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Federal E-NewsMarch/April/May 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 (540) 333-1015 or by email at: lsnell@nctr.org. GASB Issues Invitation to Comment on Possible Revisions to Governmental Plan Accounting and Reporting Standards The Governmental Accounting Standards Board (GASB) has taken the
next step in its Post-Employment Benefits project by releasing an “Invitation
to Comment” (ITC) on possible changes to GASB Statements 25
and 27. These two GASB statements provide standards for accounting
and reporting on the pension benefits that governments provide to
their employees. Depending on the outcome of this project, GASB’s
rules could be changed to require governmental plans to disclose
the value of their liabilities using a risk-free rate of return,
often referred to as the market value of liabilities (MVL) approach.
In addition to the MVL issue, GASB is seeking input on other very
important subjects including the range of actuarial cost methods
that are permitted to be used; amortization issues; and asset smoothing.
Comments are due by July 31, 2009, and NCTR is working with NASRA
to develop a joint response to this critically important challenge.
All NCTR members are urged to become involved ASAP. GASB Invitation to Comment Feds Reverse Themselves on Withholding Tables, but Create Even More Problems with Proposed Solution The Internal Revenue Service (IRS) has now decided that pension plans’ use of new withholding tables reflecting the “Making Work Pay” tax credit could indeed create under-withholding problems for many retirees – as they were advised in February by NCTR and others. However, instead of simply permitting plans to revert to the use of the old withholding tables, the IRS has provided new withholding adjustment procedures that pension plans, at their option, can choose to implement in an effort to try to “put the toothpaste back in the tube.” The new procedures will be costly and time-consuming for many plans to implement, and trying to explain this latest twist will also be expensive and even more confusing to retirees who flooded call centers when the first changes in withholding were made. As a result, some plans are considering doing nothing more in connection with this mess and relying instead on IRS promises to conduct a “wider outreach campaign to educate pensioners and other taxpayers about the withholding tables.” Following complaints from employee groups, including AFSCME, and
retiree organizations such as the NRTA, AARP’s educator community
-- as well as inquiries from Capitol Hill and increasing press
coverage of the potential impact of under-withholding on retirees
-- the Internal Revenue Service (IRS) announced on May 14th that
it had decided pension plans could choose a new procedure to address
the potential under-withholding problems created by Publication
15-Tt. NCTR notified the Treasury Department in February about this problem, and officials there agreed that “Because pension income is not subject to the new credit, using the new tables will increase the likelihood that pension recipients will owe taxes (and possibly penalties) at the end of the year.” NCTR also helped alert participant organizations and retiree groups to the issue. However, the IRS decided that permitting pension plans to use the old withholding tables in Publication 15 would be confusing and ignored these expressions of concern. Consequently, many public plans spent thousands of dollars revising their systems to accommodate the new tables, and then even more monies in connection with notices to retirees advising them of the reason for the withholding change and the possible need to make changes in their W-4P withholding forms. Plan call centers were then swamped with inquiries from confused retirees. The IRS itself also began to hear from plan participant and retiree organizations, who also contacted Capitol Hill to alert them to the impending problem. The media began to run stories on the potential impact on retirees as well. For example, in early April, the Columbus Dispatch ran a piece that noted that while Americans are getting more money in their paychecks and pension payments thanks to a new tax change in the Federal stimulus package, “but retirees beware: A little-publicized quirk could lead to a nasty surprise at tax time next year.” CNN also picked up the story. However, when the IRS decided to make the change, it did not consult with pension plans. Also, it refused to advise NCTR about any details concerning a possible change in this policy despite repeated calls to the agency. As a result, the new “cure” is in many ways worse than the original problem itself. Instead of permitting plans to simply revert to the old withholding tables in Publication 15 that were replaced by the new withholding tables in Publication 15-T -- which would have been a relatively easy switch for most plans – the IRS produced new withholding tables which are “to be used only in conjunction with the withholding tables found in Publication 15-T.” These new tables provide additional withholding amounts which, according to the IRS, provide “an approximate offset for the withholding reduction” that was included in the new tables that jiust went into effect. Clear as mud? Unfortunately, given that some under-withholding has already probably occurred, a simple reversion to the old tables would likely not completely offset the damage. In order to return an individual retiree to the position he/she would have been in prior to the original change, some over-withholding may now be necessary. Hence, the apparent need for yet a new withholding table. As noted, the use of the new tables is optional. Based on the additional time, cost and confusion it would entail, some plans are already deciding not to make the change. Here is how one NCTR system director of a relatively small plan explained it: “The change to the new tax tables in March caused considerable concern among our retired members, which resulted in hundreds of calls and numerous new tax withholding filings. We are now preparing to send another targeted mailing to our retirees to provide further updates, which will likely generate more calls. A rough estimate of the additional cost incurred, including the upcoming mailing, is around $20,000. This includes staff time, postage and miscellaneous items such as paper stock for the mailings, etc. Frankly, if we included compensation for the ‘pain and suffering’ of our retired members as they struggle to understand what this means to them, the cost would be significantly higher. It is not an overstatement to state that the confusion surrounding this issue had had a negative impact on our most vulnerable population.” The IRS claims that it is committed to helping address the confusion that their original decision has created. For example, the IRS says that they are “gearing up for a wider outreach campaign to educate pensioners and other taxpayers about the withholding tables and Recovery payments.” The IRS has also promised that it “will work with partner groups to provide taxpayers information to make sure they have the appropriate withholding for their situation,” and will also “work on developing a variety of information products, including brochures, video and audio material to help educate taxpayers.” NCTR will be contacting the IRS to learn more about these IRS efforts to determine if they can be useful to our member systems. Regardless how your plan decides to deal with this latest turn, there will likely still be problems next year at tax time. NCTR will be using this experience as an example with both Congress and the Treasury Department of how costly and unfortunate the IRS refusal to work closely with pension systems can be. It would therefore be very helpful, if you haven’t already done so, to provide us with your experiences with this program, particularly any cost figures that you may have developed. IRS Announcement on New Withholding Option for Pension Plans Financial Markets Reform: Public Plans Weigh in as Overall Process Continues to Evolve Both Congressional Democrats and the Obama Administration remain committed to major reform of the capital markets. However, the shape of that reform effort and its likely timetable are all very much in flux. In the meantime, the Securities and Exchange Commission (SEC) and the Congress are moving on a number of important market-related matters, including proxy access and credit rating agency reform. An ad hoc group of public pension plans has weighed in with a statement of principles concerning financial market reform that provides their view of what the framework for more effective regulation of the global financial markets should look like. The statement also cautions against placing restrictions on the investment options available to public plans. This same group has also expressed strong support for the SEC and its continued role as the primary advocate for investors, but the Obama Administration’s reported plans for a new “consumer protection” agency as part of market reform could present problems in this regard. Convinced that reform of the current regulatory structure of the financial markets must be accomplished in order to prevent another economic crisis from occurring, the House and Senate as well as the Obama Administration continue to work on the details of what could be a massive restructuring of the current system of Federal market controls. Promising sweeping reforms of the financial system, Treasury Secretary Timothy Geithner was recently quoted as saying that “We’re going to have to bring about a lot of changes to the basic framework of oversight, so there’s better enforcement,” and that this will “require simplifying, consolidating this enormously complicated, segmented structure.” Federal Reserve Board Chairman Ben Bernanke has also said that it is necessary to develop a strategy that regulates the financial system as a whole, “in a holistic way, not just its individual components.” While strong and effective regulation and supervision of banking institutions is necessary for reducing systemic risk, Bernanke believes that such reforms would not be sufficient by themselves. But the outlines of the overall reform effort continue to evolve. For example, much of the early discussion focused on the creation of a “systemic risk” regulator and the merging of several of the current regulatory agencies. Generally, by “systemic risk,” most commentators seem to be referring to the effects created by the inability of the current financial regulatory system to adequately oversee large and interconnected financial institutions; the fact that some of today’s financial activities and institutions are not subject to oversight and /or control by the current system’s financial regulators; and the impact of market innovations that have created new and complex financial products that the current regulatory system was simply not designed to regulate, such as credit default swaps (CDS). It was initially thought that the job of regulator of these systemic risks would best be entrusted to the Federal Reserve. However, based on what many saw as the Fed’s failure to adequately oversee the AIG bailout, Senate Banking Committee Chairman Christopher Dodd (D-CT) and House Financial Services Committee Chairman Barney Frank (D-MA) have both suggested that this may no longer be their view. Instead, there has been some discussion that the job should be given to a council or committee of existing regulators. For example, SEC Commissioner Luis Aguilar (D) recently outlined such a possible approach with an empowered, appropriately funded SEC as a key participant. As Commissioner Aguilar warned in an April 17th speech, "systemic risk" and its regulation must not be so centered on preserving the viability of institutions that are "too big to fail" that it produces a financial regulatory model “that focuses on institutions, not investors, and positions a government regulator to pick winners and losers among companies at the expense of investors and market certainty.” Aguilar argues that systemic risk regulation should instead “focus on ensuring the continuation of systemically important market functions, and on investor protections.” It must, he said, “pro-actively regulate” to prevent institutions from being too big to fail in the first place. “This regulation [of systemic risk] must do more than set prudential standards,” Aguilar believes. Another alternate that some are considering is a “hybrid” approach -- in which there would be a single regulator for systemically significant firms coupled with a systemic risk council to provide “macro-prudential oversight of risk.” This is a proposal that has been floated by Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair and recently received support from SEC Chairman Mary Shapiro. “Given the various components of effective financial regulation,” Ms. Shapiro recently told the Investment Company Institute (ICI), “I have long been concerned about excessive concentration of power -- which really means excessive concentration of point of view -- in a single regulator.” Chairman Shapiro said she envisioned a new system of financial regulation that would include (1) an entity responsible for the regulation of the markets for investment capital; (2) an entity (or entities) responsible for regulating banking institutions; (3) an entity responsible for monitoring and averting risks to the financial system as a whole, and (4) an entity responsible for resolution of troubled institutions. In her view, the SEC is the clear choice for the capital markets regulator. “Capital markets regulation is of a single piece,” she said. “Splitting it into smaller pieces, I strongly believe, would be a disaster.” Most recently, State financial regulators (the North American Securities Administrators Association, the Conference of State Bank Supervisors, and the National Association of Insurance Commissioners) joined the debate. They have put their support behind a systemic-risk council that would include all Federal and state banking, insurance and securities regulators, and urged that a single agency should not be made responsible for systemic risk. They believe that such a council's power should be limited to making recommendations to those regulators, and that the authority of existing functional regulators should remain intact. Nevertheless, as recently as May 8th, the Obama Administration underscored its support for a new systemic risk regulator, and continued to press its view that the job should be given to the Federal Reserve. Indeed, many think that the White House will send a proposal to Capitol Hill in June to do just that. But will it fly? Some think that “systemic-risk” authority will simply be divided up among the existing regulatory authorities, and that there will be no single agency in charge. Others believe that there will indeed be a new regulator – in all likelihood the Fed because it is felt that the systemic-risk regulator has to be able to control the ability to lend in on emergency basis to institutions that are in crisis. However, it may not be all-powerful. “I suspect we’ll end up with a systemic-risk regulator, but with lots of functional regulators who will try to figure out whose job it is to do what,” according to Annette Nazareth, a former SEC Commissioner. As for the “hybrid” idea suggested by Bair, Shapiro and others, the Obama Administration is reportedly not supportive of the concept of a council because of the difficulty of getting decisions made in such a setting. And what of the fate of the SEC? Its Chairman is certainly pressing to maintain and revitalize an independent SEC. Ms. Shapiro believes that there should be one agency of government “focused single-mindedly and without dilution on the well-being of America's investors,” and that the SEC has built expertise and a culture of investor protection that should be preserved and maintained. She says that “I will do whatever I can to make sure that the interests of investors are preserved in the debate on regulatory reform.” The possibility that the SEC -– or certain of its functions -- would be merged with other regulatory agencies was originally seen as a likely outcome of regulatory reform. However, more recently, this approach appeared to have been losing some steam, with Chairman Shapiro pursuing an aggressive agenda for the SEC, which she said “will be one of the most active rulemaking periods in the Commission's history.” But the most recent rumors are that the Obama Administrations’ latest market reform proposals, expected to be released shortly, will indeed propose stripping the SEC of some of its powers. Reportedly, the Fed may inherit some of them. Other functions would go to other bodies, including a new “consumer protection” agency, which would be charged with policing mortgages and other “consumer-oriented” financial products including mutual funds, which are currently the SEC’s responsibility. Such a move could seriously deplete the SEC’s staffing and other resources. However, the SEC has its supporters, and such an effort will be strongly contested. For example, in early May, an ad hoc group of public pension plans wrote in support of the SEC to both the House Financial Services Committee as well as the Senate Banking Committee. In their letter, the fourteen plans expressed their support for the new SEC Chairman, strongly urging that the SEC “must have the independence, robust regulatory authority, staffing, and budgetary resources necessary to effectively fulfill its unique mission of investor protection.” In response to the recent rumors that the SEC could be effectively abolished or seriously diminished in an Administration reform proposal, this ad hoc group immediately wrote to Secretary Geithner, asking him “in the most forceful terms possible” that the SEC not be diminished. “In the wake of recent market events, it is difficult to imagine a more compelling need for a strong, independent regulator with a proven record of expertise and experience to oversee and advocate the interests of investor protection,” the pension funds wrote in their May 21st letter. This ad hoc group had also previously developed a set of “Principles of Financial Regulation Reform” that are intended to serve as a framework for more effective regulation of global financial markets. Specifically, the group believes that the “Re-establishment of the SEC’s role as a voice and protector of investors is overdue and critical.” The group also stressed that “Regulatory changes need to recognize that investor protections must be tailored to the type of investor and type of investment product, rather than a ‘one-size-fits-all’ approach.” The key elements of the principles are: greater disclosure and transparency; true regulatory independence; an increased and effective shareowner voice in the capital markets; earlier identification by regulators of issues that give rise to overall market risk that threaten global markets; and the preservation of institutional investors’ freedom to invest in the full range of investment opportunities. The Council of Institutional Investors (CII) has also recently officially endorsed this set of principles. The ad hoc public sector investors group includes the California Public Employees’ Retirement System; the California State Teachers’ Retirement System; the Connecticut State Treasurer; the Colorado Public Employees’ Retirement Association; the Los Angeles City Employees’ Retirement System; the Los Angeles County Employees’ Retirement System; the Los Angeles Fire and Police Pensions; the Maryland State Treasurer; the New York State Common Retirement Fund; the Ohio Public Employees Retirement System; the State Universities Retirement System of Illinois; and the State of Wisconsin Investment Board. So there is much that is happening in Washington of great importance to institutional investors, including public pension plans. While reform of the capital markets is the primary focus on Capitol Hill, the SEC is moving aggressively to address a number of structural issues, including access to the proxy and credit rating agency reform, that could also have as important an impact on the shape of the markets, their regulation – and their participants. However, if the SEC is stripped of much of its authority as part of market reform, how effective an investor protection agency can it be? SEC Commissioner Luis Aguilar Speech on Market Reform Retirement Security Debate Heating Up While the economy and the financial markets have stolen much of
the spotlight in Washington, D.C., in recent days, and healthcare
reform promises to become an increasingly important focus as the
Senate prepares to advance a specific proposal, the problems with
retirement security are also beginning to draw growing attention.
For example, Congressman George Miller (D-CA), chairman of the
House Education and Labor Committee, continues to hold his series
of hearings on the problems with defined contribution (DC) plans,
which he says “have become little more than a high stakes
crap shoot.” As Miller explains, “We must … ask
the difficult questions about the state of our nation’s retirement
system as a whole and look to see whether we need to create a new
leg of retirement security.” According to a small but growing
number of voices, models built around the precepts of the defined
benefit plan could fulfill that role better than a “new and
improved” version of the DC approach. The Retirement USA principles are to be used as a framework for evaluating how well proposals would fulfill the goals of universal coverage, and secure and adequate income. The principals would include concepts such as: pooled assets that are professionally managed; shared responsibility among employers, employees and the government; payouts only at retirement; and benefits that could move with you even if you change jobs. Sounds like a DB model to me! The Retirement USA groups say that their initiative is not intended to diminish in any way ongoing efforts to preserve, strengthen, and improve current pensions, 401(k plans, and other retirement plans, and to expand retirement plan coverage, but to begin work on a new, more comprehensive system as an add-on to Social Security. Alicia Munnell with the prestigious Center for Retirement Research at Boston College, in a recent paper looking at the future of 401(k) plans, also wonders if the time may have come to consider returning 401(k) plans to their original position as a third tier on top of Social Security and employer-sponsored pensions. In the meantime, the Obama Administration is signaling its support for DC solutions. In the President’s 2010 budget blueprint, the Administration supported a proposal that would require employers sponsoring 401(k) or similar defined contribution plans to offer automatic enrollment, while a second proposal would require employers who do not already have their own retirement plans to enroll their employees in a direct-deposit IRA. However, the Administration has also indicated that it may have
serious problems with the current way in which the Federal government
subsidizes employer-based retirement. Noting that roughly half
the work force has no access to employer-based retirement plans,
Thomas E. Gavin, a spokesman for the Office of Management and Budget,
also stressed that “the existing incentives to save for retirement
are weak or non-existent for the majority of middle- and low-income
households.” Given that about two-thirds of the current tax
code subsidies for retirement security are for DC-type models,
perhaps the Administration might also be open to a DB-type approach? So the debate on the future look of retirement security is clearly underway, and while apparently outnumbered for now, DB supporters have some opportunities to make a difference. NIRS is an important resource for public plans in this debate. If you have ideas on how the defined benefit model can be used to provide real retirement security for all Americans, be sure to share them with NIRS. Retirement USA Principles New Public-Private Investment Initiative Announced; Feds Seeking Public Plan Particiption In late March, the Treasury Department formally announced its Public-Private Investment Programs (PPIP) in conjunction with the FDIC and the Federal Reserve Board. The goal of the overall effort is to buy troubled mortgage loans and mortgage-backed securities from banks using $75 billion to $100 billion in Troubled Asset Relief Program (TARP) funds. Under the new program’s Legacy Loans initiative, these TARP funds will be used to leverage private investor monies which will fund the purchase of $500 billion of troubled bank assets through public-private investment funds. A Legacy Securities program will build on the current Term Asset-Backed Securities Loan Facility (TALF). Pension funds in particular have been targeted for participation in the new programs. The PPIP’s purpose is to help “unfreeze” credit markets by moving at least some of the “legacy” troubled assets off the balance sheets of financial institutions so that they can start lending again. Instead of using TARP funds to make direct capital infusions into banking institutions, as was initially the case when the program was set up in 2008, the PPIP program is intended to utilize the TARP monies to help purchase troubled loans and mortgage-backed securities. The PPIP is intended to both leverage private sector dollars for this purpose, as well as help establish market prices for the effort through what the Treasury Department calls “Private Sector Price Discovery.” However, some believe that politically, of equal if not greater importance is the desire of the Obama Administration to have the overall Federal efforts in this area viewed more as responsible investments that governmental giveaways. So the political importance of having private investors such as pension funds involved to some degree in “risk-sharing” along with the taxpayer is an important image that the Administration wants to convey. Also, there is some concern that without such participation, this program will be viewed as simply another “bailout” – this time for hedge funds, who are likely participants and who have suffered during the current economic crisis The new program has two components: a “Legacy Loan Program” and a “Legacy Securities Program.” Both programs involve the purchase of assets by new Public-Private Investment Funds (PPIF) capitalized by equity contributed by the Treasury Department and private investors. These will be leveraged by direct government or FDIC-guaranteed debt financing. The Loan Program’s goal is the establishment of a market for troubled loans that continue to overwhelm banks’ balance sheets. The Securities Program is designed to initially address illiquidity in the secondary markets for certain mortgage-backed securities, but it could be expanded to include other asset classes. Under the Legacy Loan Program, banks will identify the assets they want to sell -- usually a pool of commercial and residential loans – and the FDIC will determine the amount of funding it is willing to guarantee; leverage will not exceed a 6-to-1 debt-to-equity ratio. Then these pools of assets will be auctioned off to the highest bidder, who will then create a PPIF. The winning bidder will contribute 50 percent of the required equity in excess of the guaranteed debt, with the Treasury contributing the remaining 50 percent of equity. Once the PPIF purchases the assets, the private fund managers will control and manage the assets until final liquidation, subject to FDIC oversight. The second program, the so-called “Legacy Securities Program,” actually has two parts: one provides debt financing from the Federal Reserve pursuant to the TALF. Under the TALF program, the Federal Reserve loans private investors most of the funds they need to purchase securities backed by loans of various kinds; previously, the program covered only highly creditworthy, new securitizations of loans to consumers and small businesses. This new program will now permit the TALF to be used in connection with much more “toxic” TARP assets, chiefly residential and commercial mortgage-backed securities. Under the second part of the Legacy Securities Program, private sector fund managers will submit proposals and will be pre-qualified to raise private capital to participate in this joint investment program with Treasury. These managers will form both a private investment fund and a PPIF (the “Legacy Securities Fund”). Investors will invest in the private investment fund, where they will be locked in for at least three years. This private fund will then invest along with the Treasury Department in the Legacy Securities Fund, with each providing 50 percent of the required equity. The Federal government will also consider an additional loan to the fund of up to 100 percent of the total equity raised from private investors and the Treasury. The Legacy Securities Funds will essentially pursue a long-term buy and hold strategy. Securities eligible for purchase will initially include only certain residential and commercial mortgage-backed securities that were originally rated AAA by two or more nationally recognized statistical ratings organizations. There is apparently interest in the new PPIP from public pension funds, and a number of State officials have reportedly already spoken with Treasury representatives about the details of participation. Some think that public plans, as long-term, patient investors, would be well-suited to accept the risk associated with these mortgage securities pools in return for the opportunity to make above-market gains. Girard Miller, a frequent commentator on public pension issues for Governing Magazine, believes that the new program could represent a “viable opportunity” for public pension funds “to tip-toe into the mortgage market for long-term investment returns.” Furthermore, he also notes that there would be political benefits to such a move, calling it a good opportunity “for state and local pension fund participation in the cure of our nation's economic malaise.” Whether the program will be seen as a golden investment opportunity for plans and a boost to the nation’s economic recovery effort, or (as characterized in at least one major news media release) a case of public pension funds becoming entangled with “toxic bank assets” will be a judgment call that each fund will have to make on its own. However, it appears that there is sufficient interest in the concept among some public plans that "people are going to try to work on options on how to potentially pursue it," as one public fund official has been quoted (anonymously) as saying. Treasury Fact Sheet on Public Private Partnership Investment Program Healthcare Reform Advances; Mandatory Medicare for Public Employees Rears it's Head, as Does Taxation of Employer-Provided Healthcare Congress has begun to take the first steps in the actual consideration of healthcare reform legislation, but the idea of creating a new government-run health plan in order to expand coverage continues to be a major sticking point. Of course, there is also the overarching issue of how to pay for the massive reform effort, and one possibility that has recently been included in a list of possible revenue-raising options developed for the Senate Finance Committee is to extend the Medicare payroll tax to all State and local government employees. Means testing of the Medicare Part D prescription drug benefit has also been put on the table. Finally, an idea that initially seemed to be off the table may be back on: taxing some employer-provided healthcare benefits. At the end of April, the Senate Finance Committee
began the arduous task of drafting healthcare reform legislation,
focusing on Medicare
and revisions of its payment system. Finance Committee Chairman
Max Baucus (D-MT) and Ranking GOP Member Charles Grassley (R-IA)
based the discussion on a set of proposals they released that are
aimed at improving the quality of patient care and reducing healthcare
costs. There appears to be a good deal of consensus on the direction in which the quality of care options lead, according to both Baucus, who said that there was “near unanimity on the goals we’re reaching for,” and Grassley, who observed that he “did not find a lot of dissension” when they were discussed in the full Committee. However, these discussions have been closed to the public, so it is difficult to judge the true depth of any real consensus. Furthermore, all is apparently not “sweetness and light” when the focus turns to coverage. For example, the Committee’s options to expand coverage included three alternatives for a public health insurance option. One is a Medicare-like option that would be administered by HHS, with the Federal government setting payment rates. Another alternative is a public health insurance option that would be administered through multiple, regional, third-party administrators, which would establish networks of participating medical providers and would negotiate payments for providers participating in this option. The third alternative would be a state-run public health insurance option. The policy paper also presents the option of not creating a public health insurance option, but expanding coverage through a reformed and better regulated private market. When Senator Baucus signaled that, in an effort to obtain bipartisan support for a reform proposal, he might not push for such a public insurance option in any final plan, he was immediately assailed by sixteen Senate Democrats urging him to change his views. Their letter, which was also sent to Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Ted Kennedy(D-MA), outlined the need for a public health insurance plan option to be included as a way of keeping HMO costs in-line and ensuring health insurance access in all parts of the country. Pressing for a public plan option as “a core component” of healthcare reform, they argued that “There is no reason to believe that private insurers alone will meet the public purpose of ensuring coverage for all Americans at an affordable price for taxpayers.” However, Republicans are adamantly opposed to the public plan option in any form, and the business community also has serious problems with it. For example, the steering committee of the National Coalition on Benefits – which includes the Business Roundtable, the National Association of Manufacturers and the U.S. Chamber of Commerce, among others -- has expressed “grave reservations.” In a letter to President Obama and House Ways and Means Committee Chairman Charles Rangel (D-NY), the business leaders said that “A public plan, particularly combined with the impact of Medicare, Medicaid and other public plans, cannot operate on a level playing field and compete fairly if it acts as both a payer and a regulator.” They stressed their belief that “The public plan’s unfair competitive position, both by its size and regulatory authority, will merely shift costs to the private sector and employees covered by private plans.” Even some Democrats reportedly raised concerns when the Senate Finance Committee met in another closed-door session to discuss the coverage options. Indeed, Senator Grassley has been reported as saying that there was "an awful lot of conflict" when the issue was discussed. So where is the Obama Administration in all of this heated discussion? In general, the President has indicated his desire to set broad policy goals for healthcare reform and let the Congress hammer out the details. For example, when he released his 10-year budget plan earlier this year, he included the creation of a reserve fund to be used in connection with healthcare reform, but provided no details of how the coverage is to be provided. However, he cannot avoid some of the more critical aspects of the debate. In fact, the President has said that a public plan provided by the Federal government would help guarantee access to health insurance for all Americans, and during the Presidential campaign, Mr. Obama indicated that he thought such a public plan could be modeled on Medicare. But, with reports that such an approach appears to be off the table, the White House is reportedly indicating that it could perhaps live with the two other options that seem to still be viable: a public insurance plan run by multiple regional third-party administrators; or insurance plans created by the States, which could permit the general public to purchase policies through the plans available to State employees. In any case, the pressure is on from many Congressional Democrats on both sides of the Hill for the President to hold firm for expanding the government’s role in providing health coverage. But Mr. Obama is playing his cards close to his vest, and has not yet made a final commitment to a public plan. Then there is the issue of the cost of healthcare reform – and how to pay for it. A threshold question is just how much that cost will be, with some saying that it could top $1 trillion. In any case, according to this year’s Congressional budget, any healthcare legislation bill must pay for itself over an 11-year period, and President Obama agrees with this goal. Of course, the manner of paying for this expense promises to also be a very tricky topic for discussion. The third set of policy options developed by the Senate Finance Committee deals with this subject, and was just released in mid-May. As with their coverage options, this latest package of financing proposals promises to also produce a vigorous debate. Of chief interest to many State and local governments is a proposal included in this set of options that would extend Medicare coverage on a mandatory basis to all employees of State and local governments, without regard to their dates of hire or participation in a retirement system. Currently, State and local government employees hired (or rehired) after March 31, 1986, are subject to mandatory Medicare coverage. Employees who were hired before April 1, 1986, and who have been in continuous employment with the employer since March 3l, 1986, who are not covered under a Section 218 Agreement nor subject to the mandatory Social Security and Medicare provisions, remain exempt from both Social Security and Medicare taxes, provided they are members of a public retirement system. Under the “Mandatory Medicare” revenue option, such employees and their employers would become liable for the hospital insurance (Medicare ) tax; the rate is 1.45 percent for the employee and 1.45 percent for the employer, and the amount of wages subject to Medicare taxes is not capped. Employees would earn credit toward Medicare eligibility based on their covered earnings. When the Congressional Budget Office (CBO) looked at this kind of proposal in 2007, it determined that such an option would increase revenues by only $0.6 billion in 2008 and by a total of $2.7 billion over the 2008–2012 period. However, CBO also noted that the annual gain in revenues from that change would decline over time as employees who were hired before April 1986 gradually retired or otherwise left the payrolls of State and local governments. So the real argument for such a change is not really revenue-related. Rather, it deals with what proponents assert is fairness. Specifically, they argue that even though only about 10 percent of State or local workers do not currently pay the Medicare tax through their employers, nevertheless most of them will receive Medicare benefits under current law because they either previously had other, Medicare-covered jobs, or they will be covered through their spouse's employment. Thus, the argument goes, these workers unfairly receive high levels of benefits in relation to the payroll taxes they paid. Another funding option that has resurfaced recently is the taxation of certain healthcare benefits. This idea was floated by President Bush in January of 2007, when he proposed to “treat health insurance more like home ownership” by giving people tax deductions for their health insurance similar to those for home mortgage interest. His proposed deductions were to be used by people who didn’t have employer-provided coverage. The deductions would have been paid for by taxing people on that part of their employer-provided health insurance that exceeded the dollar amounts of the deductions. The idea went nowhere, and when the general concept
was resurrected during the last Presidential campaign by Senator
John McCain (R-AZ),
it ran into a buzz saw of opposition, including from then-candidate
Obama, who characterized it as “the largest middle-class
tax increase in history.” Also, unions have long considered
such employer-provided benefits among their most outstanding accomplishments,
and many Members of Congress are adamantly opposed to the idea
of changing the current structure. For example, Congressman Pete
Stark (D-CA), Chairman of the House Ways and Means Committee’s
Subcommittee on Health, has reportedly called it “a dumb
idea,” saying that it is important “to maintain as
much as we can of the employer payments.” Even the U.S. Chamber
of Commerce opposes totally doing away with the exclusion for employer-provided
health benefits (but may not oppose placing limits on it). One cause for their concern is that the President’s suggestion would only raise an estimated $318 billion over 10 years, compared to the potential for trillions of dollars that could be raised from adjustments to the tax treatment of employer-provided health benefits. For example, CBO says that including health benefits in taxable income could produce as much as $246 billion in additional Federal revenue in just one year. Another factor in this discussion (one that could have major
ramifications down the road for the current tax treatment of employer-provided
pension benefits) is the level of subsidies and incentives related
to healthcare in the Federal tax code and whether they are producing
the most “bang for the buck.” The so-called “tax
expenditure” (i.e. the amount of money that the Federal government
foregoes in tax collections in order to subsidize a certain behavior)
that results from the exclusion of employer-sponsored health care
from income ($132.7 billion for calendar year 2008), when added
to the other healthcare subsidies in the Internal Revenue Code,
such as the exclusion of Medicare benefits from income, totaled
a whopping $194.2 billion in the last calendar year. First, as far as mandatory Medicare coverage for State and local governments is concerned, this may be a very hard sell. As previously noted, the revenues associated with the proposal are not large when you are looking at potentially a $1 trillion hole to fill, and they will begin to decline rather rapidly as the fixed group of potential new Medicare taxpayers increasingly begin to retire. Also, as the CBO points out, extending the tax to more employees would eventually increase the number of Medicare beneficiaries and could increase the Federal government's obligation for future Medicare benefits. But perhaps the most compelling reason at this juncture not to extend coverage is the fiscal impact that this tax increase would have on the already precarious finances of those State and local governments with large numbers of workers who are not currently covered by Medicare. It is reported that Senators from affected States, such as Senator John Kerry (D-MA), are already working to keep the option off the table. As for a means test for Medicare Part D, this one could fly. First, it was an idea that John McCain and his GOP colleagues endorsed in last year’s Presidential campaign. Next, even though he voted against such a means test proposal in 2007 as a Senator, now President Obama has included the idea as part of his FY 2010 budget proposal. Even Senator Baucus, who also voted no along with Obama in 2007, has now said that times have changed. There is a growing consensus among Democrats that health-care costs must be contained, and that coverage must be expanded to everyone, he says. "In the past, we've dealt with Part D on its own, and that tends to be polarizing,” Baucus is quoted as saying. “So the thought here is, that's much less likely if people think we're all in this together," Baucus said. Finally, as for the possibility of some level of taxation of employer-provided
healthcare benefits, this also appears to be an idea that is increasingly
being given serious consideration. It could raise a very significant
amount of money and could therefore well be part of some “grand
compromise” on healthcare reform. Even President Obama may
be changing his views on the subject. For example, Peter Orszag,
the President’s Director of the Office of Management and
Budget (OMB), has testified before Congress that it is an idea
that “most firmly should remain on the table.” Also,
Treasury Secretary Timothy Geithner has said in Congressional testimony
that the administration was open to all ideas as to funding healthcare
reform. Finance Committee Policy Options on Quality of Care SEC Proposes New Proxy Access Rule In a move that institutional investors view as long overdue, the
Securities and Exchange Commission (SEC) has approved for public
comment a proposal that should finally provide meaningful proxy
access. Under the proposal, shareowners holding (for at least one
year) 1 percent of the shares of companies with market values exceeding
$700 million would be able to have their nominees included on such
a company’s proxy ballot. The smaller the company, the more
shares that would have to be owned before such access would be
provided. The SEC also proposed changes to its so-called “election
exclusion” rule that would generally no longer allow a company
to exclude shareowner proposals to amend the company's bylaws dealing
with the nomination of directors from the company’s proxy
materials. The Business Roundtable called the SEC’s action “an
unprecedented preemption of state corporate law,” and the
U.S. Chamber of Commerce was threatening a lawsuit even before
the SEC acted. But Senator Chuck Schumer (D-NY) has also introduced
legislation that, among other things, would confirm the SEC’s
authority in this area. Now, with Democrats in control of a majority of
the 5-member Commission, the SEC has proposed a new Exchange Act
Rule 14a-11. Under this
new Rule, shareholders would be eligible to have their nominee
included in the proxy materials of a "large accelerated filer" --
a company with a worldwide market value of $700 million or more
-- or of a registered investment company with net assets of $700
million or more if the shareholders own at least 1 percent of the
voting securities. “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. SEC Continues to Look at Credit Rating Agency Reform, CII Issues White Paper New Administration Appointments of Interest to Public Plans HELPS II Reintroduced; Would Expand $3,000 Public Safety Healthcare Benefit to All Public Employees Society of Actuaries Public Pension Finance
Symposium Produces Wealth of Information on MVL NCTR, NASRA, Other Public Sector Groups File Comments on IRS Pilot Public Plan Questionnaire, Survey Process NCTR, NASRA and twelve other national organizations representing
public employers and employees filed a joint comment letter in
response to the IRS’ request for comments regarding its pilot
questionnaire for governmental plans. The letter contains many
of the same concerns that NCTR had expressed to the IRS during
the development of the Questionnaire, and focuses on three specific
areas: (1) the purpose for which the information will be used;
(2) the scope of the information being requested; and (3) the methodology
by which the information is being collected. Public Sector Comment Letter on IRS Pilot Governmental Plans Survey SEC Continues to Look at Credit Rating Agency Reform; CII Issues White Paper The Securities and Exchange Commission (SEC) is taking additional
steps to address credit agency problems. For example, a roundtable
was held at the SEC on April 15, 2009, to further explore needed
reforms. Gregory Smith, general counsel of the Colorado Public
Employees’ Retirement Association, appeared on a panel offering
user perspectives, and discussed what have been identified by CII
as two key areas for immediate further action: oversight and accountability. SEC Wants Greater Control of Muni Bond Market While Municipalities Want the Feds to Help Fund a New Municipal Bond Insurance Company An SEC official has reportedly announced that the Commission is
thinking about obtaining greater authority over the municipal bond
market. According to the National Association of State Auditors,
Comptrollers and Treasurers (NASACT), Mary N. Simpkins, the senior
special counsel of the Securities and Exchange Commission’s
Office of Municipal Securities, told the Council of Infrastructure
Financing Authorities Federal Policy Conference recently that the
SEC will be “aggressively” looking to improve the operations
of the municipal market. At the end of April, the House Financial Services Committee approved
the Iran Sanctions Enabling Act, H.R. 1327. The legislation, which
is thus cleared for consideration by the full House, is intended
to support the decision of State and local governments and educational
institutions to divest from, and to prohibit the investment of
assets they control in, persons that : (1) have investments of
more than $20 million in Iran's energy sector; (2) provide Iran
with tankers for oil or liquefied natural gas or with products
for oil or liquefied natural gas pipelines; or (3) extend at least
$20 million in credit to be used in Iran’s energy sector. New Administration Appointments of Interest to Public Plans Phyllis C. Borzi has been nominated to be the Assistant Secretary
of Labor for Employee Benefits Security. Ms. Borzi’s appointment
is significant to public plans not because the Department of Labor
has jurisdiction over governmental systems – at least for
now -- but because she will be an important voice within the Obama
Administration on retirement security reform. GPO/WEP Repeal Introduced, While Obama Administration Wants to Require States to Help with Collection Data Congressman Howard Berman (D-CA) has once again introduced legislation
to repeal the Government Pension Offset (GPO) and the Windfall
Elimination Provision (WEP). His legislation, H.R. 235, already
has 282 cosponsors as of May 22, 2009; a Senate companion measure,
S. 484, has also been reintroduced by Senator Dianne Feinstein
(D-CA), and it currently has 27 cosponsors. However, even though
the same legislation was eventually cosponsored by 352 House Members
in the last Congress, it did not receive consideration by the full
House. HELPS II Reintroduced; Would Expand $3,000 Public Safety Healthcare Benefit to all Public Employees As anticipated, Congressman Joe Crowley (D-NY) has reintroduced
his proposal to extend the so-called “HELPS I” $3,000
healthcare benefit contained in the Pension Protection Act of 2006
(PPA) to all public employees. The legislation, H.R. 1413, would
extend eligibility for the benefit, currently limited to retired
public safety officers only; (2) provide for a tax deduction of
such distributions rather than an exclusion from gross income;
(3) allow nonitemizing taxpayers to claim such tax deduction; and
(4) allow an annual inflation adjustment to the $3,000 limit beginning
after 2009. The bill currently has two cosponsors. It has been
referred to the House Ways and Means Committee where no hearings
have yet been held or scheduled. SEC Considers New "Pay-To-Play" Rules in Response to NY Placement Agent Controversy; NY AG Cuomo's Pension Code of Conduct is Talked About as Possible Federal Standard In late April, the Securities and Exchange Commission (SEC) announced
that it is considering adopting rules to restrict money managers
from making payments in order to obtain state business, often referred
to as “pay-to-play.” This announcement was made in
connection with the ongoing investigations involving private-equity
firms and hedge funds allegedly making illegal payments to placement
agents in order to win business with New York public pension funds.
Specifically, SEC Chairman Mary Shapiro said that her agency is
re-examining a 1999 proposal that would have barred investment
advisers from managing state pension funds if they donated to elected
officials involved in awarding adviser contracts. CalPERS Policy on Disclosure of Placement Agent fees Society of Actuaries Public Pension Finance Symposium Produces Wealth of Information on MVL The Society of Actuaries (SOA) issued a call for papers in 2008
seeking a wide variety of perspectives on the measurement of public
pension plan liabilities and related issues. More than 20 papers
were submitted, and the SOA held a Public Pension Finance Symposium
in Chicago May 18-19, 2009, to hear these papers presented. Topics
included the application of financial economics to public pensions;
the use of traditional actuarial methods; alternative methods to
measure risk in public pensions; risk profiles of public pension
plans; and intergenerational equity issues within public pensions.
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