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2010 Federal E-NewsMarch/April 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 Becomes Law; Implementation Spread Out Over Nine Years Following a contentious rollercoaster of a legislative ride, President Obama’s goal of national healthcare reform has finally been achieved. The new law is intended to help guarantee that eventually 95% of all Americans will have health insurance. The President and Congressional Democrats claim that it will also reduce the Federal deficit by more than $100 billion over the next decade – and more than $1 trillion over the following ten years – by cutting government overspending on healthcare and by controlling waste, fraud and abuse. The massive overhaul will not be fully in place until 2018, but there are a number of changes that will take effect this year. Some will offer additional revenues for State and local governments’ healthcare efforts, while others will likely create significant administrative burdens and could increase costs. The full details of the law are now in the hands of Federal bureaucrats, who are scrambling to draft implementing rules and regulations. Careful monitoring of these efforts will be necessary if the unique characteristics of State and local governmental healthcare systems are to be accurately reflected and accommodated. After more than a year of effort, healthcare reform was finally cleared for the President’s signature on March 21st when the House of Representatives adopted the Senate-passed healthcare bill by a vote of 219 to 212, with not one Republican member voting for the legislation. This House vote to agree to the Senate’s changes to the version of healthcare reform that the House approved last year avoided the need for further Senate action -- and a GOP filibuster which Senate Democrats no longer had enough votes to overcome, thanks to the election of Scott Brown (R-MA) to fill the seat of the late Senator Ted Kennedy (D) earlier in January. This House action was promptly followed by another House vote to approve a package of “fixes” to the Senate approach, which Senate negotiators had previously agreed to accept. These changes were then sent to the Senate as part of a budget reconciliation package, which, under the arcane rules of the Senate, could not be filibustered. With some minor changes, the Senate adopted the package – with no Republican support -- and final Congressional action on this component of healthcare reform occurred on March 25th when the House accepted the Senate passed bill without further amendment. President Obama, who had signed the original bill on March 23rd (PL 111-48), approved the budget reconciliation changes on March 30th (PL 111-152). Now the hard work really begins: implementation of this historic revamping of the nation’s health insurance and healthcare industries. The changes that the new laws establish will be phased in over nine years, as follows: 2010 There are a number of significant provisions that begin to take effect in 2010, but first, a word about “grandfathering.” A “grandfathered health plan” is any group health plan or individual coverage that was in effect on March 23, 2010. This grandfathered status of a plan is not affected if an individual reenrolls, or new hires are added to the plan. In addition, if a plan permitted dependent/family coverage as of the grandfathered date, then a covered individual may add these persons to coverage without affecting the “grandfathered” status of the plan. Being grandfathered is very important, as a number of new mandates will NOT apply. These new requirements that will NOT apply to grandfathered plans include, but are not limited to, such things as the application of the Internal Revenue Code Section 105(h) nondiscrimination provisions (which prohibit discrimination in favor of highly compensated employees); new rules for processing claims appeals; and the requirement to provide “essential benefits” without any cost sharing for those benefits. A very significant new rule that would also NOT apply to grandfathered plans is the requirement that certain preventative care benefits be provided, and provided without cost sharing. However, even for grandfathered plans, there are new requirements that will apply – but these may be delayed until 2011, depending upon when your plan year begins, or, in the case of grandfathered collectively bargained multi-employer and single employer plans, when the last of the collective bargaining agreements relating to coverage terminates. Specifically, grandfathered plans must comply with the following provisions starting with plan years beginning on or after October 1, 2010 (or, if a calendar year plan, with plan years beginning on or after January 1, 2011):
Clearly, these requirements may present cost implications for some public sector healthcare plan sponsors, and administrative challenges for those who run them. However, one of the most significant provisions of the healthcare reform law also takes effect in 2010, namely the creation of a $5 billion retiree reinsurance program to reimburse plan sponsors annually for 80% of claims between $15,000 - $90,000 for retirees age 55-64 who are neither an active employee nor eligible for Medicare. Reimbursement is also available for a retiree’s spouse and dependents enrolled in the plan, and the reinsurance “corridor” of $15,000 - $90,000 will be adjusted in subsequent fiscal years by the medical component of the consumer price index. This program will be up and running by June 23, 2010, according to HHS, and they are scrambling to develop applications and regulations to govern it. According to a recent HHS release, application forms will be available in June, and they expect the application process will be similar to that for submitting applications for the Retiree Drug Subsidy program. While this new program will be available to both self-funded and insured plans, including plans sponsored by private entities, state and local governments, nonprofits, religious entities, and unions, it should be of particular interest to government healthcare programs, given the large number of public sector pre-Medicare retirees and the significant reimbursement that is possible. In this regard, it is important to keep in mind that this reinsurance feature is temporary, and expires in 2014, or whenever the $5 billion is exhausted, whichever comes first. Furthermore, it appears that the money could be made available on a first-come, first served basis, with no prioritization of applicants. Finally, there are a few strings attached that must also be kept in mind in preparing to apply for funding. First, to be eligible, plans must implement programs and procedures to generate cost savings for participants with chronic and high-cost conditions. However, the law does not provide specificity as to exactly what kind of programs would qualify as such. Furthermore, plans must use the funds they receive to lower health costs for enrollees. Once again, however, there is not a lot of guidance as to what certain terms mean, such as to “lower costs for the plan,” nor is it clear whether the lower costs must be for early retirees only or for all active participants as well. Clearly, not being prepared to demonstrate that chronic care programs are being implemented, or that the funds will be used to lower costs in the appropriate manner for the appropriate participants, could create serious delays in applying for this money. These are just a few of the issues that should therefore be considered, and governmental plans who may be eligible to apply for these funds need to be paying careful attention as the application forms and regulations are being developed. Before turning to the changes that take effect in 2011, there are several other important provisions of healthcare reform that will begin to be implemented in 2010:
2011 Important changes will also begin occurring in 2011, including the following:
Once again, the changes in 2011 will create new administrative burdens for employers (the CLASS program voluntary payroll deduction and the reporting of the value of employer-provided healthcare on the W-2, for example). If HRAs are offered, there could also be administrative costs associated with the new restrictions. There could also be added administrative burdens on health plans: how will that W-2 “value” be calculated and who will do the calculation? Will the value of retiree health care benefits have to be reported on the 1099-R? Finally, there could also be added costs, as pharmaceutical manufacturers can be expected to attempt to pass on the costs of their new fee. 2012 There are not a lot of new provisions taking effect in 2012. However, one that should be particularly noted that could apply to some health plans beginning in 2012 is a new fee to partially support the Patient-Centered Outcomes Research Trust Fund (PCORTF) in the U.S. Treasury. This trust fund is to be used to pay for the new Patient-Centered Outcomes Research Institute (PCORI), created by the healthcare reform law as a nonprofit corporation whose purpose will be to effectively provide for comparative effectiveness research, which involves the direct comparison of existing health care treatments to help in determining which work best, for which patients. In addition to Federal appropriations and transfers from the Medicare Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, there would be a new fee imposed on health insurance policies and self-insured health plans for each policy year ending after September 30, 2012. The new fee would be equal to $1 in the case of policy years ending during fiscal year 2013, multiplied by the average number of lives covered under the policy or plan. This multiplier would increase to $2 for FY 2014, and would then be $2 increased by annual medical inflation for FYs 2015 through 2019, whereupon the fee would end. While proponents of comparative effectiveness research argue that it provides an important and valuable means to improve the quality of healthcare and cut costs, which would be a good thing, the fee associated with its funding will also arguably increase costs in the short term for health plans on which it will be levied. So be prepared. 2013 This is the year in which many of the new funding mechanisms to help cover the costs of healthcare reform kick in, primarily aimed at wealthier Americans. These include:
2014 In 2014, many of the most dramatic and controversial elements of the new reform package will begin to take effect, including the individual mandate and employer penalties. New State-based health insurance exchanges will also come into existence, but there will not be a so-called “public option” healthcare plan run by the Federal government. Finally, the insurance reforms of 2010 will be expanded, and new insurance reforms initiated. Major provisions effective in 2014 include the following:
2018 The final and perhaps one of the most contentious provisions of healthcare reform is not scheduled to take effect until 2018, and this is the excise tax on so-called “Cadillac” health insurance plans. This is a new tax on employer-sponsored health insurance worth more than $10,200 for individual coverage and $27,500 for a family plan. The tax is 40 percent of the aggregate value of the health insurance plan above these thresholds, indexed for inflation based on the consumer price index for urban consumers (CPI-U) -- and not healthcare costs -- for years beginning in 2020. These thresholds will be higher -- by $1,650 for individual coverage and $3,450 for family coverage -- for retired individuals age 55 and older who are not eligible for Medicare and for employees engaged in certain high-risk professions, including public safety. The threshold amounts will also be increased for employers that may have higher health care costs because of the age or gender of their workers. The tax is imposed on the issuer of the health insurance policy, which in the case of a self-insured plan is the plan administrator or, in some cases, the employer. The aggregate value of the health insurance plan to be measured for potential application of the tax includes reimbursements under a flexible spending account for medical expenses (health FSA) or health reimbursement arrangement (HRA), employer contributions to a health savings account (HSA), and coverage for supplementary health insurance coverage. However, unlike previous versions of the excise tax proposal, the final law excludes dental and vision coverage from this total. The excise tax, which was contained in the Senate version of healthcare reform, was vigorously opposed by many House Democrats and by organized labor, who complained that it fails to truly address high cost healthcare. For example, the tax does not deal with what plans cover or why they are expensive, and would not therefore necessarily guarantee that true “Cadillac” health care plans that provide so-called “luxury” health care benefits are curtailed. Additionally, even though the overall thresholds for the tax have been increased In the final law from the levels contained in earlier proposals, the thresholds will still be reached at some point. And since the thresholds are indexed to the CPI-U plus 1%, and not to inflation in healthcare costs, this will probably happen much sooner rather than later. Then there is the issue of implementation of the tax. Given that a large number of State and local governments choose to self-insure for their healthcare needs, with some utilizing a non-insurance company as a third party administrator of their health plan or, in some cases, having the entire administration of the healthcare plan brought in-house by the governmental entity, there is a question as to who would actually be liable for the payment of such a tax. For example, if the plan sponsor “administers” the benefits in a self-insured setting, then it appears that it could be liable to pay the excise tax. Also, in cases where smaller governmental entities have created purchasing coalitions, it may not be clear who the plan administrator for purposes of the tax is. Finally, under the new law, each employer appears responsible for calculating the amount of the excess benefit potentially subject to the tax, on a monthly basis. Of course, in order to be able to determine whether a threshold has been exceeded in any given month, the employer (or its designee -- perhaps the pension plan if it administers healthcare) will need to identify all the possible various components of overall coverage as well as the nature of employment of each employee (in order to know if different thresholds apply – and remember, just because someone is retired doesn’t mean that they are automatically eligible for the higher threshold, since they must also be at least age 55). If a threshold has been breached for any employee, the employer also appears responsible for determining each coverage provider’s applicable share of this excess benefit that would be subject to the tax, and for then notifying each provider accordingly – on a monthly basis! Then there is the case of coverage made available to employees through a multiemployer plan, in which case “the plan sponsor shall make the calculations, and provide the notice.” Once again, the definition of who is the “plan sponsor” will be critical. Also, where benefits are provided through a State plan that coordinates efforts with multiple local governments, financing for such may also be provided at both the State and local level for a single employee, thereby further complicating the issue of how the excise tax would apply in such circumstances. While there will be ample time before the new excise tax takes effect for these kinds of questions to be answered, it must be remembered that future changes to the excise tax may be difficult to accomplish because of the sizable revenues that this tax is expected to raise. That is, any future “fine tuning” of the Cadillac excise tax provision that would affect the amount of revenues to be raised could implicate “pay-as-you-go” requirements. In such case, any lost revenue would have to be paid for by offsetting tax increases or spending cuts, which could be difficult to achieve. Therefore, in case anyone is thinking that the excise tax won’t end up being a problem in the future because it will “surely” be repealed before 2018 may want to think again.
Financial Markets Reform Legislation Picks up Steam; Swaps Provisions Implicate Public Plans The on-again, off-again effort to fashion a bipartisan version of financial markets reform legislation appears to be off again. However, despite earlier GOP filibustering of attempts to move to the consideration of the version of the bill reported out of the Senate Banking Committee in March – which filibuster - Republicans claimed was necessary in order to keep Democrats at the bargaining table – there is now agreement to move forward on the legislation, to which any number of GOP amendments will be offered. While there are no specific restrictions in the bill on public pension investment authority, there is a troubling requirement directing the SEC to study the funding of the Governmental Accounting Standards Board (GASB). Meanwhile, the Senate Agriculture Committee has reported its proposals for regulation of derivatives, and pension plans were a topic of debate. In addition, there are new concerns being raised that a provision intended to provide for better safeguards for investors may actually result in swap dealers refusing to do business with pension plans. Senate Banking Committee Chairman Christopher Dodd (D-CT), following months of negotiations to try to develop a bipartisan bill -- first with his Republican counterpart, Senator Richard Shelby (R-AL), and then with Senator Bob Corker (R-TN) -- finally decided to go it alone, pushing his version of financial markets reform legislation, S, 3217, through the Committee on March 22nd without a single GOP vote. (The House of Representatives has already completed work on its version of the legislation, H.R.4173, which passed the House on December 11, 2009.) The Senate bill, which is very similar to the House approach in several areas, would do the following:
The issue of derivatives regulation will also be dealt with in the final legislation, and this has necessitated the input of the Senate Agriculture Committee, which has jurisdiction over the Commodity Futures Trading Commission (CFTC). On April 21st, the Agriculture Committee reported out its proposals in this area, which would provide for real-time price reporting and generally require trading of swaps on regulated exchanges and the clearing of swaps through a clearinghouse. Perhaps the most controversial provision of the legislation would require that financial firms that deal in derivatives separate that business from any banking business that they conduct. Essentially, as some in the press have put it, banks would have to “spin off their swaps desks.” During the Agriculture Committee’s consideration of their bill, an amendment was offered to exempt defined benefit pension plans from being considered as “major swap participants” (MSPs). (A swap is a type of financial product known as a “derivative.” Essentially, it permits one party to the agreement to exchange, or “swap,” the benefits of its financial instrument for those of another party’s financial instrument. Swaps are often used to hedge certain risks, such as interest rate risk. They are also tools that permit speculation.) In both the House-passed financial markets reform legislation, and in the original Agriculture Committee bill, pension plans could qualify as MSPs, and in so doing, would be subject to capital and margin rules, registration requirements, and sales practice rules. As MSPs, pension plans would be required to comply with the new clearing and exchange-trading requirements in the reform proposals. However, a group including the American Benefits Council, the Business Roundtable, the Committee on Investment of Employee Benefit Assets (CIEBA), the ERISA Industry Committee, the National Association of Manufacturers, the Profit Sharing/401k Council of America, and the U.S. Chamber of Commerce, raised concerns with this application to defined benefit pension plans. They argued that these new rules for swap dealers were designed for dealers using swaps for speculation, and not for entities that use swaps primarily to reduce risk. As they noted, “end-users” of swaps that use swaps primarily to reduce commercial risk were exempted from the definition of an MSP in the House bill, and they reasoned that pension plans that use swaps primarily to reduce portfolio risk should be treated in the same way. However, the Council of Institutional Investors (CII) disagreed, at least as far as the exemption from clearing and exchange-trading is concerned. In a letter to Congressional leaders, CII stated that it “opposes exemptions to exchange trading and central clearing requirements for any users of standardized or standardizable OTC derivatives.” “In our view,” the Council argued, “such exemptions would leave a gaping hole in the regulation of derivatives that will likely be exploited to the detriment of the capital markets. “ The California Public Employees’ Retirement System (CalPERS) also opposed the idea of the need for an exemption as unnecessary and contrary to public plans’ support for increased transparency in this area. In a letter to the editors of Pensions and Investments, CalPERS Chief Investment Officer Eric Baggesen rejected the claims made by the private pension lobbyists and stressed that public plans should not be grouped with private ones on this issue. “In near 30 years of experience investing for many of the world’s largest pension plans – both corporate and public – I see absolutely nothing of merit in objections raised to derivatives regulatory proposals by private pension fund lobbyists,” Baggesen wrote. Nevertheless, the bill as reported by the Senate Agriculture Committee and as further modified in cooperation with Senator Dodd to form the basis of a joint amendment to the Senate Banking Committee legislation, would exempt from the definition of MSPs “positions maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan”. Therefore, since the reference to ERISA section 3(32) is to the definition of a governmental plan, then it would appear that public pension plans are exempt from the requirements to be imposed on MSPs. However, the exemption may not be as clear-cut as it may first appear. Specifically, as has been pointed out by one public plan, the meaning of “hedging or mitigating any risk directly associated with the operation of the plan” could be somewhat problematic, as holding a long position in various commodity futures, for example, could be said to involve speculation as much as it involves risk mitigation through portfolio diversification. Another public pension official has pointed out that “A risk management tool can become speculative almost instantly should the user of such instrument suddenly not have sufficient liquidity to meet their obligations.” Given the other controversies involving the regulation of swaps and the pressures from other groups to be excluded from the definition of MSPs, it is unclear whether any opposition to this apparently “done deal” for pension plans will surface that will be sufficient to have the exemption stricken. But it could be an issue when the bill is reconciled with the House-passed measure, which contains no similar carve-out for pension plans. Another issue involving pension plans has also recently surfaced involving swaps, and this one deals with the requirement that swap dealers will have a “fiduciary duty” imposed on them, similar to that required of investment advisers. Specifically, the legislation would require that “A swap dealer that provides advice regarding, or offers to enter into, or enters into a swap with a pension plan, endowment, or retirement plan shall have a fiduciary duty to the pension plan, endowment, or retirement plan, as appropriate.” The problem that some see with this approach is that it could have the unintended result of discouraging swap dealers from agreeing to do business with pension plans. Indeed, there are reports that some plans have actually received calls from swap dealers saying as much. The argument is that as a fiduciary, the dealer would be required to act on behalf of the plan, but the dealer is actually the “opposing” party to the transaction. As such, a swap dealer would therefore have a conflict of interest that would preclude the dealer from fulfilling its fiduciary duty under the law. “In other words, the dealer cannot act on behalf of both parties in a negotiation,” as one Washington attorney puts it. According to reports of conversations between private sector pension attorneys and the Senate Agriculture Committee staff, there is no intention to prohibit pension plans from using swaps. Instead, the concern is that less sophisticated plans that enter into swaps with more sophisticated dealers may need protection, particularly where non-standardized swaps are involved. Finally, as the legislation does not amend ERISA, but apparently creates a separate fiduciary duty independent of that law, then it would appear that swap dealers working with public pension plans are likely to also be subject to this requirement. Committee staffers have also confirmed that this was indeed their intent. Do you think that there is any way that a dealer could enter into a swap with a pension fund and also be able to act as fiduciary to that fund? Will this fiduciary duty in reality serve to freeze pension funds out of the swaps market? Or is this simply an argument that swap dealers are trying to use to avoid new fiduciary requirements being imposed on them? Your timely input would be appreciated, as this issue is already being actively pursued by private sector plans. Their success with the MSP issue would suggest that they could be successful here as well. So if you think fiduciary duties imposed on swap dealers is a good idea, now is the time to speak up! There is another issue of particular concern to State and local governments that is contained in Senator Dodd’s legislation. Specifically, the Dodd legislation would require the SEC to study the funding of GASB. According to their report accompanying the legislation when it was approved in March, the Banking Committee is concerned that GASB’s current voluntary funding arrangements “can cause undue uncertainty and potentially lead to the compromise of the GASB standard setting process.” Noting the importance of the municipal securities market to the Nation‘s capital markets, the Banking Committee says that it is “concerned that the current funding mechanism may not ensure that GASB can produce high-quality, unbiased, and transparent governmental accounting and financial reporting standards.” Accordingly, the SEC would be directed to conduct a study that evaluates the role and importance of GASB in the municipal securities markets; the manner in which GASB is funded and how such manner of funding affects the financial information available to securities investors; the advisability of changes to the manner in which GASB is funded; and whether legislative changes to the manner in which GASB is funded are necessary for the benefit of investors and in the public interest. But why the SEC and not the Government Accountability Office (GAO)? Isn’t this a little like asking the fox to produce a report for the farmer on the security needs of the henhouse? After all, it is no secret in Washington that the SEC has for some time now wanted to bring GASB under its control. Former SEC Chairman Chris Cox (R) produced a “white paper” in 2007 that spoke of the need for SEC oversight of GASB. Furthermore, the Banking Committee report actually favorably references Congressional action in 2002 when the Financial Accounting Standards Board (FASB), which had been relying on voluntary contributions and materials sales, was given a secure funding mechanism through Section 109 of the Sarbanes-Oxley Act. What the Banking Committee fails to mention is that this same section of Sarbanes-Oxley has been used by the SEC to assert oversight of FASB. And why would SEC “control” of GASB be problematic? Current SEC Chairman Mary Shapiro has spoken of the need for the SEC to “level the playing field on disclosure between corporate and municipal bond issues.” She is probably not talking about making FASB conform with GASB in this regard. And what are the implications of convergence with international accounting standards, which the SEC favors, for GASB’s approach to whether or not governmental accounting is—and should continue to be—different? Finally, on a more positive note, the important corporate governance reforms contained in the Dodd proposal – affirmation of the SEC’s authority to provide for proxy access, and say-on-pay advisory votes by shareowners - to name a few - appear to be standing firm despite adamant opposition from the business sector. Indeed, in his recent speech on Wall Street, President Obama specifically mentioned these provisions, calling them a “key component of reform.” “These Wall Street reforms will give shareholders new power in the financial system,” the President promised. Shareholders “will get what we call a say on pay, a voice with respect to the salaries and bonuses awarded to top executives,” the President explained, and “the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the company in which they’ve placed their savings.” So there is much that is of interest to public pension plans as the financial markets reform legislation lurches toward enactment. And it does appear that, in spite of continued GOP efforts to slow the measure down, it will now be taken up by the full Senate and some version will likely be passed - probably by mid-May. NCTR recently joined with NASRA in writing to the Senate Banking Committee concerning the importance of repairing the nation’s financial system and restoring its integrity. “The extraordinary market events of the last several years and the resulting global economic crisis revealed significant gaps and weaknesses in the oversight and regulation of financial firms, markets and other institutions, such as credit rating agencies,” the letter stressed. These resulted in “an unacceptable level of systemic risk and an inability to supervise, prevent, or otherwise appropriately address levels of risk as they developed, to the detriment of all investors, including our member systems,” the letter concluded. The letter also conveyed resolutions that both organizations adopted last year addressing the issue of financial markets reform. The NCTR resolution, among other things, underscored the belief that “a lack of adequate transparency has been one of the most significant factors in the economic collapse; that the responsible disclosure of (i) all trading activity related to financial securities, (ii) participant accounting, (iii) credit rating agency methodologies and other activities, and (iv) counterparty exposure is essential in order to assess systemic risk and develop meaningful solutions to the problems such risk creates; and that any comprehensive and effective reform of the regulation of financial markets must therefore have enhanced transparency at every level as a core element.” A tall order. Hopefully, Congress will prove to have been up to it.
IRS Working on Compliance Guide for Public Pensions; First Step in the Process Expected Soon The Internal Revenue Service (IRS) is close to issuing for comment a “topical index” to a compliance guide dealing with Internal Revenue Code (IRC) sections that apply to governmental pension plans. This effort has replaced the original public pension plan questionnaire and survey effort that was announced at an IRS Governmental Plans Roundtable in Washington, DC, a little over two years ago. NCTR is working with NASRA, the National Association of Public Pension Attorneys (NAPPA) and the Government Finance Officers Association (GFOA) to help provide input so that the effort is collaborative and that the finished product will be truly useful to pension plans at all levels. NCTR, NASRA and NAPPA representatives met on April 14 with Rhonda Migdail and her staff at the IRS to discuss the status of the Governmental Plans Compliance Initiative and the “guide” that the IRS has agreed to develop in collaboration with the public pension plan community. Rhonda is Manager, Technical Guidance and Quality Assurance, in the Employee Plans (EP) business unit of the IRS Tax Exempt and Government Entities (TE/GE) Division, and is in charge of the compliance guide project. While some Treasury officials previously appeared to have an interest in the public pension community taking a first crack at such a compliance guide, recent “back-channel” communications have suggested that the IRS may not necessarily be comfortable with this approach. Furthermore, Rhonda appeared on an IRS panel at the NCTR/NASRA Joint Legislative Workshop in February of this year, and said that they were “very far along” in their development of this new guide. This statement caused many to become concerned that the collaborative effort was turning into an IRS-only project that the public pension community would be asked to simply comment on, but not help in developing. Hence, the meeting with the IRS to get a better idea of exactly what was going on. In preparation for such a meeting, a plan of action was jointly developed that would allow the public pension community to relay to the IRS the prevailing industry understanding of which Internal Revenue Code (IRC) sections applied to the governmental plans community, how their specific application to governmental plans might best be clarified, and what might be contained in an end product that might be most useful to the overall public pension community (particularly smaller plans). Briefly, this plan entails first reaching out to the governmental plans community, beginning with NAPPA members, to identify agreement on applicable sections of the code, areas where the regulations are unclear/inappropriate with regard to their application to public plans, and how they might best be clarified. A representative example of what it is hoped that sections of the compliance guide might contain was also developed with the generous help of the Ice Miller law firm and Paul Zorn with Gabriel, Roeder, Smith and Company. In the meeting with the IRS, it was very clear that EP was far along in their work on this project and that within less than three months, they expected to put out for public comment, on their new governmental plans website, a “topical index” of the guidebook as they currently see it, as well as a chart of IRC provisions that in their opinion apply to public plans. The IRS officials explained that they were doing so in order to get the public pension community’s input as to whether, in their words, these were the “right topics” for a compliance guide, whether they had “left anything out,” and also to obtain an indication of which topics should be “prioritized.” It was also explained that the IRS was seeking to determine whether there was agreement on what IRC sections applied to governmental plans, and where there might be some confusion or disagreement, as well as begin to obtain input as to issues that these sections present for governmental plans. The IRS sees this as the first step in the development of the final guide, which will be a “living guidebook” that would not be completed all at once, but that would be developed over time. It was also clear that the resolution of certain areas where more clarity or better guidance was needed would take longer to resolve than others, and that as this process evolved, the guide would be adjusted to reflect these changes. The IRS officials underscored their interest in better understanding the public pension community and its often unique issues, which was encouraging. NCTR and NASRA in turn offered our commitment to work closely with them, to provide whatever educational assistance they thought would be helpful, and to help serve as a means for a more candid discussion of where the problems lay. As we explained, an individual plan would be much more likely to share its problems/confusion/lack of understanding as to certain IRC rules and regulations with our organizations than it would be to admit such ignorance directly to the IRS. We underscored that this was one way in which it was felt that NCTR and NASRA could play such an important intermediary role in this process. There was also a candid discussion as to the degree of nervousness that still existed in the governmental plans community with regard to this project, and the many pitfalls there were as governmental plans and their stakeholders worked to address the serious issues dealing with sustainability. In this regard, it was explained how helpful this compliance guide could be in resolving any IRC problems that might affect the ability of plan sponsors and plan stakeholders to develop innovative solutions for the future. On balance, the meeting seemed to be very productive. Hopefully, the IRS has been reassured that NCTR does not see its role as trying to dictate to the Service what their own rules mean or to “negotiate” regulations. The meeting appeared to help them understand how and why their regulations were being interpreted in certain ways, how this might implicate other regulations that they might not have thought about, and how NCTR’s and NASRA’s ability to help synthesize what is often a diverse industry viewpoint on such matters would provide them with a more holistic view of the problem than they might receive from individual comments alone. In turn, the IRS appears to be truly desirous of approaching this project in a very thoughtful, purposeful manner, and what they are proposing to do -- at this point at least -- fits very well with the public sector’s planned approach. Nor do they seem to be interested in ramming something very formulaic down our throats so that they can move on to auditing public plans ASAP. In short, there is a lot of work ahead, and there will surely be many potholes in the chosen path. But, at least for now, it appears that there is a chance for a positive outcome. NCTR Supports Proposed Exemption for Public Plans from FBAR Reporting NCTR, along with NASRA and NCPERS, has filed comments concerning the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed revisions of the regulations implementing the Bank Secrecy Act (BSA) provisions dealing with Foreign Bank and Financial Accounts (FBAR) reporting requirements. The comments support the stated intent of FinCen to exempt public plans from the filing requirements, but suggest further clarifications regarding possible ambiguities between the filing instructions and the regulation’s language. Whether there is an obligation for governmental plans to file FBAR reports that may fall due before June 30, 2011, is also somewhat unclear, and would benefit from more precise language. There has been much controversy surrounding the filing of FBAR reports by governmental pension plans over the last 10 months. In the past, since the original purpose of the law that created the FBAR filings (The Bank Secrecy Act of 1970) was to detect and prevent taxpayers from hiding assets offshore to avoid income taxes or launder money, it was generally thought that pension funds and other tax exempt entities were not intended to be subject to the filing requirements. Furthermore, under the Bank Secrecy Act language, unless the Treasury Secretary decides otherwise, it appears that governmental entities are essentially exempt from coverage. Finally, “foreign financial accounts” subject to FBAR reporting were generally thought to exclude foreign hedge funds and foreign private equity funds. But last June, an IRS representative on a panel discussing FBAR stated that an offshore hedge fund is a “foreign financial account” for FBAR purposes, and, accordingly, every U.S. investor in such a fund must file an FBAR for 2008 and the preceding five years. They also reportedly said that any foreign partnership or foreign corporation that was used to commingle funds for investment would also be covered. Much confusion subsequently ensued concerning who and what must be filed. Then last August, the IRS issued a notice announcing an extended filing date for (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund, such as offshore private equity funds and hedge funds. These persons were given until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years. At the same time the IRS requested public comments regarding the FBAR filing requirement for both these groups. In October, 2009, NCTR joined NASRA and NCPERS in filing a comment letter that argued that a requirement of FBAR reporting and recordkeeping by public pension plans would not further the aims of Federal law in this area, but would instead create an unproductive and unnecessary administrative burden for plans. In addition, the comments pointed out that it will often be the case that the information public plans would report is already being reported by U.S.-domiciled investment entities in their own FBAR forms. The letter also argued that the BSA requires the Secretary of the Treasury to expressly prescribe that governmental entities are covered under the statute, but this designation had not been made. Finally, the letter stressed that public pension plan employees with signature authority over, but no financial interest in, foreign investments in a pension fund often have extremely limited information about the details of the investments in such accounts, and that subjecting these public servants to personal liability through performance of their public duties under State law would not further the policy aims of the statute. In response to this and other comment letters, FinCen proposed in February of this year 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. It appears clear that the intent of the proposed new regulations is that no FBAR will be required to be filed with respect to a foreign financial account of a State or local government retirement or welfare benefit plan, and the proposed filing instructions make this clear. However, some concerns have been expressed that the actual regulations themselves are not as definitive. Specifically, it appears that it could be possible to argue that some governmental pension plans which are not considered to be political subdivisions, state agencies or instrumentalities under the laws establishing them and legal framework within which they operate, would therefore not be exempt. There are other drafting concerns with the regulations that, if interpreted in one possible manner, could also raise questions about the scope of the exception for pension plans since they themselves do not exercise the powers to tax, to exercise the power of eminent domain, or to exercise police powers. Accordingly, NCTR has once again joined NASRA and NCPERS in filing a new comment letter in connection with the February, 2010 rulemaking that requests that the Treasury Department clarify the proposed rule to state, as the instructions state perfectly, that an employee retirement or welfare benefit plan of a governmental entity is not required to report under FBAR. There is also another possible problem with the proposed regulations dealing with the delayed FBAR filing deadline of June 30, 2011 contained in IRS Notice 2010-23. Since this notice clearly seems intended to postpone until June 30, 2011 any FBAR filings that may not be required if the proposed rulemaking goes into effect, and yet there could technically be filings due in June of 2010 for some governmental plans absent the new regulations, the new NCTR/NASRA/NCPERS comment letter recommends that further guidance be issued stating that a governmental plan with a financial interest in, or signature authority over, any foreign financial account will not need to file before June 30, 2011, any FBAR that might otherwise be due before that date. Hopefully, given what appears to be a clear intent not to have governmental plans file FBAR reports, these clarifications will quickly be forthcoming, and this issue can finally be put behind us. Credit Rating Agencies under the Gun in Senate Hearing; Committee Documents Serious Conflicts of Interest Following an 18 month investigation into some of the causes and consequences of the financial crisis, the Senate Permanent Subcommittee on Investigations has found that in the year leading up to the crisis, credit rating agencies used outdated models and inadequate data, were too influenced by investment bankers, and delayed downgrading investments once problems in the mortgage market became clear. In a recent hearing, credit rating agencies were blasted for these failures, with the Subcommittee’s Chairman, Senator Carl Levin (D-MI), calling for stricter provisions dealing with conflicts of interest to be included in the financial markets reform legislation now moving through Congress. The Committee’s hearing on April 23rd showcased the two biggest U.S. credit rating agencies, Moody’s and Standard & Poor’s, and the ratings they gave to the key financial instruments that are commonly viewed as having fueled the financial crisis -- residential mortgage backed securities, or RMBS, and collateralized debt obligations, or CDOs. Senator Levin began by explaining how, for the last century, investors trusted U.S. credit rating agencies to help them identify safe investments. “Even sophisticated investors, like pension funds, municipalities, insurance companies, and university endowments, have relied on credit ratings to protect them from Wall Street excesses and distinguish between safe and risky investments,” Levin noted. But Levin said that this trust had been broken now, as the Subcommittee investigation found that those credit rating agencies “allowed Wall Street to impact their analysis, their independence, and their reputation for reliability.” “And they did it for the money,” Levin stressed. Furthermore, Senator Levin noted that at the same time, the credit rating agencies were operating with an inherent conflict of interest because their revenues were derived from the companies whose securities they rated. “It’s like one of the parties in court paying the judge’s salary, or one of the teams in a competition paying the salary of the referee,” the Michigan Democrat observed. And although the credit rating agencies assured Congress and the investing public that they could “manage” this conflict, and that their ratings were independent and rigorous, “the documents tell a different story,” according to Levin. For example, in his opening statement, Senator Levin spoke of the competitive pressures on the rating agencies and how the “drive for market share, and the revenues from increased volumes of ratings, created pressure on both agencies to provide favorable credit ratings to the investment bankers bringing in business.” The Subcommittee’s investigation uncovered instances of bankers pushing to remove analysts who were not “playing ball.” And they discovered instances where analysts who resisted banker demands or challenged ratings were restricted from deals. The investigation also highlighted the focus on short-term profits that also permeated the industry. Levin spoke of a witness who described how, when he once questioned a banker about the terms of a deal, the banker replied, “IBG-YBG.” When asked what that meant, the banker explained, “I’ll be gone, you’ll be gone.” As Levin described it, “in other words, why give me a hard time when we are both making a lot of money and will be long gone before the house of cards comes crashing down.” Senator Levin concluded that the House and Senate financial reform bills, while offering a number of measures to increase credit rating oversight and subject the agencies to lawsuits by investors for reckless or unreasonable ratings, need to go further. “The bills should be further strengthened by directing regulators to tackle the inherent conflicts of interest that arise when rating agencies are paid by the people they rate,” Levin insisted. The issue of inherent conflicts of interest in the current “issuer pays” model of credit rating agency compensation has been difficult to deal with. As Professor John C. Coffee, Jr. with the Columbia University Law School testified before the Senate Banking Committee last August, the ratings agencies receive an estimated 90% of their revenues from issuers who are paying for their ratings, and therefore, “the agencies will predictably continue to have a strong desire to please the client who pays them.” “Moreover,” he warned, “the market for ratings has become more competitive, and the latest empirical research finds that, with greater competition, there has come an increased tendency to inflate ratings.” One alternative that has been suggested is a subscriber/investor-pays model. However, in a “white paper” issued by the Council of Institutional Investors (CII) in April of 2009, entitled “Rethinking Regulation of Credit Rating Agencies: An Institutional Investor Perspective,” it was pointed out that investor-pay credit rating agencies “are subject to potential pressure from clients to slide ratings one way or another.” For example, institutions that can only invest in highly rated instruments “might pressure a rater to guarantee a particular security gets an investment-grade rating,” while others “might press the rating agencies for lower ratings in hopes of receiving higher returns.” The Obama Administration has not been willing to take on the task of changing the current approach either, saying that it wants to solve these problems within the current framework rather than prohibiting specific models of rating agency compensation. In testimony before the Senate Banking Committee last year, Administration representatives said that they did not believe it is the place of government to prescribe allowable business models in the free market. Furthermore, they argued that under the Administration’s approach, it will be “simple for investors to understand the conflicts in any rating that they read and allow them to make their own judgment of its relevance to their investment decision.” So, despite Senator Levin’s devastating indictment of the industry’s performance under the current compensation model, don’t look for major upgrades to the current approach of the Senate bill toward credit rating agency compensation, which approach is to cast more light on the problem through a new office in the Securities and Exchange Commission to regulate rating agencies, but not to mandate any changes in the current process itself. New Study Finds Public Employees Earn Less than Private Sector Counterparts A study commissioned by the Center for State and Local Government Excellence (SLGE) and the National Institute on Retirement Security (NIRS) finds that employees of State and local government earn an average of 11% and 12% less, respectively, than comparable private sector employees. Furthermore, an analysis of two decades of data shows this pay gap between public and private sector employees has widened in recent years. Finally, while the study shows that benefits make up a slightly larger share of compensation for the governmental sector, even after accounting for the value of retirement, healthcare, and other benefits, state and local employees still earn less than their private sector counterparts. The new report, "Out of Balance? Comparing Public and Private Sector Compensation Over 20 Years," is based on an original analysis of data from the U.S. Bureau of Labor Statistics conducted by Keith A. Bender, associate professor, and his co-author, John S. Heywood, distinguished professor, both with the Department of Economics at the University of Wisconsin-Milwaukee. It was commissioned because the current recession and the resulting fiscal difficulties faced by State and local governments have brought a renewed interest in the compensation of public workforces—pay, pensions, and other benefits. Their study makes a number of important findings, which help to explode the myth that public employees are overpaid and have benefits that are too rich. As Beth Almeida, NIRS executive director noted, "For a long time, there has been a compensation trade-off in public sector jobs - better benefits come with lower pay as compared with private sector jobs. This study tells us that this is still true today." However, Ms. Almeida also pointed out that on a total compensation basis -- looking at both pay and benefits -- employees of state and local government still earn less than their private sector counterparts, which she called “striking.” First, the report found that jobs in the public sector typically require more education than private sector positions, with state and local employees therefore twice as likely to hold a college degree or higher as compared to private sector employees. Only 23% of private sector employees have completed college as compared to about 48% in the public sector. As Professor Heywood said, "Jobs in state and local governments consist disproportionately of occupations that demand more education and skills. Indeed, accounting for these differences is critical in understanding compensation patterns." Accordingly, looking at comparable earnings determinents such as education and work experience, wages and salaries of State and local employees are lower than those for private sector employees, with State workers typically earning 11% less and local workers making 12% less. Even when you add in benefits, which, as noted earlier, make up a slightly larger share of compensation for the State and local sector, total compensation is, on average, still lower for State employees, by 6.8%, and 7.4% lower for local employees than for comparable private sector employees. Finally, the new study also found that during the last 15 years, this pay gap has grown. Earnings for State and local workers have generally declined relative to comparable private sector employees, and this pattern of declining relative earnings remains true in most of the large states examined in the study, although there does exist some state level variation. "The picture is clear,” according to Professor Bender. “In an apples-to-apples comparison, state and local government employees receive less compensation than their private sector counterparts," he pointed out. "These public sector employees earn less than they would earn if they took their skills to the private sector," he added. The study sheds light on a recent survey of government hiring managers, sponsored by SLGE. Elizabeth K. Kellar, president and chief executive officer of the Center reported that "Hiring managers told us that despite the economy, they find it difficult to fill vacancies for highly-skilled positions such as engineering, environmental sciences, information technology and healthcare professionals. The compensation gap may have something to do with this." This new study is an important addition to the body of evidence that demonstrates that, despite media representations to the contrary, compensation of state and local employees is not excessive as compared to similar private sector employees – and this remains true even when benefits are included. In addition, the pattern of results over the last twenty years has generally been one of declining relative earnings of State and local workers compared to those in the private sector, and this remains true in most of the states examined. The Center for State and Local Government Excellence helps state and local governments become knowledgeable and competitive employers so they can attract and retain a talented and committed workforce. The National Institute on Retirement Security is a non-profit organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs; NCTR was a founding member of NIRS.
Obama Administration Views on Retirement Security The Obama Administration’s Task Force on the Middle Class has released its first annual report, which includes recommendations to improve retirement security. While most of the proposals focus on improving the defined contribution model of retirement savings, there is an interesting nod in the direction of a possible idea for retirement security that reflects many of the basic components of the defined benefit approach. If you want to get a sense for the course the Obama Administration intends to pursue when it comes to retirement security, there is perhaps no better place to start than with the annual report of the White House Task Force on the Middle Class, released on February 26, 2010. The goal of the Task Force, which is chaired by Vice President Biden, is to expedite administrative reforms, propose Executive orders, and develop legislative and policy proposals that can be of special importance to working families. In its first annual report, the Task Force discusses retirement security. The Task Force acknowledges what it calls “the gradual shift from defined-benefit pensions to 401(k)s and other defined-contribution retirement plans” that has been taking place for decades, and “has left more workers than ever before to plan their retirements for themselves and to bear the risk of investing for retirement alone.” It also says that the Obama Administration “recognizes that the current system does not provide sufficient retirement security for millions of Americans.” However, the set of specific initiatives that the Task Force proposes essentially all build on this current defined contribution system that it acknowledges is insufficient for the retirement security of the future, and include:
Nevertheless, it is encouraging that the Task Force also mentions Guaranteed Retirement Accounts (GRAs), which “would give workers a simple way to invest a portion of their retirement savings in an account that was free of inflation and market risk, and in some versions under discussion, would guarantee a specified real return above the rate of inflation.” The report notes that “These accounts would allow workers to be sure that the funds invested in them will grow steadily without the risk of a market collapse.” GRAs are an idea developed by Teresa Ghilarducci, Irene and Bernard L. Schwartz Professor of Economic Policy Analysis at The New School for Social Research Department of Economics in New York City. Essentially, her idea would be to eliminate the preferential tax treatment for 401(k) plans and use the savings from this to pay for the Federal government to deposit $600 (inflation indexed) annually into individual accounts for every American worker. Each worker would also have to put 5 percent of their pay into the accounts, to which the government would pay a 3% inflation-indexed guaranteed return. When the worker collects Social Security, the GRA will pay an inflation-adjusted annuity, based on the accumulated funds. Ghilarducci claims that these accounts would be sufficient to supplement Social Security benefits to achieve a 70% replacement rate at retirement. The White house Task Force stresses that GRAs would not replace Social Security, and that “most workers will want to continue to have a mix of assets with different risk and return profiles in their overall retirement portfolios.” However, the report does suggest that, in combination with the Administration’s other retirement security proposals, GRAs, or what it refers to as “increased access to safe investment options,” may provide a more secure retirement for American workers. The Task Force therefore “recommends further study of these issues.” Hmmm. Shared responsibility; pooled investments; guaranteed lifetime payout; salary replacement basis. This is starting to sound familiar! Maybe there is hope for a DB component in the retirement security debate after all?
“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. GFOA Approves Best Practices for Governance of Public Employee Retirement Systems New BLS Publication on Frozen DB Plans New RAND Study Finds More Americans Delaying Retirement NIRS Says Governmental Plans Outperformed Private Sector Counterparts in 2009 PWC Study of Securities Litigation Class Actions in 2009 Released GFOA Approves Best Practices for Governance of Public Employee Retirement Systems In March, the Government Finance Officers Association (GFOA) approved a “Best Practices” document for the governance of public employee retirement systems. This was developed by GFOA’s Committee on Retirement Benefits and Administration (CORBA Committee) and approved by the GFOA Executive Board. According to GFOA, “Proper board structure and clarity of board roles and responsibilities that are consistently and fairly enforced promote good governance and provide legal protections for both plan fiduciaries and plan participants.” Accordingly, GFOA recommends that the State or local government or other designated governing entity establish rules of governance for its post-retirement benefit systems that define the key elements necessary for trustees and other fiduciaries to fulfill their responsibilities, in accordance with fiduciary standards. The governance best practices that are recommended deal with:
A GFOA Best Practice identifies specific policies and procedures as contributing to improved government management. According to GFOA, “It aims to promote and facilitate positive change rather than merely to codify current accepted practice. Partial implementation is encouraged as progress toward a recognized goal.”
The Financial Accounting Foundation (FAF) recently announced the appointment of Michael H. Granof, PhD, CPA, Ernst & Young Distinguished Centennial Professor of the McCombs School of Business at the University of Texas at Austin, to serve as a member of the Governmental Accounting Standards Board (GASB) starting July 1, 2010. Mr. Granof will become one of six part-time members serving on the seven-member Board, and his term extends until June 30, 2015. He succeeds Dr. William Holder, who concludes his second five-year term on the GASB on June 30, 2010. Mr. Granof is currently a part-time member of the Financial Accounting Standards Advisory Board for the Federal government, and he previously was a member of the National Council of Governmental Accounting, the AICPA Committee on Governmental Accounting and Auditing, the U.S. Comptroller General’s Advisory Council on Government Auditing Standards, and various committees of the Texas Society of CPAs. New BLS Publication on Frozen DB Plans In April, the U.S. Bureau of Labor Statistics (BLS) released a new issue of its on-line publication “BLS Program Perspectives” examining “frozen” defined-benefit retirement plans. BLS defines a frozen plan as typically one that is closed to new workers and may limit future benefit accruals for some or all active plan participants. The BLS data show that while most (94 percent) frozen State and local government defined-benefit plans were closed more than 5 years ago, only 33 percent of frozen private industry plans had been closed for more than 5 years. In fact, sixty-one percent of the frozen private industry plans have been closed for 2-5 years, indicating increased private sector freezes in recent years. The BLS also found that:
GAO Report Shows Healthcare Costs Continue to be “Primary Driver” of State, Local Government Fiscal Problems According to a March 2010 update to the Government Accountability Office‘s report on State And Local Governments’ Fiscal Outlook, “The primary driver of fiscal challenges for the state and local government sector continues to be the growth in health-related costs.” Specifically, the GAO said that State and local expenditures on Medicaid and the cost of health insurance for State and local retirees and employees are projected to grow more than GDP. According to their models, health-related costs will be about 3.5 percent of GDP in 2010 and 3.8 percent of GDP in 2011. In contrast, the GAO found that other types of State and local government expenditures—including wages and salaries of state and local workers and investments in capital goods—are expected to grow slightly less than GDP. Given that revenue growth, excluding Medicaid grants from the Federal government, is projected to be relatively flat as a percentage of GDP, “the projected rise in health-related costs is the root of the fiscal difficulties” that the GAO says that its simulations suggest will occur. Finally, using a measure known as the “fiscal gap” -- an estimate of the action needed today and maintained for each and every year to achieve fiscal balance over a certain period – GAO said that, measuring the gap as the amount of spending reduction or tax increase needed to prevent operating deficits (or negative operating balances), “ we calculated that closing the fiscal gap would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3 percent reduction in state and local government current expenditures.” In the alternative, closing the fiscal gap through revenue increases would require “action of a similar magnitude through increased state and local tax receipts,” GAO noted.
New RAND Study Finds More Americans Delaying Retirement According to a new study by the RAND Corporation, an “unprecedented upturn in the number of older Americans who delay retirement” is likely to continue and even accelerate over the next two decades.Contradicting U.S. Bureau of Labor Statistics projections suggesting that the number of older Americans who remain employed is likely to level off over the coming decade, the RAND study claims that “a more likely scenario” is that the increase in delaying retirement that began in the late 1990s is likely to increase. As the population ages and Baby Boomers reach retirement age, there will be proportionately fewer people in the workforce to pay taxes. “Longer work lives for many Americans will help to ease that imbalance and the financial stress it puts on Social Security and Medicare,” according to the RAND researchers. The study suggests that lawmakers may want to consider policies that would further aid older Americans who want to delay retirement, including the elimination of measures in some pension plans that penalize recipients who continue working. NIRS Says Governmental Plans Outperformed Private Sector Counterparts in 2009 According to a March 15, 2010 commentary by Beth Almeida, Executive Director of the National Institute on Retirement Security (NIRS), the investment returns of state and local pension plans outperformed their private sector counterparts in 2009, based on information contained in the U.S. Federal Reserve Board’s Flow of Funds report for the fourth quarter of 2009. Ms. Almeida said that this data show that governmental plans gained 16% compared to 13% for private sector pension plans. “Such a large performance gap between public and private sector DB plans is new and can be attributed to fairly dramatically changes that private sector plans have made to their portfolios in recent years,” according to Ms. Almeida. This is a reference to the increasing move away from equities in the private sector in response to “Market Value of Liabilities” accounting requirements and strict funding standards based on these valuations contained in the Pension Protection Act of 2006. Indeed, as Ms. Almeida’s analysis found, “by the end of 2009, private pension plans, as a group, had significantly retrenched from investing in stocks, holding just 38% of their portfolio in equities. Public plans, meanwhile, made small adjustments, but no drastic moves – equity shares at the end of 2009 stood at about 57%.” As Ms. Almeida notes, “Thank goodness that pension policy in the public sector has avoided this trap.” But with the Governmental Accounting Standards Board (GASB) contemplating accounting rules changes that could force public pensions and their sponsors to follow more closely the rules that have gotten their private sector counterparts into such trouble, this fortunate state of affairs may change. All the more reason that policymakers and others who think that public plans should have to follow private sector rules should be aware of this important NIRS commentary. PWC Study of Securities Litigation Class Actions in 2009 Released PriceWaterhouseCoopers has released its new Securities Litigation study of class actions, and finds that institutional investors remained active as lead plaintiffs during 2009, but to a lesser extent than in previous years, with the percentage of total 2009 filings naming an institutional investor as lead plaintiff fell to 48 percent from a high of 60 percent in 2005, and an average of 52 percent since 2002. In general, the study shows that the total number of Federal filings dropped in 2009 as compared to 2008, along with the number of filings related to the financial crisis. However, notwithstanding this drop in financial-crisis-related filings, the study found that financial services “continued to be the most frequently sued industry for the second year running.” The study also found the number of settlements was lower (by 2) in 2009 than in 2008, though the total remained slightly higher than the average annual number of settlements recorded since the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA). The total value of settlements agreed to in 2009 decreased when compared to 2008 -- $3.1 billion in 2009 as compared to $3.9 billion in 2008. The average settlement value in 2009 was 20 percent less than in 2008, though it remained 10 percent above the average settlement value over the last ten years, according to the study. What about the impact of these class actions on the firms that are the subjects of the lawsuit? Are these suits necessary for deterring of future wrongdoing as well as compensating investors for their damages suffered as a result of financial frauds? Or do they weaken the defendants so severely that they are permanently worse off as a consequence of the action? A new paper, “Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms,” by Lynn Bai, University of Cincinnati - College of Law, James D. Cox, Duke University School of Law, and Randall S. Thomas, Vanderbilt University - School of Law, attempts to throw some light on this subject. They conclude that “there is something in our results for both sides of the debate regarding the effects of securities litigation.“
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