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2010 Federal E-News
January/February 2010
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.
Healthcare Reform: On Life Support, or Terminal?
As they had hoped, the Senate leadership was able to pass a comprehensive healthcare reform package just before the 2009 Christmas holidays. In subsequent negotiations with the House, a deal had been cut that retained the Senate bill’s controversial excise tax on so-called “Cadillac” health plans, but reflected public sector union concerns with the provision’s potential impact by providing governmental healthcare insurers a delayed effective date. However, attempts to fashion a final compromise between the Senate version of the massive legislation and the House-passed measure did not move quickly enough, and time appeared to run out for President Obama and Congressional Democrats when Scott Brown won the race for Ted Kennedy’s Massachusetts Senate seat on January 19, 2010, thus denying Democrats the 60th vote needed to avoid a GOP Senate filibuster. Democrats are still trying to come up with a “Plan B,” and President Obama has even released his own specific proposal – something he refused to do last year. The President has also called for a televised bipartisan Congressional summit to try to fashion a compromise, but hopes are not high that he will succeed. Should these efforts to obtain a bipartisan agreement fail, it is unclear if “Plan C” will involve passing the bill with a simple Senate majority using special “budget reconciliation” rules, or if the historic effort will have finally taken its last breath.
The Senate measure, which was approved on Christmas Eve, garnered no Republican support. Accordingly, to obtain the 60 votes necessary to avoid a GOP filibuster, several significant deals were made with wavering Democrats and Independents. Perhaps the most significant, and the most anticipated, was the decision to finally abandon the so-called “public option” contained in the House-passed bill and strongly supported by many Democratic liberals.
Briefly, the House bill would create a new marketplace called the national “Health Insurance Exchange,” with an option for States that agree to meet Federal standards to run their own exchange, through which certain individuals and families could receive Federal subsidies to substantially reduce the cost of purchasing coverage as long as they were not enrolled in employer sponsored insurance, Medicare or Medicaid. Within this exchange, a public health insurance option would be made available, administered by the Federal government through the Health and Human Services (HHS) Secretary, who would negotiate rates for providers that participate in the public option.
However, while the Senate bill also includes a health insurance exchange approach, it would not create a national exchange, but instead would require each state to establish its own. And instead of a public option, the Senate bill would require the Federal Office of Personnel Management (OPM) to contract with health insurers to offer at least two multi-state qualified health plans (at least one being non-profit) through the State exchanges. Such plans would have to comply with the minimum standards and requirements of the Federal Employees Health Benefits Program (FEHBP).
As expected, the Senate-passed bill also included a 40 percent excise tax on the cost of employer-sponsored health plans above certain dollar thresholds (the so-called “Cadillac” plans), beginning in 2013, to be paid by the health insurance issuer, the employer, or the plan administrator, depending upon the circumstances. Health plans covering State and local governments would NOT be exempt from this tax. For single coverage, the threshold would be $8.500, and for family coverage, it would be $23,000. These thresholds would be increased to $9,850 and $26,000, respectively, for retired individuals over the age of 55 and individuals engaged in high-risk professions, including public safety, as well as longshore workers, or workers employed to repair or install electrical or telecommunications lines. The thresholds would also be indexed for inflation by the Consumer Price Index for All Urban Consumers (CPI-U) plus one percent.
The cost of employer-sponsored coverage subject to the tax would include medical, dental, vision, or any other health coverage, including benefits provided through a Health Flexible Spending Arrangement (FSA), Health Reimbursement Arrangement (HRA), or Health Savings Account (HSA). However, disability, long-term care, and accident insurance or workers' compensation insurance, would not be counted. Generally, the premium costs/contributions paid by both the employee and the employer would count toward the cost of coverage (but not deductibles, coinsurance, or copayments).
While the House bill contained no comparable excise tax – choosing instead to help pay for healthcare reform with an income tax surcharge on household income exceeding $1,000,000 – it appeared that the excise tax would be retained in any final House-Senate deal, given the adamant opposition to the House approach by many Senators, including some Democrats, and the need to keep the Senate’s shaky 60-vote super-majority intact for final passage of any final compromise.
However, the Senate excise tax has been vigorously opposed by many, including organized labor groups and many House Democrats. In response, a deal was reportedly struck in mid-January in negotiations with the White House and Congressional leaders that would have increased the thresholds to $8,900 for individuals and $24,000 for families, and would also have provided adjustments for age and gender differences. Most importantly, a 5-year transition period would have been created, delaying the application of the tax to collectively bargained plans as well as State and local governments for five years.
Compromises on other differences between the House and Senate bills were also nearing completion when Scott Brown’s election to the U.S. Senate in Massachusetts on January 19th brought healthcare reform to a complete standstill in Washington, DC. President Obama and the Congressional Democratic leadership have been left struggling to find some way to jump-start the process and salvage as much as they can of their reform efforts. Several options were initially discussed.
One possibility would be to have the House simply agree to the Senate-passed bill. Under this approach, the bill would not require any further action by the Senate, and could be sent to the President immediately for his signature. But House Speaker Nancy Pelosi (D-CA) admitted early on that she did not have the votes for such an option, particularly given that this would mean that the changes to the Senate’s excise tax that had been hammered out earlier in January would not be retained, requiring that any such “fixes” would have to be provided in subsequent legislation.
Another option would be to take up healthcare reform under the budget reconciliation process, which cannot be filibustered and would only require 51 votes in the Senate to advance. In this way, the deal that was being brokered between the House and Senate prior to Senator Brown’s election could be retained. But this approach would abandon all hopes of even the appearance of a bipartisan effort, and has not been warmly received in the Senate in particular, where the implications of Brown’s election are still being studied in minute political detail. There are also technical questions involving just what can be done in the name of budget reconciliation, which is limited to provisions that affect the budget, and may not therefore be appropriate for use in dealing with such things as insurance exchanges.
A third possibility would be to effectively start over with a scaled-back approach that attempted to focus on non-controversial elements that had bipartisan support. However, in Washington these days, nothing about healthcare seems noncontroversial anymore, and bipartisanship appears to be about as scarce a commodity as hens’ teeth.
Now, however, President Obama has decided to try one last time to obtain comprehensive healthcare reform. In advance of his February 25th televised “summit” with Congressional Republicans and Democrats, the President has released a new proposal. Rather than a scaled-back version of reform, his new program is a blend of the House and Senate versions that have already passed, using the Senate bill as the basic framework, with some important exceptions and additions.
Some key provisions of the President’s new plan are as follows:
The health insurance exchange approach in the Senate-passed bill would be retained: no single Federal exchange, but exchanges in every State, with regional exchanges permitted, and with no public option.
The Senate’s 40% excise tax on “Cadillac” plans would also be kept, but with some major modifications: the thresholds would be increased to $10,200 for singles and $27,500 for families, with even higher thresholds for high-risk professions; dental and vision benefits would not be included; the effective date would be postponed an additional 5 years (until 2018) for everyone, not just unions and State and local governments; and adjustments to reflect geographic differences would be permanent. However, the CPI-U plus one adjustment would be retained, not the healthcare CPI.
To help offset lost revenue from the changes to the excise tax, the Medicare Hospital Insurance (HI) tax would be increased by .9 percent to a total of 2.35 percent for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly. In addition, these households would also have to pay a 2.9 percent HI tax on income from interest, dividends, annuities, royalties, and rents (currently the HI tax only applies to earned income).
The individual mandate to obtain health insurance would remain. Following the Senate approach, the President’s proposal would impose a penalty in the form of a flat dollar amount or percentage of income, whichever is higher. In addition, the President would lower these flat dollar amounts from $495 to $325 in 2015 and $750 to $695 in 2016. However, Obama would raise the Senate’s percent of income that is an alternative payment amount to the levels used in the House-passed bill, making the assessment more progressive. There would still be a hardship exemption, and individuals with income below the tax filing threshold would also be exempt.
There would not be an employer mandate, as in the House-passed bill, but instead the President would follow the Senate’s so-called “Free Rider” approach, which imposes a penalty on employers with 50 or more employees who don’t provide health coverage when their employees take advantage of Federally-subsidized insurance. However, in a further nod to small businesses, the President would decrease the Senate’s penalties.
A new “Health Insurance Rate Authority” would provide Federal assistance and oversight to States in conducting reviews of unreasonable rate increases and other unfair practices of insurance plans.
The Medicare Part D "doughnut hole" would be closed, and not just reduced, as in the original Senate bill. The Obama approach would provide a $250 rebate to Medicare beneficiaries who hit the doughnut hole in 2010, and would phase in a reduction in coinsurance so it is the standard 25% by 2020 throughout the doughnut hole’s coverage gap.
Other provisions that were essentially the same in both House and Senate bills would be kept, such as a limitation of $2,500 per year for health flexible spending arrangements (FSAs); a temporary reinsurance program to reimburse employers who sponsor retiree health care for a portion of the claims for pre-Medicare retirees between 55-64, reimbursing plans for 80% of the claims for a covered individual between $15,000 and $90,000; and a provision that would tax the Medicare Part D Retiree Drug Subsidy.
So where does it go from here? Unless there is a major breakthrough at the President’s healthcare summit with Congress on February 25th, and a bipartisan agreement on the shape of – and timetable for – healthcare reform can be reached, what are possible next steps?
Clearly, by the size and scope of his proposal, President Obama has apparently abandoned the scaled-back, just-the-essentials option to achieving healthcare reform, and has decided instead to pursue, one last time, what some might view as an all-or-nothing tack. The political pundits have been swift to conclude that the White House has decided that the President and his fellow Democrats will suffer more in the upcoming mid-term elections this November if they fail to try to achieve major reform than if they simply abandon the effort as too difficult and politically costly.
Republicans, in turn, worry that they are being set up. They fear that the televised meeting is all about political theater, potentially providing the President with cover to do what he and the Congressional Democratic leadership have decided to do anyway, which is to try to pass healthcare reform using the budget reconciliation process, with a failed “bipartisan” summit providing them with all the justification they need.
Some Democrats also worry that this is the plan, and that voters will punish them for abandoning efforts to work together with the GOP, and for resorting instead to legislative gimmickry to force the will of a tyrannical majority on a reluctant minority. Will the President’s high-profile, high-wire show reassure his Democratic colleagues? Will Republicans feel that they can continue to “fight the good fight” and let major health insurance reforms -- with which many of them agree -- pass without their support?
This last year has been a true roller coaster of a ride when it comes to healthcare reform. One way or the other, win or lose, the end may finally be in sight.
Section-by-Section Summary of Senate Passed Bill
New Obama Healthcare Reform Proposal
Financial Markets Reform: An Idea Whose Moment Has Finally Come...and Gone?
Last December, the House of Representatives approved massive legislation to overhaul the nation’s financial regulatory structure. The bill would create several new agencies, including a Consumer Financial Protection Agency, and is intended to improve transparency and oversight of financial firms, as well as provide investors with improved corporate governance tools. Action has now shifted to the Senate, where, despite months of effort, the success of an attempt at a bipartisan proposal appears tenuous at best, and business opposition to expanding corporate governance features has intensified. Nevertheless, action by the Senate Banking Committee appears imminent. While efforts to restrict pension plan investment options surfaced briefly in the House, they went nowhere, and there are no signs of any similar plans in the Senate – at least not yet. The real question is whether there will be the time – and the political desire – to take on a bruising, partisan debate in this area following the challenges presented by healthcare reform. In other words, will this turn out to have been the “waste of a perfectly good crisis,” as some wags have complained, when it comes to making real changes in the existing structure of financial markets and their oversight?
The “Wall Street Reform and Consumer Protection Act of 2009,” H.R.4173, passed the House on December 11, 2009. The measure is actually a combination of several separate acts, and would do a number of things, including:
Create a “Financial Stability Council,” composed of existing regulators, whose job it will be to identify financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk, and to subject such “systemically risky” firms to increased oversight, standards, and regulation by the Federal Reserve, which will serve as the agent of the Council in regulating such firms on a consolidated basis; the Office of the Comptroller and the Office of Thrift Supervision would be merged.
Establish an orderly process for shutting down large, failing financial institutions (like AIG or Lehman Brothers) in place of taxpayer bailouts; if financial assistance is necessary for their dissolution, the industry will pay for it through a Systemic Dissolution Fund, which will be pre-funded by assessments on financial companies with more than $50 billion in assets and by hedge funds with more than $10 billion in assets.
Create the Consumer Financial Protection Agency (CFPA), a new, independent Federal agency whose sole purpose would be to protect consumers from unfair and abusive financial products and services; while the new CFPA will write rules under existing consumer finance laws and will cover all financial providers, including banks, thrifts, credit unions and non-bank financial institutions, such as subprime mortgage companies, pension plans are explicitly exempt from this agency’s regulatory authority.
Provide shareholders with a so-called “say on pay” advisory vote on corporate pay practices including executive compensation and golden parachutes, and require that compensation committees at public companies include only independent directors; financial firms would also be required to disclose incentive-based compensation structures, and regulators would be authorized to ban inappropriate or imprudently risky compensation practices.
Strengthen the SEC’s powers, including an explicit reaffirmation of its authority to set rules expanding the ability of shareholders to place director nominations on corporate proxy ballots, and double the agency’s budget over five years.
Regulate derivatives by requiring that all standardized swap transactions between dealers and “major swap participants” would have to be cleared and traded on an exchange or electronic platform; a major swap participant is anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring.
Require almost all advisers to private pools of capital, including hedge funds, to register with the SEC, and be subject to systemic risk regulation.
Allow Congress to audit the Federal Reserve’s activities, including the raising and lowering of interest rates.
Reform credit rating agencies by imposing a liability standard on the agencies and attempting to reduce conflicts of interest and market reliance on the ratings.
The omnibus measure passed by a vote of 223 to 202 – hardly an overwhelming margin. It failed to obtain a single Republican vote in support, and 27 Democrats voted against it. Objections were raised with the legislation’s expansion of government power, and concerns that it would slow economic growth and inhibit jobs creation were also noted. A major issue for many was the creation of the CFPA.
The addition of explicit language in the House bill affirming the SEC’s authority in the area of proxy access reforms was a major victory for a number of large public pension plans. The amendment language was offered by Congresswoman Maxine Waters (D-CA) during the Financial Services Committee’s consideration of the reform legislation, and generated a firestorm of opposition from the U.S. Chamber of Commerce.
However, strong support from an ad hoc coalition of public plans, among others, was successful in keeping the Waters amendment in the final House-passed bill. The ad hoc coalition included the California State Teachers’ Retirement System (CalSTRS); California Public Employees’ Retirement System (CalPERS); Washington State Investment Board; Colorado Public Employees’ Retirement Association; State of Wisconsin Investment Board, Oregon Public Employees’ Retirement Fund; Ohio Public Employees’ Retirement System; Los Angeles Fire and Police Pensions; Los Angeles County Employees’ Retirement Association; New York State Common Retirement Fund; Connecticut Retirement Plans and Trust Fund; North Carolina Retirement Systems; Pennsylvania Public School Employees’ Retirement System; and Pennsylvania State Employees’ Retirement System.
As the bill was finally moving to the House floor, an effort was made in the House Rules Committee to permit an amendment to be in order, to be offered by Congressman Stephen Lynch (D-MA), that would have provided that “no public entity (including a local government entity, State, or public pension fund) may enter into a swap or security-based swap.” The amendment was apparently seen by some as an effort to strengthen a provision in the bill that permits governments to be eligible contract participants whose derivative transactions would not have to be exchange-traded but only if they have $50 million dollars or more of discretionary investments or their counterparty is a broker-dealer or bank.
The amendment was not made in order, and follow-up with Lynch’s staff did not provide any insight as to why the Congressman wanted to offer the amendment. Nevertheless, it is an example of the ways in which public plans’ investment authority and flexibility could be affected by the massive reform legislation.
The House-passed bill has been generally well-received by reform advocates. The Council of Institutional Investors (CII) praised the bill for its corporate governance provisions, and its measures that would enhance the oversight and accountability of credit rating agencies and bolster the resources of the SEC. However, CII believes that the act’s provisions to regulate over-the-counter derivatives trading, “while an improvement, need to be strengthened.”
The focus of financial markets reform efforts has now shifted to the Senate, where the Senate Banking Committee is reportedly about to formally consider its own reform package. Last November, Senator Chris Dodd (D-CT), the Committee’s Chairman, released his outline for reform, which was similar in many ways to the House measure. For example, both would create a Consumer Financial Protection Agency (CFPA) and both would address the process of preventing excessively large or complex financial companies from bringing down the economy, including requiring the industry to provide their own capital injections.
However, there were some notable differences. For example, Dodd proposed a new, independent Agency for Financial Stability with its own board of regulators to identify and address systemic risks, as compared to the House approach, would set up a council of existing regulators, essentially run by the Federal Reserve, to take on this task.
Another difference is the Dodd approach’s establishment of a single Federal bank regulator, combining the functions of the Office of the Comptroller of the Currency and the Office of Thrift Savings, the state bank supervisory functions of the Federal Deposit Insurance Corporation and the Federal Reserve, and the bank holding company supervision authority from the Federal Reserve. It would be headed by an independent chairman appointed by the President and confirmed by the Senate, a Vice Chairman experienced in state banking regulation, and a board including the chairmen of the FDIC and the Federal Reserve and two other independent members.
The Dodd bill also includes important corporate governance reforms, in some cases exceeding those in the House-passed bill. For example, rather than simply reaffirming the SEC’s authority to provide shareowner access to the corporate proxy, the Dodd bill would specifically require the SEC to issue rules permitting the use by shareholders of company proxy solicitation materials for the purpose of nominating board candidates.
The Dodd bill provides for enhanced regulation of credit rating agencies, including a provision authorizing investors to bring private rights of action against ratings agencies for a knowing or reckless failure to investigate or to obtain analysis from an independent source. Hedge funds and over-the-counter derivatives would be regulated. Dodd would also make the SEC self-funded, and hold brokers giving investment advice to the same fiduciary standard as investment advisers.
Finally, in an area of growing interest to the SEC, the Dodd proposal would address the municipal securities market by requiring SEC registration for financial advisers, swap advisers, and investment brokers; subject them to rules issued by the Municipal Securities Rulemaking Board (MSRB) and enforced by the SEC or its designee; and require that investor and public representatives have a majority of seats on the MSRB.
Since the release of his proposal, Senator Dodd has worked with his Committee’s Ranking Republican, Richard Shelby (R-AL), to try to reach a bipartisan consensus on a reform proposal, creating bipartisan teams of Senators to focus on specific areas. However, after extended deliberations, Dodd and Shelby have essentially agreed to disagree, and Shelby is now drafting his own proposal. In the meantime, Dodd has joined forces with Senator Bob Corker (R-TN), and a joint proposal from the two of them is expected to be considered by the Banking Committee very shortly. While its provisions are not yet public, it is expected to look much like the original Dodd proposal of last November.
If so, then the Dodd-Corker effort may be bipartisan in name only, as there are still major differences between the two when it comes to the Consumer Financial Protection Agency: Dodd wants to establish a strong independent agency, while Corker believes that this is unnecessary, and would prefer that an existing agency be provided with a new division that could write rules in this area. So the path out of the Senate Banking Committee is unclear, let alone the fate of the proposal when it reaches the Senate floor.
And there will surely be a major fight at that point. With the proposal most likely to include a CFPA, the GOP leadership can be expected to mount a filibuster – which the Democrats will not be able to prevent if all Republicans hang together. And the Chamber of Commerce, faced with corporate governance provisions that are anathema to it in the House bill, is already mounting a vigorous effort to ensure that Dodd’s discussion draft language in this area is significantly weakened, or better yet, that corporate governance is not covered at all by a financial regulatory bill – an actual possibility, as far as the Chamber is concerned, as long as efforts to obtain a bipartisan bill continue.
Recently, however, there have been some indications that the Obama Administration may be willing to accept reform that does not contain a completely independent CFPA, may agree to a CFPA that is a separate division or department of an existing agency, as Republicans have suggested. Also, there are signs that banks as well as the business community may be more agreeable to have a reform bill passed, even if it contains some objectionable provisions, because they fear that without legislation, the Obama Administration may try to impose many of its proposals by regulatory means that could be worse that what might be able to be negotiated in Congress.
There are no indications that the Senate Banking Committee bill will contain any provisions specifically targeting public pension investing. However, Senate rules governing consideration of legislation are much more lenient than those in the House. Given past concerns raised in the Senate with public plan investment activity by a number of Senators – remember the long-held concerns with public pension investing in hedge funds of Senator Chuck Grassley (R-IA), and the problems that Senator Joseph Lieberman (I-CT) has had with public pension “speculation” involving oil futures – continued vigilance is clearly warranted when any financial reform package reaches the Senate floor.
But perhaps the more operative word is not “when,” but “if.” With so much time having passed since the worst of the Wall Street shenanigans, and the focus of the American public increasingly centered on restoring the American economy and jobs creation, there is growing concern in some quarters that the time for major market reforms may have come and gone. Some now question if any comprehensive reform package can make it out of the Senate in the best of circumstances – let alone if healthcare reform is pushed through by Democrats using a budget reconciliation approach.
With the mid-term elections growing closer by the day, soon the Congress may well want to be spending more time at home campaigning than in Washington, trying to produce another landmark piece of legislation with so much controversy – not to mention potential campaign contributions – linked to it. Thus, the outlook for comprehensive financial markets reform this year does not look nearly as good as one would have previously thought, given the enormous impact of the economic meltdown on the nation, and the clear role -- at least clear to many – of the markets and their regulators in its making.
Information, Summaries of Provisions of House-Passed Bill
Summary of Dodd 2009 Discussion Draft
GASB Accounting, Disclosure Project Picking Up Steam; Outlook Increasingly Troublesome
The Governmental Accounting Stands Board (GASB) review of its Statements 25 and 27, which govern the calculation and disclosure of public pension liabilities, is picking up steam. Following the release of an Invitation to Comment (ITC) on proposed revisions in April of 2009, public hearings were held in the second half of the year, and the shape of a number of preliminary decisions are beginning to come into focus based on recent GASB board staff briefings and meetings. While it does not appear, at this point, that GASB is inclined to adopt, in whole, a market valuation of liabilities (MVL) approach to the discount rate that has been pressed on it by proponents of so-called Financial Economics, there are signs that GASB may try to find a Solomon-like solution, cutting the MVL “baby” in half. There are also troubling signs that major changes could be in the works dealing with smoothing and amortization that could present significant challenges for public plans and their government sponsors. It is increasingly thought that a likely outcome of the GASB effort will be to break any linkage between expensing and funding, and that without the ability to use the annual required contribution (ARC) as a viable funding requirement, there will be no source for contribution standards.
The GASB Post Employment Benefits (PEB) project actually had its beginning in 2006, when GASB implemented a research project examining the effectiveness of its accounting and reporting standards for public pensions and OBEB benefits, which have now been in place in their current form for more than ten years.
While there are many aspects to this re-examination, NASRA’s Director of Research, Keith Brainard, recently underscored at the NCTR/NASRA Joint legislative Conference in Washington, DC, that the “overarching question” the PEB project seeks to answer is “to what extent, if any, market value of liabilities (MVL)-type measures should be incorporated into public pension accounting standards?” Keith went on to explain that the basic features of MVL include a) recognition of liabilities accrued only to-date, exclusive of liabilities resulting from future salary growth and service credit; b) use of an investment return assumption based on a “risk-free” rate, linked to bond yields, rather than one based on the long-term expected return from a diversified portfolio; and c) immediate recognition of investment gains and losses, with no asset smoothing.
In response to its ITC, to which responses were due by July 31st of 2009, GASB received a little more than 100 separate communications, although the number of individuals and entities represented by that figure was much higher. For example, a joint letter (drafted by NCTR and NASRA staff) was signed by 107 public plan administrators, board chairs, and others representing 61 public pension systems, and another comment letter was signed by 27 state treasurers. NCTR also joined NASRA and twenty other national organizations in submitting a joint comment letter to GASB, representing the views of a wide range of users of public retirement system financial reports, including state legislators and other policymakers; executive officials, such as mayors, county officials, treasurers, and comptrollers; public employers, public employees and retirees; and trustees or other governing bodies of governmental pension plans.
Subsequently, GASB held two days of public hearings in late August at which a number of representatives of the public sector testified, including Keith Brainard; Paul Angelo with the Segal Company, testifying on behalf of a group of 43 public pension actuaries; Rob Wylie, Executive Director of the South Dakota Retirement System; Barbara Avard, chair of the Committee On Retirement and Benefits Administration (CORBA) of the Government Finance Officers Association (GFOA); Bob Scott, Assistant City Manager/Chief Financial Officer for the city of Carrollton, Texas; Jim Rizzo, an actuary with Gabriel, Roeder, Smith (GRS) and a member of the Public Plans Subcommittee of the Pension Practice Council of the American Academy of Actuaries, as well as Paul Zorn with GRS; John Chiang, California State Controller, and Alan Milligan, actuary with CalPERS; Luke Huelskamp, CFO, Municipal Employees’ Retirement System of Michigan, on behalf of the Public Pension Financial Forum; and Nancy Kopp, Treasurer of the State of Maryland.
Of course, critics of public pensions and their current accounting methodologies also made presentations, including Jeremy Gold, perhaps the most outspoken supporter of MVL; Diann Shipione, former Trustee of the San Diego City Employees’ Retirement System, often credited with blowing the whistle on its funding problems; Sheila Weinberg, representing the Institute for Truth in Accounting; and David Crane, Special Advisor to the Governor of California for Jobs and Economic Growth .
At these hearings, which were attended by all of the GASB board members and staff, it was clear to this observer of both hearings that GASB was clearly trying to see beyond simple positions and understand the reasoning behind them. Based on their questioning, it appeared that they were seriously thinking about changes in the area of amortization, as well as possibly placing some limitations on smoothing.
Comparability was also a focus, particularly at the first day of hearings. Board members asked every witness about whether this was an important goal; how people currently made comparisons; and where comparability could be improved. It appeared that this was something that they wanted to achieve, and were really struggling as to the appropriate way in which to accomplish it.
The GASB board has continued to discuss the PEB project since these hearings, and also held a meeting with the GASB Post-employment Benefits Task Force in December. Task force members included Paul Angelo, Tom Cavanaugh, Meredith Williams, and Keith Brainard, along with roughly a dozen others, including Bob Scott, CFO of Carrollton, TX and Michele Mark Levine of the City of New York, as well as Jeremy Gold, representatives of the California Foundation for Fiscal Responsibility, a group that has expressed concern about the cost of pensions in California; and The Civic Federation, a Chicago-based taxpayer-rights group.
So where do things stand now? The GASB staff has made its recommendations to the Board on a number of elements of the review, several of which are troubling. For example, the staff has supported elimination of the smoothing of investment gains and losses; the immediate recognition of obligations, rather than amortizing them; and reporting by sole and agent employers of their unfunded accrued benefit obligation as their pension liability, rather than identifying the liability as the difference between their Annual Required Contributions and amounts actually paid. GASB has been reviewing these recommendations and, based on minutes of the GASB board meetings since November, a number of tentative decisions have been made, while others have been deferred.
With regard to the discount rate to be used for discounting projected pension benefits to their present value for accounting purposes, which has been perhaps the issue of most concern for the public plan community, GASB has tentatively determined that the discount rate(s) should be a blend reflecting the funded status of the plan. Specifically, the minutes say that, “To the extent current and projected pension plan assets are expected to be sufficient to provide for payment of benefits in future periods, the projected benefit payments should be discounted at the long-term expected yield on plan assets. Additional benefit payments, if any, payable beyond the point at which plan assets are projected to be fully depleted should be discounted using a current high-quality municipal bond index rate.”
Not exactly a victory for MVL proponents, but then again, is it a “win” for opponents of MVL? As for the rest of the issues framed in the GASB ITC, here, in a nutshell, is the current state of affairs:
Focus of Pension Accounting and Reporting -- No decision has yet been reached on whether the focus should be on the incurrence of the pension obligation (i.e., the value of the accrued benefit), or the financing of that benefit (the level cost of services to the taxpayer).
Pension Liability Recognition -- GASB has tentatively decided that the employer incurs a pension obligation to its employees (however measured) as a part of the exchange between the employer and its employees of salaries and benefits, including defined pension benefits, for employee services (the employment exchange); that the pension plan becomes the primary obligor and the employer becomes the secondary obligor for that pension obligation to the extent that plan assets have been accumulated to provide for the payment of benefits to employees or their beneficiaries when due; and that the employer remains the primary obligor for that pension obligation to the extent that it is unfunded. Furthermore, GASB has tentatively decided that this “unfunded accrued benefit obligation” meets the Board’s definition of a liability and is measurable with sufficient reliability to be recognized on the financial statement. (Some actuaries have suggested that this “unfunded accrued benefit obligation,” or UABO, could be thought of as a version of the unfunded actuarial accrued liability, or UAAL, and might be called a “net pension liability.”)
Pension Expense Recognition – GASB has tentatively decided that changes in the UABO/UAAL due to changes to benefits of current retirees should be recognized immediately; that changes in the UABO/UAAL because of changes to benefits of active employees associated with collective bargaining agreements or similar arrangements might be amortized over the term of the agreement; that changes in the UABO/UAAL because of investment earnings within corridors might be amortized over some time period (to be explored at a later meeting); that changes in the UABO/UAAL because of actuarial gains/losses might be amortized over a some period, except for events not likely to reverse themselves (to be explored at a later meeting); and that changes in the UABO/UAAL because of changes in actuarial assumptions might be amortized over some period, except those associated with events that are not likely to reverse themselves (to be explored at a later meeting).
Measurement Issues -- GASB tentatively decided that for the purpose of measuring the UABO/UAAL, the effects of automatic COLAs should be included in the projection of benefits; that projected future ad hoc COLAs, referring in this context to COLAs that are dependent upon a decision to grant by a responsible authority, should be included in the projection of benefits when certain criteria for inclusion (to be further discussed at a subsequent meeting) are met; that projected future salary increases should be included in the projection of benefits in circumstances in which the pension benefit formula is based on future compensation levels; and that projected future service credits should be included both in determining an employee’s probable eligibility for benefits and in the projection of benefits in circumstances in which the pension benefit formula is based on years of service.
Attribution Methods and Other issues – There is no GASB tentative decision yet on actuarial methods. While, as noted earlier, GASB staff has supported the immediate recognition of obligations, rather than amortizing them, no decision has been made here either. Finally, staff has also supported reporting by sole and agent employers of their unfunded accrued benefit obligation as their pension liability, rather than identifying the liability as the difference between their Annual Required Contributions and amounts actually paid, but once again, no tentative decisions have been reached yet.
Based on these tentative decisions, it appears increasingly clear to some public pension actuaries that, with regard to the role of the annual required contribution (ARC), while it may be a viable funding requirement standard under current practices (often used as a de facto funding standard for pension obligations), a likely outcome of the GASB’s PEB project will be the breaking of any linkage between expensing and funding. With no real source for contribution standards, public pension actuaries have stressed to GASB that this will raise serious accountability issues.
So where do things go from here? In June of this year, GASB is expected to publish either an Exposure Draft or a Preliminary Views document. If it is the former, it will indicate that the board’s views with respect to any likely revisions are fairly clear and firm – suggesting that the changes that will be proposed to Statements 25 and 27 will not be major in scope. On the other hand, a Preliminary Views document, which will only suggest which directions the board is inclined to follow, will likely signal that major reforms are on their way.
Right now, the betting is that it will be a Preliminary Views document, which will then be followed by a comment period and then perhaps more public hearings. This will then be followed by an Exposure Draft, with its own comment period, and then, finally, new standards and effective dates. So it is likely that any final outcome is still more than a year away. While it looks like there could be major problems in store as a result of the PEB project, it is well to remember some “words of wisdom” from Keith Brainard. Keith said that in preparing for the GASB PEB Task Force meeting this past December, he looked at some of the background material which described the GASB process leading up to the original establishment of GASB Statements 25 and 27. Keith said that it appeared that “the path from a starting point for developing or modifying a GASB statement, to staff recommendations, to a Preliminary Views document, to an Exposure Draft, to a final Statement, was long and circuitous.” As Keith therefore points out, “Initial perspectives articulated by staff and board members do not appear to be a reliable indicator of where the GASB ultimately arrived in terms of a final statement.”
FOR MORE INFORMATION ON THE GASB PEB PROJECT, GO TO THE GASB WELCOME PAGE AND FOLLOW THE LINK TO THE “GASB PROJECT PAGES” AND THEN CLICK ON THE LINK TO “POSTEMPLOYMENT BENEFIT ACCOUNTING AND FINANCIAL REPORTING.”
IRS Changes Direction on Governmental Plans Compliance Initiative
Following meetings late last year with Mark Iwry, Deputy Assistant Treasury Secretary for Retirement and Health Policy, and Sarah Hall Ingram, the new IRS Commissioner for Tax Exempt and Governmental Entities (TEGE), it is clear that the IRS Governmental Plans Initiative has changed direction along with the change in Administrations. The public plan survey and questionnaire are effectively dead for now, and there is a commitment from Commissioner Ingram to instead work together with the public sector to develop a plain‐English IRS compliance guide for public plans, identifying priorities for needed guidance, and assisting with educational programs for and with the governmental plans community.
In November of 2009, Mr. Iwry and Commissioner Ingram met with representatives from NCTR, NASRA and more than a dozen other national public sector organizations, plans and unions for a very constructive dialogue regarding the IRS’ governmental plans compliance project. The two top officials led an open ninety‐minute discussion regarding how Treasury, IRS and the governmental plans community might work more collaboratively in this area.
By way of background, the Internal Revenue Service (IRS) held a “Governmental Plans Roundtable” on April 22, 2008, in Washington, D.C. to discuss the tax qualification requirements of governmental plans. At that time, the IRS made it clear that it intended to increase its review and enforcement efforts related to public plans, based on the results of a planned IRS questionnaire and survey.
One of the major objections that NCTR has had, from the very outset, with this IRS governmental plans compliance initiative is the absence of needed guidance in a number of areas involving the application of the IRC to public plans, and incomplete, irrelevant or erroneous guidance in other areas.
NCTR has always urged the IRS to focus on guidance first – so that plans understand what the rules are – before moving to any kind of enforcement regime. At a Congressional Roundtable to discuss the IRS initiative, held in September, 2008, the consistent message from public sector organizations was that the State and local government community hoped it could work cooperatively with Treasury and the IRS in an orderly process to establish clear and appropriate guidelines for public plans prior to enforcement efforts being initiated. The goal was to convince the IRS to change its current questionnaire approach and replace it with a process that is based on more accurate information than would otherwise result from their survey, and which would serve as a sound basis for more detailed written guidance.
At this Congressional Roundtable, public sector representatives specifically pointed to a guide prepared by the IRS and state administrators of Social Security and Medicare as a possible model for such a collaborative effort. This guidance, covering a large percent of the issues for public agencies in this area, is still used today (IRS Publication 963, “Federal-State Reference Guide, a Federal-State Cooperative Publication”).
Initially, the IRS showed no interest in such an approach, and proceeded with its pilot survey of approximately 25 plans in February of 2009. However, with the arrival of the Obama Administration, things have changed. At a meeting on September 11, 2009, between and Mark Iwry and NCTR , NASRA and a group of other public sector representatives, this idea of a compliance guide for governmental plans was presented. Mr. Iwry thought it was an excellent approach, and suggested that if the public sector wanted to take the lead in developing the idea, he would be happy to pursue it with the IRS. In response to this invitation, the executive committees of NCTR and NASRA approved the establishment of a joint NASRA/NCTR Compliance Guide Task Force to assist in setting the parameters of such a project.
Then, at the November 2009 meeting with Commissioner Ingram (the successor to former TEGE Commissioner Steve Miller, who announced the original governmental plans compliance initiative in 2008), she stated the IRS would not be moving forward with their governmental plans questionnaire (for now at least). Instead, she expressed her desire to ensure the right conversations were had with the right people in the right order to establish a collaborative future with the public sector pension community. She welcomed governmental plans’ ideas regarding how to structure an easy‐to‐read compliance guide along the lines of the similar project that was done nearly fifteen years ago, noted above, regarding governmental payroll tax issues.
NCTR and NASRA staff have started the process of pulling together industry leaders and experts to begin drafting an outline. The IRS has also indicated that it will soon make available for public comment its suggestions with regard to the compliance effort.
Also, with regard to the formulation of a compliance guide, there has been another most fortuitous “alignment of the stars,” as it were. Daryl Dunagan, who currently works for NCTR’s president, Gary Harbin, the Executive Director of the Kentucky Teachers’ Retirement System, was the president of the National Conference of State Social Security Administrators (NCSSSA) in 1993-1994 when IRS Publication 963 – the intended model for this new collaborative effort -- was completed. Furthermore, Maryann Motza, currently Colorado’s State Social Security Administrator as well as a member of the board of trustees of Colorado PERA, was also a member of NCSSSA at the time.
Ms. Motza, who had taken a lead role in the 90’s in working with the IRS to draft Publication 963, is now also the chair of the IRS’ Advisory Committee on Tax Exempt and Government Entities (ACT), and she wants to advance the idea of a similar guide for governmental pension plans as one of her priorities as ACT Chair. (The ACT is an organized public forum for the IRS and representatives who deal with employee plans, exempt organizations, tax-exempt bonds, and federal, state, local and Indian tribal governments, whose goal is to allow the IRS to receive regular input on administrative policy and procedures of the Tax Exempt and Government Entities Division.) Having Mr. Dunagan and Ms. Motza available to assist with this new project should prove to be very fortuitous indeed.
As part of this “new and improved” relationship between public pension plans and the IRS, Commissioner Ingram has also stated her desire to hear from the community regarding the most pressing areas needing official guidance in order to assist with priorities in the IRS’ work plan. This work plan, formally known as the 2009 – 2010 Priority Guidance Plan, identifies the projects that the IRS hopes to complete from July 2009 through June 2010, and it allows the IRS the flexibility throughout the plan year to consider comments received from taxpayers and tax practitioners relating to additional projects and to respond to developments arising during the plan year.
This plan includes a number of projects of potential interest and importance to public plans, including the following:
Guidance on group trusts under Rev. Ruls. 81-100 and 2004-67
Notice extending effective date of normal retirement age regulations for governmental plans (published 11/16/09 in IRB 2009-46 as Notice 2009-86)
Revenue ruling under §§401(a) and 401(k) on contributions of unused paid time-off to a tax qualified retirement plan upon termination of employment (published 09/28/09 in
IRB 2009-39 as Revenue Ruling 2009-32)
Final regulations under §401(a)(9) on required minimum distribution rules for governmental plans, as directed by the Pension Protection Act of 2006. (Proposed regulations were published on July 10, 2008)
Extension of remedial amendment period for governmental plans (published 08/31/09 in IRB 2009-35 as Rev. Proc. 2009-36).
Update of model notice under §402(f) relating to eligible rollover distributions (published 09/28/09 in IRB 2009-39 as Notice 2009-68)
Guidance on governmental plan status under §414(d).
Guidance on distributions from §457(b) plans for unforeseeable emergencies.
Guidance concerning FBAR filing (released 08/07/09 as Notice 2009-62).
The Priority Guidance Plan should effectively be viewed as an Invitation to Comment on any of these projects, so if you have specific concerns regarding some of them, now is the time to speak up. Should there be a consensus on certain topics among NCTR and NASRA members, a joint letter along the lines of that already submitted by NCTR and NASRA in connection with the Normal Retirement Age regulations could possibly be in order.
Finally, at the November meeting, Commissioner Ingram also indicated her strong interest in building educational efforts with the major national organizations – and other groups at the state and local levels – to help Federal officials understand how the majority of public plans operate and their compliance needs, while also assisting IRS in reaching out to the smallest plans around the country to build a better understanding of compliance requirements.
In this regard, the Commissioner pointed to her efforts to have staff in the Employee Plans (EP) division work more closely with staff in the Federal State and Local Government (FSLG) division. Currently, staff with knowledge of pensions don’t have a deep understanding of governments and vice versa. At the NCTR/NASRA Joint Legislative Conference on February 1, 2010, representatives from both the EP and FSLG divisions reiterated their commitment to this effort initiated by Commissioner Ingram, as well as the willingness and desire of the two units to get beyond any lingering problems related to the original questionnaire and survey issues and work together on the new compliance guide.
In connection with this educational effort, NASRA and NCTR have also supported the application of Pat Robertson, Executive Director of the Mississippi Public Employees Retirement System, to fill a vacancy on the IRS Advisory Committee on Tax Exempt and Government Entities (ACT). Two of these vacancies are on the Employee Plans subcommittee, which currently does not have public pension representation, and it is hoped that one or both of these can be filled by a governmental plan applicant in furtherance of this effort by Commissioner Ingram to better integrate these EP and FSLG functions at the IRS.
In the near future, NCTR and NASRA intend to survey member systems seeking their input on areas that need to be covered in this important new compliance guide collaborative project. It is critical that the public pension community seize the initiative and do not simply allow ourselves to become nothing more than a reviewer of an IRS-only work product.
Department of the Treasury 2009-2010 Priority Guidance Plan
SEC's New Public Pensions Unit Now Open and Ready for Business
The Enforcement Division of the Securities and Exchange Commission (SEC) has formally launched its new “Municipal Securities and Public Pensions Unit” with the naming of its new chief, Elaine C. Greenberg. In addition, the Enforcement Division has also provided enhanced tools to this and its other four new national specialized units. The new unit is to focus on misconduct in the municipal securities market and at public pension funds, but Ms. Greenberg recently attempted to assure NCTR and NASRA members that the new unit was also there to help protect pension plans from fraud, and that it was not intended as an effort to “regulate through litigation.” Nevertheless, based on certain actions already taken over the signature of Ms. Greenberg’s deputy at the SEC’s Philadelphia Regional Office, there may be some cause to believe that certain regulatory interests of the SEC in this area may be involved with the new unit’s activities nonetheless.
Elaine C. Greenberg, Associate Regional Director of the SEC’s Philadelphia Regional Office, was named as the first head of the SEC Enforcement Division’s new “Municipal Securities and Public Pensions Unit” on January 13, 2010. The unit is one of five new national specialized units established by the SEC’s enforcement chief, Robert Khuzami, in five priority areas “dedicated to particular highly specialized and complex areas of securities law,” as he puts it. These units will be given new tools, in the form of formal written agreements, intended to encourage cooperating witnesses to step forward, including Cooperation Agreements, Deferred Prosecution Agreements, and Non-prosecution Agreements.
In announcing his intention to create these units last August, Mr. Khuzami said that there were a number of areas involving municipal securities and governmental pension plans that “appear ripe for scrutiny,” including “unfunded or underfunded liabilities” and pay-to-play schemes. In naming Ms. Greenberg to head this new unit, he specifically spoke of pension fund problems, saying that this unit “will focus on misconduct in the $2.8 trillion municipal securities market and at public pension funds.”
Describing the municipal securities marketplace and public pension funds as “thinly regulated,” Ms Greenberg, a veteran of more than 20 years at the SEC, made it clear in her comments following her appointment that she intends to develop strong cases that “send a resounding message about particular conduct — cases that will have an impact on the behavior of market participants.” She said that she plans “to build a comprehensive enforcement program where we will develop the case law and legal precedent through the high impact cases that we bring.”
She also specifically said that the new unit will focus on “public pension accounting and disclosure violations” and pay-to-play and public corruption violations. Her new unit will have increased clout in pursuing such cases, as the new SEC Chairman, Mary Schapiro (D), last year discontinued a policy instituted during the tenure of her predecessor, Chris Cox (R), which required agency enforcement staff to obtain the approval of the SEC’s Commissioners before negotiating fines and penalties. Senior officers such as these new unit chiefs also have received the authority to open formal investigations and initiate the issuance of subpoenas.
It is clear that Ms. Greenberg’s office has already begun their efforts in this regard. Specifically, the “confidential informal inquiry” into “Certain Public Pension Fund Activities” that was received by a number of NCTR and NASRA members last year came from the SEC’s Philadelphia Regional Office, where Ms. Greenberg is also the Associate Director, over the signature of Mark Zehner, the deputy chief of Ms. Greenberg’s new unit.
As was reported in last year’s E-News article on this subject, this inquiry dealt with a range of issues. For example, there was a section devoted to pay-to-play payments as well as solicitations, and conflict of interest policies. Such questions were likely part of an effort at the time to update information obtained by the SEC in this area when the first pay-to-play rules were proposed by the SEC in 1999, and have probably been used in connection with the SEC’s most recent rule making in this area, initiated last year and the subject of a comment letter by NCTR and other national organizations. Furthermore, pay-to-play abuses will definitely be a target of Ms. Greenberg’s new unit.
However, there were also other questions in the SEC inquiry which were more troubling. For example, there was a lengthy section of questions dealing with “Disclosure of Unfunded or Underfunded Liabilities,” in which plans were asked about disclosure documents ("Official Statements") prepared in connection with their State's general obligation bonds or similar State-supported bond issues. These questions deal t with such things as changes in actuarial asset valuation methods, actuarial cost methods, or amortization methods, and asked for both the effect of those changes and “how the change was disclosed in the Official Statements of the bond issuer.” Other questions in this section asked for detailed information about what had been included in these Official Statements, and then inquired if the State has changed its Official Statements in the last five years to include or exclude any of this information. If so, the SEC also asked the plans to provide an explanation as to why such information was excluded or included.
Clearly, based on these kinds of questions, it would seem that the SEC is assuming that the pension plan is directly involved with both the preparation of these Official Statements, as well as the decision-making process involving what is or is not contained in them. This apparent blurring of the distinction between the plan and the employer/bond issuer was made even clearer in a series of questions asking about “pension holidays” and payments of less than the annual required contribution (ARC), and the reasons why the employer made these decisions.
Ms. Greenberg appeared at the NCTR/NASRA Joint Legislative Conference on February 1st to discuss the role of her new unit, where she was asked specifically about this interest by the SEC’s Enforcement Division in activities that are not under the control or direction of the pension plan related to bond issuances. Several NCTR and NASRA members explained how plans determined pension liabilities and disclosed them to the plan sponsor, but were not in control of how these were subsequently treated in documents issued in connection with bond offerings.
While Ms. Greenberg provided assurances that she was aware of this distinction, and that she appreciated that control of pension plans by employers in the private sector was not the model for the public sector, she nevertheless questioned whether or not there might be some interest (read “obligation?”) on the plan’s part in seeing that its information was accurately portrayed by a bond issuer. She also used some of these questions as an opportunity to underscore the SEC’s lack of real authority or control over the municipal securities market, pointing out that the SEC cannot require municipal bond issuers to file documents with them before their securities are sold so that the adequacy of disclosures could be reviewed.
Ms, Greenberg also attempted to focus in her presentation on the positive role that she saw her new unit playing with regard to public pension plans, stressing that it would help to ensure that those who attempted to defraud public pension plans would be one focus, and cited the Enforcement Division’s recent actions taken in connection with investment frauds affecting certain public pension systems.
However, she also discussed the SEC’s Report of Investigation involving the Retirement Systems of Alabama, released in 2008, which was issued, in the words of the SEC report, “to emphasize the responsibilities of all investment professionals, including large public retirement systems and other public entities, under the federal securities laws and to highlight the risks they undertake when they operate without a compliance program.” Clearly, she said that the SEC is interested in “helping” plans in this area by determining whether plans have policies and procedures to ensure compliance with the Federal securities laws that do apply to them; whether Federal securities law training to plan employees are provided; and whether plans have a compliance officer who is responsible for ensuring compliance with the Federal securities laws.
OK. So, notwithstanding these assurances that the SEC understands how public pensions operate, and that they are really here to help and not to regulate through litigation, just what is their authority when it comes to public plans and plan sponsors – and what, perhaps, do they think it should be?
While State and local governments are exempt from the registration and reporting provisions of the Securities Act and the Exchange Act, and the SEC’s authority to establish rules for accounting and financial reporting does not extend to municipal securities issuers, State and municipal securities issuers are nevertheless still subject to the antifraud provisions of Securities law. That is, any disclosures and other statements made to the market in connection with the offer or sale of securities cannot contain misrepresentations or omissions of material facts, and the SEC can take enforcement action if such misrepresentations or omissions are done with the intent to deceive, manipulate or defraud.
Thus, it seems clear that the SEC’s inquiries are essentially attempting to determine possible links between pension plans’ funded status and potential misrepresentations or omissions regarding this status that are contained in disclosure documents prepared in connection with their sponsor’s bond issues. Furthermore, it is highly likely that another purpose of the Unit is linked to the SEC’s efforts to obtain greater authority over the municipal bond market – witness Ms. Greenberg’s comments, noted earlier, in that regard.
For example, the SEC continues to think it should have greater control of municipal accounting standards; increased regulation of market intermediaries; and the ability to change the composition of the Municipal Securities Rulemaking Board (MSRB) – which currently has two-thirds of it 15 members made up of bank and securities dealers – to make it into a more independent self-regulator. But in order to do so, the SEC would have to convince Congress to change the laws in this area, and specifically repeal the so-called “Tower Amendment,” which prevents the SEC (as well as the MSRB) from directly or indirectly requiring municipal bond issuers to file documents with them before their securities are sold.
Therefore, if the SEC can build a strong case that pension plans’ unfunded or underfunded status is not being accurately disclosed, and that the SEC has no effective way of policing this problem, then it could potentially bolster its arguments before Congress in favor of expanded jurisdiction in the area of municipal securities. As noted in a previous story in this issue of E-News dealing with financial markets reform, Senator Dodd has proposed major changes in the area of municipal securities, and so if the SEC wants to make a move in this area, now would certainly be a good time in which to do so.
Of course, this then raises the question of how “accuracy” is measured. Misrepresentations can clearly occur if the issuer simply fails to accurately disclose information provided to it by the pension plan. But what if the real question is whether the pension plan itself failed to accurately measure its funded status in the first place, which then produced the inaccuracies in the issuer’s public disclosures -- even though the information provider to the issuer was otherwise accurately disclosed?
Is Ms. Greenberg’s stated interest in focusing on “public pension accounting and disclosure violations” all about the SEC’s interest in positioning itself to become the arbiter of such judgment calls? Is her new unit part of the SEC’s efforts to acquire the same type of statutory authority over financial accounting and reporting standards for State and local governments as it has over publicly held companies? After all, it is no secret that the SEC wants oversight authority over GASB similar to that provided over FASB in the Sarbanes-Oxley Act of 2002. Is the SEC beginning to try to do indirectly what it is not permitted to do directly?
Hey, even a paranoid can have enemies!
NCTR has told Ms. Greenberg that our members, as fellow public servants, share the SEC’s interest in and commitment to ensuring that all the laws, rules and regulations pertaining to our systems are followed. Furthermore, we have underscored that an important way to ensure that this is accomplished in the most effective and efficient manner is to see to it that all parties are aware of and appreciate what these rules entail, and how they relate to the way in which public pensions, as opposed to private sector plans, work. In the invitation to her to speak at the Joint legislative Conference, NCTR and NASRA underscored that strong and effective lines of communication are therefore essential, and once again offered to meet with her and her staff to discuss the important distinctions between public and private sector pension plans and how they are operated.
This is an area of increasing concern for public plans, and will require careful watching.
SEC Announcement of New Enforcement Units
Greenberg Comments on Her Appointment as Unit Chief
NCTR, NASRA Comments on Pay-to-Play
NCTR, NASRA Joint Legislative Workshop - An Overview Dodging the snow bullet, NCTR and NASRA were able to successfully hold their Joint Legislative Workshop on Monday, February 1st, in Washington, DC. Speakers included Congressional staff, key IRS and SEC officials, and experts on financial markets reform and healthcare. A former top House staffer also came to give her unvarnished view of the challenges that public pension plans face on Capitol Hill, and a public pension veteran lobbyist with one of the State pension systems shared her secrets on how to have a productive visit with Congressional delegations. All in all, participants appeared to enjoy the workshop. We even ended on schedule -- early enough for those who needed to make late afternoon flights home do so!
Notwithstanding the subsequent “Snowmageddon” that crippled the Washington metropolitan area for more than a week following it, the NCTR/NASRA Joint Legislative Workshop came off essentially without a hitch - even though snow at the beginning of the conference weekend made getting INTO DC on Saturday a real challenge for some. But it could have been worse. SO much worse!
The good news is that all the speakers for the Workshop showed up, and provided some interesting and sometimes provocative information to attendees. As we have done in the past, NCTR and NASRA staff kicked off the Joint Conference on Monday morning at 8:50 AM with an overview of Federal legislative and regulatory issues for 2010. However, this year the presentation attempted to focus on the top priorities and tried to be less of a “data dump” of detailed information on every conceivable issue with which we are dealing in Washington.
The three priority areas of concern are:
The ongoing IRS Governmental Plans Compliance Initiative and several Treasury/IRS policy undertakings, including the definition of a governmental plan under IRC Sec. 414(d) and the continuing saga of the Normal Retirement Age regulations.
The SEC’s growing interest and involvement in governmental plan issues outside the corporate governance arena, including pay-to-play and third-party marketer rulemaking, the implications of the SEC Enforcement Division’s new “Municipal Securities and Public Pensions Unit,” and the SEC’s increasing interest in and concern with governmental plans’ accounting and disclosure responsibilities.
The concerns of some in Congress with governmental plans’ investment activities, and signs of increased interest, both on and off the Hill, in plan governance, particularly as it relates to investments.
This presentation was followed by a discussion of Congressional priorities for 2010 from the perspective of the Congressional tax-writing committees. This was presented by Tom Reeder, Senior Benefits Counsel for the Senate Finance Committee and its Chairman, Senator Max Baucus (D-MT). Tom was also the Benefits Tax Counsel for the Treasury Department under the previous Administration, where he was responsible for developing and reviewing policy, legislation, regulations, and revenue rulings dealing with all aspects of employee benefits taxation and related matters, including qualified retirement plans.
Mr. Reeder was joined by Adam Francis, Deputy Chief of Staff to Congressman Pat Tiberi (R-OH). Congressman Tiberi is a member of the House Ways and Means Committee and the ranking GOP member of its Subcommittee on Select Revenue Measures. Both Reeder and Francis provided their insights regarding what to expect in 2010 from the two Congressional tax-writing committees, particularly as it might relates to pensions, retirement security, and related issues. Their responses were similar: healthcare reform had “sucked all the air out of the room,” and there likely would not be any major tax legislation for the remainder of the year. They did indicate that relief for private sector plans from some of the Pension Protection Act’s funding rules was possible.
They were also asked to provide their thoughts on the perceptions of State and local government pension plans that they believe are currently held on Capitol Hill. Both thought that the general perception was good, but that, on the Senate side, the issue of funding adequacy was always there, lurking in the background. On the House side, if there was any real concern, it had to do with a potential bailout for public pensions. But in general, they did not seem to feel that public plans were misunderstood and causing undue alarm among their members. It seemed to reflect a general sense that there were much bigger fish to fry, and then everyone wanted to get out of Dodge to begin campaigning for the November midterm elections.
The next presentation was provided by a panel from the IRS, which discussed the current status of their governmental plans compliance efforts and the recent agreement to work in a more collaborative manner with the public sector. The panel included Moises Medina, Rhonda Migdail and Ingrid Grinde. Mr. Medina is the Director of the Government Entities business unit of the IRS Tax Exempt and Government Entities (TE/GE) Division; Ms. Migdail is Manager, Technical Guidance and Quality Assurance, of the Employee Plans business unit of TE/GE; and Ms. Grinde is a Tax Law Specialist with Employee Plans. Andy Zukerman, Director of Rulings & Agreements in the Employee Plans division, was also in attendance as “eye candy,” as he put it. Mr. Zukerman is responsible for developing and managing the IRS’s up-front compliance programs for Employee Plans, including the EP voluntary compliance programs, the determination letter program and the development of guidance and rulings.
Sarah Hall Ingram, the IRS TE/GE Commissioner, had been originally invited to speak and to expand upon her stated willingness to explore ways in which the IRS and the governmental plans community might work more collaboratively, starting with the development of a plain-English tax compliance guide for governmental plans, identifying priorities for needed guidance, and assisting with educational programs for and with the governmental plans community. Needless-to-say, we were disappointed that Commissioner Ingram could not join us.
However, she has underscored how she is working internally to make the Employee Plans and the Government Entities divisions work more closely together – she spoke to us of “locking them in a room together” – and the panel clearly seemed to reflect her determination to address this problem. Indeed, Mr. Medina went out of his way to stress that the two units were going to be cooperating more closely themselves, as well as with the public plan community.
Rhonda Migdail discussed the initial governmental plans pilot survey, as well as the determination letter process, which had generated several thousand responses, with which they seemed very pleased. She also discussed the compliance guide project, and went on to note that the IRS hoped to soon have an outline of possible topics available for comment.
Ms. Grinde said that the definition of a governmental plan project, which has been going on now for several years, was very close to completion and that because of its significance, the IRS intended to provide extensive opportunities for comment, including public forums. She did not give any real sense as to its specifics, but there are rumors that a likely outcome will closely track Revenue Ruling 89-49. This ruling provides the key factors that the IRS uses to determine if an organization is an agency or instrumentality of the United States, a State, or a political subdivision. Under this ruling, the most important factor is the degree of control that the government has over the organization’s everyday operations. Other factors include the source of funding, whether there was specific legislation creating the organization, and the way in which the organization’s operating board or trustees are chosen.
Another key question related to this project is whether the IRS will permit some de minimis number of private sector employees to participate without jeopardizing a governmental plan’s status. Again, there was no clear answer given, but some attorneys say that this will probably be a topic for further public comments.
As for the Normal Retirement Age rules, the answer was essentially that they had simply had other priorities to deal with, and that they had not yet had an opportunity to go through what they called “extensive” comments that had been received. The application of the rules to public plans was delayed last year until 2013, so there is apparently a sense that there is still time to deal with this.
Following the IRS panel, Elaine C. Greenberg, Associate Regional Director of the SEC’s Philadelphia Regional Office and the recently-appointed head of the SEC Enforcement Division’s new “Municipal Securities and Public Pensions Unit,” made her presentation. Her remarks were careful and precise. As discussed in the article in this E-News on this new SEC unit, she explained how she saw her work benefitting public plans, and also how public plans should perhaps pay more attention to the way in which their information, particularly that relating to liabilities, was handled. It was in the Q&A session that she became more relaxed, less guarded, and more informative.
Following lunch, attendees heard a discussion of the status of financial markets reform legislation provided by Maureen Thompson. Ms. Thompson heads up the lobbying and coalition management work of The Hastings Group, a DC-area consulting firm that specializes in public relations and consumer/investor education work. Maureen has been working very closely over the last year with an ad-hoc group of public pension plans who have been tracking Congressional efforts in this area, and has extensive experience with both the substance as well as the politics of this major initiative.
Ms. Thompson was asked to look beyond corporate governance issues and give us her thoughts on other implications of the market reform efforts for institutional investors in general and public pensions in particular. She gave a brief overview of what was in the House-passed bill, discussed Senate negotiations, and said that she had not picked up on any “below the radar” signs that anyone in the Senate intended to pursue efforts to impose investment restrictions on public investors. However, she also noted that in the Senate, anything was possible.
She was joined by Frank Shafroth, who is currently the Director of Legislation & Intergovernmental Relations for the Municipal Securities Rulemaking Board (MSRB). Mr. Shafroth has a long career of public service as a Hill staffer, Director of State-Federal Relations for the National Governor’s Association, and Director of Policy and Federal Relations for the National League of Cities, among other jobs on his impressive resume. He was asked to comment on the SEC efforts regarding municipal securities, and he also touched on a number of implications for state and local governments as a result of the economic crisis, and how Federal activities increasingly seemed to fail to acknowledge the co-equal status of States.
The next presentation was a panel discussion on healthcare reform, presented by Tom Lussier, who administers the Public Sector Healthcare Roundtable, and Kathy Bakich, who is The Segal Company’s National Director of Health Compliance. Ms. Bakich covered some of the details of the healthcare debate, particularly those elements with implications for the public sector, and Tom discussed the politics of the discussion, the role of the public sector purchasers in the debate, and the outlook for the future of reform legislation. Cathie Eitelberg, Segal’s National Director of the Public Sector Market, moderated the discussion and presented some recent research on the potential impact of the reform efforts on Segal’s public sector clients, particularly the Senate’s excise tax provision.
Next, we were provided with a very enlightening presentation by Mildeen Worrell, the former Benefits Tax Counsel to Charles Rangel (D-NY), Chairman of the House Ways and Means Committee. She was also the Staff Director of that Committee’s Select Revenue Measures Subcommittee. Mildeen served on the Ways and Means Committee staff for over 20 years, and became one of the best friends of public pensions and defined benefit plans that the public pension plan community has probably ever had on Capitol Hill. While Mildeen was always candid with her audiences, now that she has retired, she could n REALLY speak her mind. She provided a ringing defense of the defined benefit plan structure and its use in the public sector, and urged attendees to redouble their educational efforts, as they were too few staff on Capitol Hill with a real understanding of retirement security and pensions.
The afternoon wrapped up with a presentation by Terri Bierdeman, the Director of Government Relations for the State Teachers Retirement System of Ohio. Terri and her staff have developed a great working relationship with the Ohio Congressional delegation, and she provided workshop participants with some of her tried-and –true pointers and other strategies for Hill meetings.
The workshop ended on time at 3:00 PM. If you were unable to make it this year, we hope that you can join us in 2011 for our next NCTR/NASRA Joint Legislative Workshop. We can’t promise that there won’t be snow, but we can assure you that we will have interesting speakers with important news that you need to hear about. See you then!
New Pew Public Pensions Report Gets It Mostly Right
A new report from the Pew Center on the States acknowledges that public pension plans were generally well-positioned going into the economic downturn, having “socked away” more than $2.3 trillion to pay promised pension benefits. The report also points out that public pensions were 84 percent funded in the aggregate in FY 2008, “a relatively positive outcome, because most experts advise at least an 80 percent funding level” according to Pew. However, Pew also lumps pension liabilities together with future healthcare costs in its title, and many press reports failed to note the distinction. NCTR and NASRA issued a joint press statement, and several letters to the editor concerning inaccurate coverage of the report were also sent, but none were published.
The Pew report, unfortunately entitled “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform,” lumps together pension and healthcare benefits in its title to attain the catchy $1 trillion figure, but the actual report itself documents that the majority of this “gap” is not due to unfunded pensions. The problem, the report in effect is saying, is healthcare.
The new report also recognizes that public sector retirement benefits “provide a reliable source of post-employment income for government workers, and they help public employers retain qualified personnel to deliver essential public services.” This latter role of public pension plans often goes unnoticed, and Pew is to be commended for underscoring that “Retirement benefits are an important part of how states can attract and retain a high-caliber workforce for the twenty-first century.”
Finally, Pew also notes that their report “illustrates that a growing number of states are taking action to change how retirement benefits are set, how they are funded and how costs are managed.” In response, NCTR and NASRA issued a joint press statement generally commending Pew and pointing out the good “nuggets” of information in its report. The joint statement also, however, expresses disappointment with Pew’s decision to couple retiree healthcare with pension liabilities, saying that it “distracts from the issues States face with these very different benefits.” NCTR and NASRA point out that the vast majority of the “financing gap” is not attributable to pensions, but rather to health care programs, and also notes that “Retiree health care cost containment options, financing structures and benefit protections are entirely different from those of pensions, and are mired in a debate over the nation’s healthcare system.”
Nevertheless, many press reports chose to ignore the positive news in the report, prompting several letters to the editor. One, from NCTR’s Executive Director, Jim Mosman, was sent to the New York Times, and reads as follows:
“Why, when it comes to your coverage of public pensions, is the sky always falling and the glass half-empty? The new Pew report found that 16 states managed their pensions well, effectively giving them an A, while another 15 states received B’s and C’s. However, your reporting focuses on the 9 that ‘flunked.’ No mention that States’ pension systems, in the aggregate, entered the economic downturn with 84 cents on hand for every pension dollar owed. The Pew study also found that states are reforming their retirement systems in response to the economic downturn. Public pensions are resilient, responding to changing times with sound changes of their own, ensuring that public employees continue to have a reasonable, secure, and sustainable retirement. There are no doubt challenges. But how about providing balanced coverage of public pensions? Their success at providing real retirement security is a story that also needs telling.”
Another letter, sent over the signatures of the Executive Directors of NCTR, NASRA, and NCPERS, went to the Washington Post , whose editorial observations on the Pew report were generally favorable, but whose reporting on the report was inaccurate and misleading. The test of this joint letter is as follows:
“It is troubling that The Washington Post’s editorial page is doing a better job at reporting the facts than its news pages. Such was the case with recent coverage of the Pew Center on the States’ report on public sector retirement benefits. The editorial page acknowledges that Pew found public pensions in the aggregate to have been responsibly well funded, with “$2.3 trillion socked away” to cover costs, and the majority of the “financing gap” cited in the report attributable to health care programs. The news story, on the other hand, contains glaring errors, attributing to pensions what is really a health care liability – an entirely different type of benefit cost that is mired in a national discussion on health care delivery. However, both the editorial and the article misrepresent public plan investment assumptions and benefit levels. In reality, investment rates are based on sound advice from actuaries and investment experts, and public plans have historically met or exceeded them over time. Further, past letters to the editor have rightfully noted the average annual benefit is $22,000, and often goes to individuals ineligible for Social Security and who are required to share in the financing of their state pension. The economic crisis has hurt all Americans, and all types of retirement savings. Public pensions provide more than just a secure, modest benefit to retirees and survivors, but also act as an economic stabilizer in difficult times – distributing more than $165 billion last year alone to virtually every community across the country. As the editorial notes, “the bright side” is that steps are being taken at the state and local levels to implement needed changes to ensure these important programs can continue to flourish decades into the future.”
Having independent confirmation of how governmental plans are generally getting it right when it comes to pensions is very helpful. It is unfortunate that so many reporters got it wrong.
New PEW Report
NCTR/NASRA Joint Press Statement
Snapshots
“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.
New NCTQ Report Once Again Attacks Teacher Pensions
Former AFSCME Corporate Governance Advocate Named to New SEC Post
IRS Issues New Guidance On Heart Act
Federal Iran Divestiture Legislation Advances
New NCSL Report on State Pension Legislation
Treasury Proposes Revising Regulations on FBAR Reporting to Exempt Governmental Plans
New NCTQ Report Once Again Attacks Teacher Pensions
In January, the National Council on Teacher Quality (NCTQ) released the 2009 edition of its “State Teacher Policy Yearbook,” the third annual review of state laws, rules and regulations that govern the teaching profession produced by the organization. The new report asserts that, “Taken as a whole, state teacher policies are broken, outdated and inflexible,” and gives States an average overall grade of “D.”
When it comes to pensions, NCTQ finds that State pension systems “are not flexible or fair, and many are in questionable financial health.” According to the NCTQ findings, “States continue to provide teachers with expensive and inflexible pension plans that do not reflect the realities of the modern workforce and that they may be unable to sustain.”
Last year’s report made similar claims, and was blasted by NCTR in a press statement, which expressed deep disappointment with the NCTQ’s failure to accurately assess the importance of the role of governmental pensions in attracting and retaining teachers. At that time, 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 same could be said, generally, about this year’s report.
NCTQ 2009 State Teacher Policy Yearbook National Summary
Former AFSCME Corporate Governance Advocate Named to New SEC Post
Rich Ferlauto , the former Director, Corporate Governance and Public Pension Programs , for the American Federation of State County and Municipal Employees (AFSCME) and one of the most vocal national advocates for corporate governance reform, has been named as the new Deputy Director of Policy in the Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA). OIEA is the SEC’s "investors' office" and provides educational resources to help individual investors make informed financial decisions. The Office also works closely with the Commission's newly-formed Investor Advisory Committee to give investors a greater voice in the Commission's work.
SEC Press Release on Ferlauto Appointment
IRS Issues New Guidance on HEART Act
The Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 was signed into law in June of 2008, and requires, as a condition of plan qualification, that plans provide benefits to survivors of participants who die while performing qualified military service as if the participant had resumed employment and subsequently terminated employment on account of death.
For benefit accrual purposes, plans may treat an individual who dies or becomes disabled while performing qualified military service as if the individual had resumed employment under the requirements of USERRA and terminated employment on the actual date of death or disability. The law allows employers to make contributions to a qualified plan on behalf of employees killed or disabled in combat; enables employers to include differential wages paid to an employee who becomes active duty military in the calculation of wages for retirement plan purposes, makes permanent the Internal Revenue Code provision that permits active duty reservists to make penalty-free withdrawals from retirement plans, and allows a military death benefit payment to be rolled over to a survivor's Roth IRA or to an education savings account without regard to annual limits on rollovers.
The IRS has now issued guidance regarding the HEART Act (Notice 2010-15, released on January 20, 2010), and this should be carefully examined to determine if remedial plan amendments are necessary.
HEART Act Notice 2010-15
Federal Iran Divestiture Legislation Advances
On January 28, 2010, the Senate, by voice vote, passed S. 2799, the Comprehensive Iran Sanctions, Accountability, and Divestment Act. The bill, originally introduced by Senator Chris Dodd (D-CT), would amend the Iran Sanctions Act of 1996 (ISA) and also contains a section that would authorizes states, local governments, and mutual funds to divest from firms investing in Iran’s energy sector.
The divestment enabling provisions - only one part of the more comprehensive Senate bill – are essentially identical to H.R. 1327, the Iran Sanctions Enabling Act of 2009, that passed the House of Representatives last October, and which is modeled on the provisions of the 2007 Sudan Accountability and Divestment Act. The House and Senate must now try to fashion a compromise between the two measures. While the Obama Administration has publicly stated its opposition to S. 2799 in its current form, it has not objected to its divestment component, nor to H.R. 1327. In this regard, it is well to note that when he was a Senator, President Obama sponsored a Senate companion to the House-passed Iran divestiture bill.
Senate Press Release on Dodd Bill
New NCSL Report on State Pension Legislation
The National Conference of State Legislatures (NCSL) released a new report in January that summarizes the most significant features of state public retirement plan changes in 18 states from 2005 through 2009. According to the report, in general, states have made a broad range of relatively minor changes to plans, rather than undertaking fundamental change. “Their goal,” the NCSL report concludes, “has been to adjust rather than radically alter their retirement plans.”
New NCSL Report
Treasury Proposes Revising Regulations on FBAR Reporting to Exempt Governmental Plans
On February 26, 2010, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) submitted a notice of proposed rulemaking that would appear to exempt governmental pension plans from making so-called FBAR filings. Plan attorneys are in the process of examining the proposed changes to the regulations, but as one of them put it, “It is looking very good.”
FinCEN is proposing to revise the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts. The proposed rule would clarify which persons will be required to file reports of foreign financial accounts and which accounts will be reportable. In addition, the proposed rule would exempt certain persons with signature or other authority over foreign financial accounts from filing reports.
The proposed new General Instructions for filing Form TD F 90–22.1 (the ‘‘FBAR’’) specifically provide that “A foreign financial account of any governmental entity is not required to be reported on an FBAR by any person. For purposes of this form, governmental entity includes: (1) a college or university that is an agency or instrumentality of, or owned or operated by, a governmental entity; and (2) an employee retirement or welfare benefit plan of a governmental entity.”
NCTR and NASRA as well as other public sector organizations and individual governmental plans had filed comments last year arguing that governmental plans are exempt from FBAR reporting under existing law and regulations. Written comments on the notice of proposed rulemaking may be submitted on or before April 27, 2010.
Proposed New FBAR Reporting Rules
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