IRS seems to have actually gotten it right!) Congressional supporters believe that if the proposed IRS regulations are finalized with this $10,000 threshold included, then the repeal legislation could be re-scored, and the cost will drop dramatically. This could vastly improve the chances for repeal. NCTR is currently working with other national organizations on a response to the proposed regulations. Comments are due by March 5, 2009. Overview of Elementary, Secondary Education Spending in ARRA IRS Begins Compliance Survey of Public Plans The Internal Revenue Service (IRS), as promised, has now sent out a compliance questionnaire to a pilot group of 25 public plans. The questionnaire, which has been significantly revised since it was initially proposed last April, consists of nine parts with a total of 65 questions. Plans are given 90 days in which to respond, and while recipients may refuse to participate “without penalty,” the IRS advises that “you will be contacted if you choose not to participate in the pilot.” In the past, the IRS has indicated that such a contact would be in the form of a “compliance check.” Based on the results of this pilot, and feedback from the governmental plan community on the form itself, the IRS intends to revise the questionnaire and survey an additional 200-250 plans later this year, followed by a public report based on their findings. On February 19, 2009, the IRS announced that it had posted to its website the pilot “Governmental Plans Questionnaire” which has now been sent out to a sample group of 25 plans. The questionnaire is part of a new “Governmental Plans Initiative” that was announced in April of 2008. (See March/April 2008 NCTR Federal e-News.) The IRS claims that its goal is to “provide governmental plans with tools, assistance and programs to help plans comply with federal pension law.” However, despite the IRS insistence that the questionnaire is simply intended as a tool for them to gather information from the governmental plan community “so we can understand your issues and concerns,” the ultimate point, as the IRS also admits, is to determine how governmental plans comply with the Internal Revenue Code (IRC). Furthermore, while the IRS insists that their initiative “will promote voluntary compliance by such plans with applicable federal tax laws in hopes of ensuring the protection of plan participants,” the questionnaire is also referenced as just the “first step in the compliance phase of the Governmental Plans Initiative.” This latest version of the questionnaire reflects a number of comments that public plans and other public sector organizations offered to the IRS over the last 9 months. For example, several suggestions made by NCTR and others that were intended to clarify terminology and nomenclature unique to public plans were adopted, and in some cases, open questions that could lead to inconsistent interpretations and responses have been replaced with checkboxes that reflect common State and local government plan usage, as was also recommended. However, in other key areas, public sector recommendations were not included. Specifically, NCTR, NASRA and other commentators urged that, where appropriate, citations and documentation should be encouraged in lieu of prose “descriptions.” Permitting plans to attach pertinent existing plan materials (or to provide electronic links to such) to answer questions could help avoid errors in description, or responses that may later prove to be inadequate. For example, asking a plan to “describe the policies and procedures that the Plan uses” to calculate the amount of required contributions and to limit the purchase of service credits, when the State may have an entire administrative code chapter devoted to service purchases, is not a simple task. At best, it will require needless effort and, at worst, invite imprecision. Nevertheless, this suggestion was largely ignored. The questionnaire’s scope and methodology also continue to
be of concern. Instead of focusing on the applicable parts of the
IRC where additional guidance is much needed and where compliance
assistance would be very helpful, the questionnaire instead continues
to delve into matters which have no direct connection to governmental
plan compliance with Federal law. In fact, a number of questions
deal with the manner in which plans are operated in areas where
the Service itself concedes there are no applicable Federal IRC
requirements. Finally, in a presentation to the NCTR/NASRA Joint
Legislative Conference held in January of this year, IRS representatives
once again confirmed that the survey recipients will be randomly
chosen. This, and the fact that less than 10% of the overall public
plan community will ultimately be surveyed, makes it highly unlikely
that a truly representative picture will result. NCTR will continue to work with NASRA and other public sector organizations to convince the Treasury and the IRS to focus first on providing additional guidance in a number of areas involving the IRC before attempting to move to a compliance and enforcement initiative. In the meantime, since the IRS has refused NCTR’s request for a list of plans that have been sent the questionnaire, please contact Leigh Snell at lsnell@nctr.org if you are one of the lucky recipients of the survey. NCTR and NASRA will be working to provide assistance to plans as they develop their responses. Also, if you have thoughts regarding the questionnaire and are going to provide them to the IRS, as they have requested, please also share them with us. IRS Governmental Plans Questionnaire New NCTQ Yearbook Finds Teacher Pensions Inflexible, Unfair and Expensive The National Council on Teacher Quality (NCTQ) believes that State pension systems are generally inflexible and unfair to all teachers, and are particularly disadvantageous to teachers early in their careers. This was one of five “key findings” contained in NCTQ’s State Teacher Policy Yearbook for 2008, which focused on “What States Can Do To Retain Effective New Teachers.” The yearbook identifies 15 “goals” in three areas that it believes support the retention of effective new teachers, and then provides a state-by-state summary of state performance for each of these. According to NCTQ, “the laws and regulations of a majority of states discourage promising new teachers from sticking with the profession, while doing little to identify and move out ineffective teacher.” With regard to pensions, the yearbook finds that states “place a disproportionate emphasis on providing pension benefits to retiring teachers at the expense of providing benefits that would appeal to younger teachers.” NCTR has issued a statement calling the NCTQ’s conclusions about retirement security for teachers “careless,” and asserting that the yearbook “represents a great disservice to this valued component of society.” According to the NCTQ yearbook, which was released on January 29, 2009, no one state offers a “national model for change.” Indeed, most states (36 in all) received a grade in the D range or an F. Only South Carolina (which received a B-) was found to have “particularly noteworthy policies for ensuring that ineffective teachers do not remain in the classroom” according to NCTQ’s standards. Specifically, NCTQ found that “States do virtually nothing to establish teachers' effectiveness in the classroom before awarding them permanent employment status,” complaining that 44 states allow teachers to earn tenure in three years or less, “which is simply not enough time to accumulate sufficient data on a teacher’s performance.” NCTQ also found that States are not doing enough to identify effective teachers, and are “complicit in keeping far too many ineffective teachers in the classroom.” State policies were also said to “raise unnecessary barriers for advancing in the profession,” and NCTQ found that States could do much more to influence teachers’ decisions to stay or go, specifically identifying compensation, certification and induction as areas where “there is much more states could do to support the retention of effective teachers early in their careers.” When it came to pensions, the NCTQ yearbook charged that States “continue to provide teachers with expensive and inflexible pension plans that do not reflect the realities of the modern workforce.” As proof of this failing, the report cites the fact that “Just four states offer teachers a defined contribution plan as their primary pension plan,” arguing that “the portability of these plans can be attractive to an increasingly mobile workforce.” NCTQ also believes that pension systems “overly commit districts' resources to retirement benefits, leaving little room to provide benefits that might be of more immediate relevance to new teachers.” Turning to the specifics of what NCTQ believes are appropriate standards/goals for “pension flexibility,” the yearbook states that participants in the state’s pension system should have the option of a defined contribution plan as their primary pension plan; that defined benefit plans should offer the option of a lump-sum withdrawal upon termination, and that withdrawals from either defined benefit or defined contribution plans should include employer contributions; and that there should be no limits on the purchase of service credits for previous teaching experience, as well as for all official leaves of absence, such as maternity and paternity leave. With regard to the goal of “pension neutrality,” NCTQ believes that States should ensure that pension systems uniformly increase “pension wealth” with each additional year of work. Specifically, NCTQ urges that benefit formulas “should not have a multiplier that increases with years of service or longevity.” Also, NCTQ believes that eligibility for retirement benefits “should be based on age and not years of service.” The day that the NCTQ yearbook was released, NCTR also issued a statement expressing its deep disappointment with the NCTQ’s failure to accurately assess the importance of the role of governmental pensions in attracting and retaining teachers. Other public sector organizations, including NASRA and the National Institute on Retirement Security (NIRS), also prepared rebuttals of the NCTQ publication for use by the media and others. NCTR charged that the yearbook’s conclusions related to the fairness and flexibility of current State pension systems “are not supported by the facts,” and that NCTQ’s recommendations concerning pensions and teacher retirement “reflect neither the documented desires of the very teachers who are the targets of any retention efforts, nor the best interests of the taxpayers who are ultimately their employers.” The NCTR statement stressed that traditional DB pensions have been shown to be overwhelmingly and consistently preferred by teachers, to offer a proven track record in helping in their recruitment and retention, and to provide a better deal for taxpayers when compared with other DC-based models. Finally, NCTR pointed out that the recent unprecedented declines in the value of individual retirement savings plans have borne out the long-held fears of many that such 401(k)-type plans alone cannot be depended on to provide for adequate, reliable retirement security,. Therefore, promoting such accounts as a replacement for the existing DB model simply makes no sense whatsoever as a means of improving teacher recruitment and retention. NCTQ refers to itself as a “nonpartisan research and advocacy
group committed to restructuring the teaching profession.” According
to its website, it “advocates for reforms in a broad range
of teacher policies at the federal, state, and local levels in
order to increase the number of effective teachers.” NCTQ 2008 Yearbook National Summary HELPS II Legislation Expected; Would Provide All Public Sector Retirees with $3000 Healthcare Tax Deduction A bill to revise and extend the “HELPS I” public safety retiree health benefit to retired teachers as well as to all other State and local governmental employees is expected to be reintroduced in the House of Representatives soon. The legislation would also remove the mandate that, in order to be eligible, a retiree’s pension plans must make direct payments to insurer;, provide for a tax deduction instead of an exclusion from gross income; allow non-itemizing taxpayers to claim such tax deduction; and provide an annual inflation adjustment to the $3,000 distribution limit beginning after 2009. The cost of the legislation, which has been an issue in the past, has not yet been determined. The Healthcare Enhancement for Local Public Safety Retirees provision, otherwise known as “HELPS I” (Section 845 of the Pension Protection Act of 2006), added new Internal Revenue Code (IRC) section 402(l) permitting, beginning in 2007, public safety officers that separate from service by reason of disability or attainment of normal retirement age to exclude from taxation up to $3,000 for the payment of retiree healthcare premiums, if transferred directly from their governmental plan to a health insurance company (or self-insured plan as amended by the PPA technical corrections legislation, H.R. 7327, which became law in December of 2008). Late in the last Congress, Representative Joseph Crowley (D-NY), a member of the House Ways and Means Committee, introduced a bill to extend this benefit to all public retirees, and he is expected to reintroduce the legislation in the near future.. The Crowley bill, assuming that it is similar to his legislation introduced in 2008, is also expected to address several problems with the original HELPS I law:
In addition to addressing the two issues noted above, the legislation is expected to replace the current law’s exclusion from gross income with a tax deduction that could be claimed by taxpayers who do not itemize deductions. The benefit would also be made available to surviving spouses. Finally, the $3,000 limit would be adjusted annually for inflation in a manner similar to that used under IRC section 415(d). The cost of the legislation has yet to be determined, and could be a problem. The original public safety officer benefit was scored as costing the Federal government approximately $4 billion over 10 years when it was approved in 2006, but there has not yet been an official Congressional scoring of the new HELPS II approach. In the past, NCPERS projected 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, and Hank Kim, in response to a question at the recent NCPERS Legislative Conference, said that he thought a “back-of-the-envelop” number for the Crowley bill was about $3 billion over 10 years. However, others have suggested that, assuming public safety officers (including corrections) comprise 10 percent of all State and local government retirees, then the 10-year cost of including the remaining 90 percent, based on the $4 billion number for public safety, could be about another $36 billion. While it might appear from the recent economic stimulus package approved by the Congress, and the other proposals that are being advanced by the Obama Administration, that money is no longer an object in Washington these days, the PAYGO rules have not been completely repealed. For example, the cost of a repeal of the 3% non-wage withholding requirement, discussed in the story above on the details of the new stimulus package, offers a clear example of the continuing problem that high-scoring individual legislative proposals are going to have in the current Congress. NCTR supports 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, public and private, and adopted a resolution in 2007 that 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. It may well be that it is more politically feasible to deal with expanding this approach to all retirees as part of the comprehensive healthcare reform effort promised by President Obama as opposed to trying to move it as just a public retiree benefit. Crowley Bill from the 110th Congress Vanderbuilt Conference Examines "Rethinking Teacher Retirement Benefit System The National Center on Performance Incentives (NCPI) hosted its second annual conference in February 2009 at Vanderbilt University’s Peabody College, and NCTR was there. The conference was convened by Professors Michael Podgursky and Bob Costrell, and its stated goal was to “bring together scholars from renowned universities and research institutions across the country to discuss the design and implications of teacher retirement systems used in the American K-12 public education system.” Fifteen papers were presented, ranging from a treatise on State law and other controlling authorities governing pensions, to studies of the link between DB pension features and the timing of retirements. One paper examined the actual pension preferences of current and potential teachers, while another was entitled “Teacher Retirement Ponzi Schemes.” Given the well-known predilections of Podgursky and Costrel regarding teacher pensions, it could have been worse! NCPI is a national research and development center for state and local policy at Vanderbilt University’s Peabody College. Established in 2006 through a $10 million, five-year research and development grant from the United States Department of Education’s Institute of Education Sciences, NCPI conducts independent and scientific studies on the individual and institutional effects of performance incentives in education. According to the Center, the subject of teacher pensions is a critical and understudied area for education reform, both because of the effects on the teacher workforce and on school finance. While the conference was nominally to encourage a “rethinking” of teacher pensions, professors Podgursky and Costrrell have made it clear in their previous writings that they have already rethought the issue, and have reached some very specific conclusions. According to their joint paper, entitled “Peaks, Cliffs and Valleys,” published in the Winter 2008 issue of Education Next, the current defined benefit (DB) approach is “outdated,” and that in order to “build and maintain a qualified teacher workforce in today’s labor market, states should fundamentally reform their retirement benefit systems.” They have concluded that defined contribution (DC) and cash balance plans are “far better” than DB plans in promising improvements in teacher quality and fiscal stability. Some could argue that the presenters at the Vanderbilt conference were chosen to advance these views. Certainly the paper presented by Professor Laurence J. Kotlikoff from Boston University at the outset of the conference, comparing current teacher pension plans to Ponzi schemes along the lines of that perpetrated by Bernie Madoff, seemed to fall into that category. Professor Kotlikoff essentially called teacher pension plans liars, frauds, and thieves, and said that “the only thing that will really stop teachers’ retirement Ponzi schemes is closing the schemes down – once and for all.” Kotlikoff said that this would mean “freezing participation in teachers’ retirement pension plans and forcing state and local governments to pay new teachers precisely what they earn precisely when they earn it.” On behalf of all you liars, frauds and thieves, your NCTR representative strongly protested! For example, when Kotlikoff insisted that pension plans, just like Madoff, use contributions to cover withdrawals, I was quick to point out that public funds were funded to the tune of approximately $2 trillion dollars, and that about 75 cents of every dollar of benefits paid was covered by investment returns. The closing paper, “Early Career Teachers’ Perceptions of Traditional versus Innovative Benefits Packages,” was also an interesting choice. Its authors, two Teach Plus Teaching Policy Fellows from the Boston area, conceded at the outset that their survey of 52 public school teachers, 16 (31%) of whom teach in public charter schools, relied on respondents from schools in which the authors and their group of Teaching Policy Fellows are also currently teachers. “Because this was not a random sample of teachers in years 2-10,” the authors note, “our results are not generalizable beyond the bounds of the respondent pool.” Nevertheless, they drew conclusions and made recommendations for policymakers to consider. For example, they felt that “Since our research indicates that retirement benefits are not associated with decisions to stay in teaching, maintaining the current system may not help retain teachers but may deny career or location movers access to money contributed during their employment in a single district.” They also found that “Statistics on teacher attrition and our research on early-career preferences indicate that pensions are failing to serve as a retention instrument” and that only a “small minority of early-career teachers finds retirement systems an incentive.” Finally, because they believe that charter schools have more latitude to experiment with compensation, including benefits, then charter school leaders and networks should “explore ways to reform pension systems from defined benefit to defined contribution plans.” However, a paper presented earlier in the conference by two Peabody
College researchers, entitled “Teacher Pension Preferences:
Pilot Study Results,” provided conflicting data. The Peabody
College pilot survey was also small, but it went to a sample of
current teachers and administrators from various locations across
the United States, as well as students in Vanderbilt University’s
teacher preparation programs and to non-teachers to use as a comparison
group. A special effort was made to include teachers from alternative
certification programs such as Teach for America and Teaching Fellows.
The response rate for the pilot survey produced a final sample
of 100, so it is also not statistically significant. Finally, when the Peabody study attempted to ascertain whether retirement plans are actually an important factor for teachers when making employment decisions, the researchers found that, although the majority of respondents in both teacher and non-teacher groups indicated that retirement had not impacted their career decisions, more teachers than non-teachers considered their retirement plan when making these choices. More teachers than non-teachers also reported that their retirement plan had caused them to stay at a job they preferred to leave as well as that retirement was an important factor when choosing a job. “While these results are preliminary,” the Peabody researchers caution, “they do align with the incentives created by the traditional defined benefit plan in which most teachers participate.” The rest of the presenters, as well as those asked to provide comments on their papers, often displayed an unfortunate lack of basic knowledge about the way in which public pension plans are operated. It was also clear that many of them began the conversation with a bias toward DC plans, with a presumption that not only would these help to attract younger teachers, but that they were also somehow inextricably connected to the goal of attracting better qualified ones. Fortunately, in addition to NCTR, other organizations representing
governmental plan interests and plan participants were also present,
including the NEA and
the AFT. No employer groups were represented. Beth Almeida, the executive director
of the National Institute on Retirement Security (NIRS) was also on the closing
panel, and, as an economist herself, was able to point out a number of problems
with some of the research presented and the assumptions underlying some of the
theoretical arguments. That predilection – to make policy recommendations before having documented the need and basis for such – was a pervasive feature of this conference. While some of the true research presented – as opposed to opinion – was not as damning of the current DB pension structure as perhaps might have been anticipated, it is clear that the offensive against public pension plans in general, and teacher plans in particular, has taken on a new “flavor.” It is much more nuanced and tactical, focusing now on benefit design features, employee compensation issues and employer (human resource) needs. This new assault on public sector DB plans is also being linked to education policy and issues of teacher quality, as evidenced by the NCTQ ‘s actions (see story above). It is a dangerous brew. As NIRS’ Beth Almeida has pointed out, what makes this “tactical assault” more dangerous is that “improving education” is a goal that virtually everyone can get behind. In fact, as Beth warns, high profile individuals with genuine, progressive pedigrees, who, if you asked them, probably are very concerned about retirement security, don’t make the connection between these education discussions and pensions and retirement security because they are education policy people, not retirement policy people. They are therefore very vulnerable to the fact-twisting that certain academics and others perform because they don’t have the basic information to combat these so-called experts’ claims. Conferences similar to the Vanderbilt meeting are being planned around the country. Pay attention to these gatherings, as they could have a major impact on the future of teacher retirement security. National Center on Performance Incentives Conference Program "Peaks, Cliffs and Valleys" Article Ackerman Bill to Guarantee Governmental Plan Investments in TARP Banks Introduced in House A bill has been introduced in the House of Representatives by New York Congressman Gary Ackerman (D) that would provide authority for the Secretary of the Treasury to guarantee certain new preferred stock investments made by public pension plans, acting in a collective fashion, in banks eligible for the new Federal “Troubled Assets Relief Program” (TARP). The legislation would provide for an initial 8.5% Federally- guaranteed return. While such a proposal may appear attractive at first blush, there are a number of complex issues that the legislation raises. Unfortunately, the legislation is also being promoted, in part, as a bailout of sorts for public plans. Finally, as plans have examined the details of the proposal, there are also many technical matters that would need to be addressed. Nevertheless, the idea of there being a potential role for public plans to play in helping address the overall economic crisis confronting the nation may well be a concept worth pursing, and other proposals, such as President Obama’s recent call for a joint public- and private-sector fund to buy as much as $1 trillion of illiquid assets, as well as the new National Infrastructure Bank recommended in his new budget, could offer opportunities for just such discussions to take place. Congressman Ackerman, a member of the House Financial Services Committee, proposes that the Federal government authorize the creation of “public pension bank capital infusion funds,” which would be investment vehicles mutually owned by public pension plans for the sole purpose of investing in preferred stocks of banks that are considered “qualifying financial institution” under the TARP Capital Purchase Program. The stock would pay cumulative dividends at an initial annual rate of 8.5 percent, guaranteed by the Federal government. After the end of the first year, this guaranteed rate would be reset to equal the yield on 10-year U.S. treasury notes plus the difference between that yield and 8.5 percent. Generally, the stock may not be redeemed for a period of 3 years. Only public plans would be qualified to set up these new funds, each of which would be limited to $50 billion in investments. Although the legislation doesn’t require such, individuals involved in the drafting of the legislation indicate that it is anticipated that preference will be given to “stable, regionally and locally based institutions” which intend to use the funds to support credit extension through expansion of their own loan book and the purchase of asset backed securities, including those secured by home mortgages, consumer credit card receivables, or student loans. Congressman Ackerman believes that his proposal would provide a win-win for all involved, benefiting both the Federal government and governmental plans. Washington would win by leveraging billions of non-Federal dollars through the use of the guarantee to replace direct spending by the Federal government. Public pension plans would win by receiving a guaranteed 8.5 percent return on certain of their investments. Unfortunately, however, Congressman Ackerman has tended to focus on the financial condition of public plans to bolster his argument. For example, as he explained in a “Dear Colleague” letter to the rest of the House of Representatives seeking support, his measure, “would provide billions of private dollars to TARP-eligible financial institutions, while simultaneously guaranteeing that public pension funds will be able to meet their financial obligations without relying on tax increases.” He went on to explain that “Recent market losses have had a profound effect on many state and city pension funds whose expected--but now non-existent--profits are used to pay pensioners.” According to the Congressman, “Because public pension funds are guaranteed by local or state governments, any payout shortfall must be recouped by increased taxes, decreased funding to government services, or both.” Ackerman therefore claims that his legislation would thus “avert the need for local and state governments to fund public pension shortfalls.” This view of the legislation as essentially providing a bail-out for public pensions was quickly picked up on by Mary Williams Walsh of the New York Times, who explained that this guarantee would “solve one of the biggest problems now facing most public pension funds: They need to achieve average annual investment returns of 8 percent, and in today’s markets, they cannot do so with the types of securities they are required to invest in.” Furthermore, she claimed that if public pension funds “had to adjust their numbers to reflect the bleak state of the stock and bond markets, many would no longer be viable,” noting that even if they lowered their investment-return assumptions by three percentage points to 5 percent, “which is the rate of return the Treasury has been promised on its bank investments — their business models would no longer make sense.” Ms. Walsh also picked up on the fact that the new program would be available only to public pension funds, not pension funds sponsored by private companies. She suggested that the reason was because “corporate plans are covered by federal funding rules and as a result tend to be stronger.” That they are stronger might come as a surprise to many private sector employees who have seen their pensions being frozen at an alarming rate in recent months. Therefore, instead of focusing on the positive role that long-term institutional investors and their “patient capital” could play, under the right circumstances, in the nation’s economic recovery efforts, the manner in which the legislation is being advanced seems to suggest that instead, it is sorely needed in order to prevent a taxpayer bailout of governmental plans down the road. Some public plans have also taken a close look at the actual language of the legislation and have raised other issues, questions and concerns. For example:
Nevertheless, as Girard Miller suggests in his recent article in Governing concerning the Ackerman legislation, the Congressman should be given an “A for effort.” Miller says that “At least he's got people thinking along terms that might ultimately offer hope for a smart and sensible role for public pension plans to play” in finding ultimate solutions to the nation's economic crisis. One possibility might be the proposed “public-private investment fund” component of the Administration’s new “Financial Stability Plan” that was rolled out February 10th. Aimed at helping financial institutions cleanse their balance sheets of what are often referred to as “legacy” assets, the new proposal would involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion. The Administration claims that because the program would bring private sector equity contributions to make large-scale asset purchases, “it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets.” Another possibility is the new National Infrastructure Bank proposal contained in President Obama’s new Federal budget for 2010 released on February 27, 2009. According to the Administration, "The mission of this entity will be to not only provide direct federal investment but also to help foster coordination through state, municipal and private co-investment in our nation's most challenging infrastructure needs." The budget, which must be approved by Congress, requests $5 billion for the bank in FY 2010, which starts October 1, and anticipates that it will receive $25.2 billion from then through 2019. However, even if the budget is approved with these funds included, it will still be necessary for Congress to adopt specific legislation establishing the bank and its governance structure. A model for such legislation is the bill introduced by Senator Chris Dodd (D-CT), chairman of the Senate Banking Committee, in the last Congress. That bill, S. 1926, would have created an independent National Infrastructure Bank to: (1) designate qualified transit, public housing, water, highway, bridge, or road infrastructure projects for loans, loan guarantees, and other financial assistance; and (2) issue general purpose and project-based infrastructure bonds exempt from state and local taxation. Some have suggested that there could be opportunities for public plan co-financing of projects as part of such an approach. There are also other areas where there might be potentially attractive investment opportunities for institutional investors that either build on the concept using Federal guarantee powers as leverage for non-Federal participation, or offer other alternatives to the Ackerman approach. In any case, it is important that any such possibilities respect the basic fiduciary responsibilities of public plans and do not appear to suggest that public plans are looking for some special deal because they are never going to be able to recover financially otherwise. After all, no matter how well-intentioned a proposalmight be, we all know where the roads that are paved with such can lead… Obama Financial Stability Plan Summary of Dodd Infrastructure Bank Proposal “Snapshots” is a new feature of the NCTR Federal e-NEWS, intended to give you a very brief summary of an issue, event, or publication(s), and then provide links to appropriate back-up materials. This is not intended to replace the more in-depth analysis of issues which will continue to be the primary focus of the e-News, but will allow coverage of a larger number of issues of interest to NCTR members. Public Plan Alum New SEC "Insider" Public Sector Healthcare Priorities do well in Economic Stimulus Bill Financial Markets Reform Update Recent GAO Activitiy of Interest to Pensions Hedge Fund Transparency, Oversight Bill Introduced GPO,WEP in President's Budget? Credit Rating Agency Final Rules Issued Commodities Trading in the Spotlight Again New Study Claims Teacher Retirement Benefits Better than Private
Sector Public Plan Alum New SEC "Insider" Kayla Gillan, a 16-year veteran of the California Public Employees’ Retirement System (CalPERS) and its former General Counsel, has been named Senior Advisor to Securities and Exchange Commission (SEC) Chairman Mary L. Shapiro. Ms. Gillan, who was also a founding Board Member of the Public Company Accounting Oversight Board (PCAOB), will be in charge of several projects at the SEC, including the creation of an Investor Advisory Council, reconsidering access to the proxy, and evaluating shareholder advisory votes on executive compensation. The SEC’s efforts in this and other areas should benefit from a proposed 13 percent increase in the agency’s funding which is contained in President Obama’s FY 2010 budget proposal. SEC Press Release on Gillan Appointment Public Sector Healthcare Priorities do well in Economic Stimulus Bill Two major goals of public sector healthcare purchasers were addressed in the new American Recovery and Reinvestment Act of 2009. The economic stimulus measure includes $19 billion for health information technology (IT) improvements and $1.1 billion for comparative effectiveness studies. Resolutions supporting these two items were among the first goals endorsed by the Public Sector Healthcare Roundtable, a non-partisan, member-directed grassroots coalition that has been organized to give public employers a voice in the critical national debate on healthcare reform and to insure that the public sector isn't ignored in any Federal response. Two other areas of importance to healthcare purchasers also received important assistance in the new law: $10 billion for biomedical research and $1 billion for prevention and wellness programs. HealthCare Roundtable President Gary Harbin, NCTR President-Elect and Executive Secretary of the Kentucky Teachers' Retirement System, recently wrote to House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) thanking them for the inclusion of these important healthcare goals in the final stimulus package. Harbin Letter to Congressional Leaders Financial Markets Reform Update In his address to a joint session of Congress on February 24th, President Obama reiterated his commitment to reform of the regulation of financial markets, saying that in order “to ensure that a crisis of this magnitude never happens again, I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system.” There is certainly no dearth of ideas on this subject, and every day it seems a new group or organization weighs in with its thoughts on how to accomplish this important goal. To assist in the process, in January the Government Accountability Office (GAO) provided its suggestions for a “framework” to use to craft and assess such proposals. In February, the U.S. Chamber of Commerce weighed in with a lengthy report examining the efficiency and effectiveness of the Securities and Exchange Commission (SEC) with detailed recommendations for change. Most recently, the Council of Institutional Investors (CII) and the CFA Institute Centre for Financial Market Integrity announced the creation of an Investors’ Working Group (IWG), a new independent panel that will recommend ways to improve the regulation of the U.S. financial markets, to be lead by William Donaldson and Arthur Levitt Jr., both former chairs of the SEC. An initial report and recommendations from this group are expected by late spring. Finally, an ad hoc group of large public pension plans is also expected to issue a statement and set of principles for market reform in the near future. According to reports, it will focus on ensuring more transparency in often exotic and hard-to-comprehend investments; strengthening the SEC to ensure that investors' rights are better protected; and establishing an international organization to coordinate nations' financial regulatory activities. GAO Framework for Crafting Assessing Market reform Proposals Chamber of Commerce Suggestions for Reform of the SEC CII/CFA Press Release on New Investors' Working Group Recent GAO Activitiy of Interest to Pensions The Government Accountability Office (GAO) is currently working on three projects of interest and significance to public pension plans. One project, which NCTR and NASRA have already discussed with the GAO, involves a request from Senator Check Grassley (R-IA), the Ranking Republican on the Senate Finance Committee, to examine the investment strategies, asset allocations, and governance structures that public sector pension plans have employed in recent years to direct and oversee their investments “as well as the ways, if any, that these investment strategies, asset allocations, and governance structures have changed in light of recent financial market conditions.” GAO hopes to issue this report in the summer of 2009. Senator Grassley is concerned that public plans are chasing returns, and that the financial downturn could have exacerbated this problem. However, the GAO is focused more on process, and is interested in such questions as what criteria are used to formulate and evaluate a plan's investment strategy; to what extent, and how frequently, do plans reassess their investment strategy; and how might a plan's governance structure affect the formulation, implementation, and evaluation of a plan's investment strategy. A second GAO study was initiated at the request of House Ways and Means Committee Chairman Charles Rangel (D-NY), and expands on the GAO’s previous work examining the structure of IRAs and 401(k) fees. This new study will look at other retirement investment plans with a particular focus on 401(a); 403(b), and 457 plans, as well as employer-sponsored IRAs. The third GAO study is examining options to expand retirement plan coverage, with a focus on (1) adoption of auto-enrollment by 401(k) plan sponsors; (2) recent automatic-IRA proposals; and (3) recent state-assisted retirement savings program proposals. Specifically, they are reviewing recent proposals put forward by California, Connecticut, Maryland, Michigan, Pennsylvania, Vermont, and Washington to establish IRA or 401(k)-type savings plans for private-sector employees. Interest in auto-enrollment is high on Capitol Hill and within the Obama Administration, whose FY 2010 budget contains a proposed requirement that employers offering 401(k) plans and other defined contribution plans provide an automatic-enrollment feature. This is part of a larger proposal whereby employers that do not otherwise offer a retirement program would be required to enroll employees automatically in a direct-deposit IRA account. The National Institute on Retirement Security (NIRS) has already had a busy year, issuing two major reports. The first, “Pensions & Retirement Security: A Roadmap for Policy Makers,” is based on a national public opinion survey commissioned by NIRS. Key findings are that Americans believe pensions can help reduce insecurity, with 55% expressing that a pension would increase their own retirement confidence and 84% saying that policymakers should make it easier for employers to offer pensions. Further, nearly nine out of ten Americans believe all workers should have a pension plan. The second report, “Pensionomics: Measuring the Economic Impact of State and Local Pension Plans,” contains an economic impact analysis that finds state & local government pension benefits have a sizable impact that in every state and industry across the nation. According to the report, expenditures made from state & local pension benefits for fiscal year 2005-2006 had a total economic impact of more than $358 billion. NIRS is a not-for-profit organization established to contribute to informed policymaking “by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs.” NCTR, NASRA and CII helped to found the organization. Pensions & Retirement Security: A Roadmap for Policy Makers Pensionomics: Measuring the Economic Impact of State and Local Pension Plans Hedge Fund Transparency, Oversight Bill Introduced Senator Charles Grassley (R-IA), the ranking Republican on the Senate Finance Committee, and Senator Carl Levin (D-MI), a senior Democratic member of the Senate and Chairman of its Armed Services Committee, have introduced legislation to restore the authority of the Securities and Exchange Commission (SEC) to regulate hedge funds. The bill, S. 344, the “Hedge Fund Transparency Act,” was introduced on January 29, 2009. In 2006, the SEC adopted a new rule requiring managers of hedge funds with more than $30 million in assets and 15 or more clients to register with the SEC as investment advisers. However, the U.S. Court of Appeals for the District of Columbia Circuit decided that the SEC’s action was "arbitrary," vacated the rule, and sent it back to the SEC for further review. With the Bush Administration opposed to tightening regulation in this area, the SEC took no further action. The new Grassley/Levin legislation would clarify that the SEC has the authority to require hedge funds to register. It would do so by essentially permitting a hedge fund to avoid being treated as an “investment company” under the Investment Company Act of 1940 only if it registers instead with the SEC and cooperates with requests for information from the agency. In addition, the hedge fund must disclose annually a number of items of specific information., including:
The legislation would also require hedge funds to establish an anti-money laundering program and report suspicious transactions similar to the manner in which other financial institutions must disclose such information. GPO,WEP in President's Budget? The Obama Administration may be looking to impose new reporting requirements on state and local employers that do not participate in Social Security, according to the Coalition to Preserve Retirement Security (CPRS). CPRS is composed of individuals and organizations having an interest in maintaining a Social Security system which does not impose mandatory participation on state and local governmental units and their employees. According to the organization, in the middle of a budgetary table on page 126 of President Obama’s FY 2010 budget is a line showing hundreds of millions of dollars in anticipated federal revenue starting in fiscal year 2013 coming from “Social Security Administration: Program integrity: require States and localities to provide pension information.” CPRS believes that this “presumably refers to a planned attempt to enhance enforcement of the government pension offset [GPO] and the windfall elimination provision [WEP], measures that reduce certain Social Security benefits for retirees who collect pensions from jobs that were not covered by the program. If this is indeed the case, it has been tried before. In his FY 2007 budget proposal, President Bush put forward a similar plan. The Bush proposal would have penalized non-compliant employers by denying them access to IRS tax information. According to CPRS, it is not yet clear if the Obama plan would include a similar provision. Credit Rating Agency Final Rules Issued The Securities and Exchange Commission (SEC) has issued final rules to impose new requirements on nationally recognized statistical rating organizations (NRSROs), to take effect April 10, 2009. The new rules are intended to increase the transparency of the NRSROs’ rating methodologies, strengthen the NRSROs’ disclosure of ratings performance, prohibit the NRSROs from engaging in certain practices that create conflicts of interest, and enhance the NRSROs’ recordkeeping and reporting obligations. In addition, the SEC has also proposed new amendments which would require the public disclosure of credit rating histories for all outstanding credit ratings issued by an NRSRO on or after June 26, 2007 paid for by the obligor being rated or by the issuer, underwriter, or sponsor of the security being rated. Also, the SEC re-issued a proposal to amend its conflict or interest rules to prohibit an NRSRO from issuing a rating for a structured finance product paid for by the product’s issuer, sponsor, or underwriter unless the information about the product is made available to other persons. Comments are due on or before March 26, 2009. Request for Comment on Re-Proposed NRSRO Rules Commodities Trading in the Spotlight Again The Government Accountability Office (GAO) has concluded that institutional investors did not act inappropriately by investing in commodities indexes. The study came in response to charges that pension funds and other institutional investors’ speculative investments in certain commodities, particularly crude oil, had contributed to the dramatic price increases at the gas pumps last summer. Meanwhile, the issue of the regulation of commodities continues to be a controversial subject. The House Agriculture Committee has now reported out new legislation, the “Derivatives Markets Transparency and Accountability Act of 2009" (H.R 977). The bill would, among other things, give the Commodity Futures Trading Commission (CFTC) the authority to suspend credit default swaps trading, impose trading limits to prevent excessive speculation, and prosecute criminal violations of the Commodity Exchange Act. Perhaps most significantly, the bill would essentially give the CFTC primary jurisdiction over derivatives that are not traded on the traditional exchanges. This has set up a turf battle between the Agriculture Committee, which has jurisdiction over the CFTC, and the House Financial Services Committee, chaired by Congressman Barney Frank (D-MA), with jurisdiction over the SEC. Some have thought that the two agencies would be merged in any major reform proposal, but that is also still very much up in the air, with Chairman Frank recently suggesting that the two agencies should be strengthened and kept separate from a “systemic risk” regulator, commonly predicted to be the Federal Reserve Board. But any real movement on overall reform will most likely wait until the Obama Administration presents the details of where it would like to see the discussion go, which is not expected until April. Derivatives Markets Transparency and Accountability Act of 2009 New Study Claims Teacher Retirement Benefits Better than Private Sector According to Professors Robert Costrell of the University of Arkansas and Michael Podgursky from the University of Missouri-Columbia, their analysis of data from the U.S. Department of Labor shows that employer contributions to retirement benefits for public school teachers in 2008 was substantially higher than for lawyers, physicians, financial managers, engineers, computer programmers, and other private professionals. They claim that while employer contributions to teacher pensions increased from about 12 percent in 2004 to over 14 percent in 2008, comparable payments for private sector professionals remained flat. Their study contradicts findings made by Lawrence Mishel and Richard Rothstein of the Economic Policy Institute in 2007 that employer contributions for retiree benefits for teachers are no higher than for professionals in the private sector.
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