• Home
• About NCTR
  • Committees
    • Executive Committee
    • Corporate Advisory
    • Standing & Special
  • Governing Documents
    • Constitution
    • Principles and Goals
    • Resolutions
    • Strategic Plan
    • Future Strategic Planning Efforts
  • Member Directory
    • Statewide
    • City and Local
    • Commercial
    • Retired Teacher Association
    • Other Association
    • Membership and System Assets
    • Member Directory Order Form
  • Staff
• Annual Convention
  • Current
  • Future
  • Archive
• Federal Governmental Relations
• Meetings
  • Committee Meetings
  • System Directors' Meeting
  • Travel Reimbursement Request
• Member Directory
  • Statewide
  • City and Local
  • Commercial
  • Retired Teacher Association
  • Other Association
  • Membership and System Assets
  • Member Directory Order Form
• News Room
  • News Releases
  • Quick Facts
  • Media Resources
  • Legislative Information
  • NCTR Press Contact
• Resources
  • Links of Interest
  • NCTR/NASRA Public Fund Survey
  • Publications
  • Resolutions
  • Statements
  • Studies and Surveys
• Workshops
  • Administrative Assistants'
  • Deputy Directors' & Communication Specialists'
  • Trustee
  • Travel Reimbursement Request

2010 Federal E-News

May/June 2010

• GASB Issues Preliminary Views on Reform of Public Pension Accounting, Disclosure Rules; Major Changes in the Works

• Financial Markets Reform on the Brink of Enactment; Number of Items of Special Interest to Public Plans Included

• SEC Finalizes "Pay-to-Play" Rule; Eases Ban on Third Party Marketers

• New $5 Billion Reinsurance Program Takes Effect for Pre-Medicare Retirees

• Iran Divestment Bill Becomes Law

• New CPI for Seniors Proposed

• Snapshots

NCTR's Federal e-News provides important information on the issues and events in Washington, D.C. that may impact NCTR members. For more information, contact Leigh Snell, NCTR's Director of Federal Relations, at (540) 333-1015 or by email at: lsnell@nctr.org.

GASB Issues Preliminary Views on Reform of Public Pension Accounting, Disclosure Rules; Major Changes in the Works

The Governmental Accounting Standards Board (GASB) has now taken the next step down the road to making substantial changes in the accounting and financial reporting standards for state and local government employers and their defined benefit (DB) pension plans.   As expected, GASB’s so-called “Preliminary Views” on these changes did not completely embrace the concept of the market valuation of liabilities (MVL).  However, other modifications that appear to be in the works, including changes to amortization periods and smoothing, promise dramatic changes to employers’ balance sheets that would require disclosure of a pension liability that is much more volatile – and could in many cases be significantly higher -- than the current unfunded accrued liability that is now reported in the notes to the employer’s financial statements.  The implications for the continued survival of DB plans could be devastating.  

On June 16, 2010, GASB released its Preliminary Views (PV) about how to improve the effectiveness of the existing accounting and financial reporting standards for state and local governments.   As GASB explains it, these are its current views on what it believes are “the most fundamental issues related to employer accounting and financial reporting for pensions.”  GASB’s purpose in issuing the PV is “to obtain comments from constituents before developing more detailed proposals for changes to existing standards.”   Furthermore, these preliminary views generally are discussed as principles or concepts rather than as detailed potential requirements.

The PV is the next step in a multi-year process by GASB, begun in 2006, to review its pension standards—Statements No. 25, “Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans,” and No. 27, “Accounting for Pensions by State and Local Governmental Employers” --  which were issued in 1994 and were fully implemented by the late 1990s.  The purpose of the review is to determine how well these standards are working, after they have now been in effect for a sufficient amount of time to make such judgements, and what improvements, if any, could be made in them.

In a nutshell, here are what would appear to be the results if the GASB PV were to become an amendment to existing standards: 

• While the use of the long-term expected rate of investment return as the discount rate will not be replaced with the so-called “market value of liabilities” (MVL) approach, a new “blended discount rate” that will incorporate municipal bond yields will be required for some underfunded plans.
• The close nexus in the existing GASB standards between how governments fund pensions and how they account for and report information about them in financial statements will be broken, and there will be a complete disconnect between the measure of pension expense and the actuarial measure of contributions needed to fund the benefits.  The Annual Pension Cost (APC) currently in use and measuring the employer’s “annual required contribution” (ARC) will  be replaced.
• The employer will no longer be able to use the Net Pension Obligation (NPO), which reflects the cumulative difference between the ARC and the actual contributions, as the balance sheet liability for pensions, but must instead recognize on its balance sheet a Net Pension Liability (NPL), as of the employer’s fiscal year-end date , reflecting the difference between the total pension liability (using the actuarial accrued liability under the entry age cost method and the new “blended” discount rate) and the market (not smoothed) value of assets.
• The six currently permissible actuarial cost methods will be replaced with only one cost method, namely entry age, with the allocation of service costs as a level percentage of payroll over the employees’ expected service.
• The current maximum 30-year amortization of non-investment gains/losses (i.e. changes in the total pension liability due to changes in plan experience, assumptions, or benefits) will be replaced with an amortization period reflecting such changes over the average expected remaining service lives of active employees, weighted to approximate individual amortizations – likely to be in the range of 7 to 15 years. However, if the current changes apply to vested, inactive members (including retirees and beneficiaries), then all such changes would be recognized immediately.
• The current maximum 30-year amortization of investment gains/losses will also be replaced.  There would be a deferred recognition permitted for the cumulative difference between actual and expected investment earnings within a 15 percent corridor of fair (market) value of assets, with immediate recognition of any portion of the gains/losses outside such corridor.
• A smoothed market value of assets will no longer be permitted, and all assets would instead have to be marked to market. 
• For employers in cost-sharing multiple-employer plans, pension liability will no longer be measured as the difference between the employer’s contractually required contribution and their actual contribution, but instead will be measured as their proportionate share of the cost-sharing plan’s collective net pension liability.  Furthermore, the measurement of such employers’ pension expense, which currently is the employer’s contractual contribution to the cost-sharing plan will also be replaced with the proportionate share of the cost-sharing plan’s pension expense.

 Background 

The current GASB review began in 2006 with a two-year research effort.  According to GASB, although their research “did not find widespread dissatisfaction with the existing pension standards, ” it did identify a number of areas “in which some constituents believe improvements could be made that would increase accountability, more accurately estimate the long-term obligations and annual costs associated with retirement benefits, or produce information that is more useful.”

In 2008, GASB therefore decided to undertake a formal project to address pension-reporting issues and consider the possibility of amendments to existing standards.  At that time, GASB said that the reasons for the project included the sharp drop in the fair values of plan assets in the years 2000–2002 and the financial effects of decisions by many plan sponsors, made when plans were at or near fully funded status, to either redefine benefits (the examples they cite are the granting of thirteenth checks or ad hoc cost-of-living increases, and the revision of benefit terms in ways that increased benefits, sometimes with retroactive application to past periods of service), or to defer payment of some or all annual required employer contributions.

While GASB noted that “these events alone do not argue for a review of the accounting and financial reporting standards,” they also pointed out that the experience “raised the level of awareness and concern among some user groups, particularly taxpayers, regarding defined benefit pension plans.”  As a result, GASB said that “greater attention” had been paid to the information about postemployment benefits that the GASB’s current standards require to be reported.  They also noted that “some commentators” believe that current accounting and financial reporting standards and the issues that they raise were among the various factors that contributed to those events noted above.

Accordingly, in 2009, GASB issued an Invitation to Comment (ITC) that described the key issues it believed were raised during the research project and explored potential approaches to addressing them.  The ITC posed two alternatives for consideration.  One approach reflected the current GASB model, which is to apply measures based on actuarial methods and assumptions used to fund the promised benefits. The alternative followed the view of “financial economics,” and would involve recognition of liabilities accrued only to-date, exclusive of liabilities resulting from future salary growth and service credit; the 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 the immediate recognition of investment gains and losses, with no asset smoothing. 

Following the submission last year of written public comments and two days of public hearings in response to the ITC, GASB has now issued its preliminary views on what changes might be needed in light of those comments and its review of them.

Preliminary Views Summary

• Preliminary Views about the Nature of a Government’s Pension Obligation
   For accounting and financial reporting purposes, GASB believes that the pension plan is primarily responsible for the obligation to pay pension benefits in the future, to the extent that assets have been set aside to fund the obligation. The employer government is secondarily responsible for that part of the obligation.  However, the employer is primarily responsible for the unfunded obligation, namely, that portion of the pension obligation not covered by assets in the pension plan.  Furthermore, GASB’s preliminary view is that this unfunded obligation is a liability of the employer, which it refers to as a “Net Pension Liability” (NPL), and that a measure of this obligation should be included with other liabilities and recognized in the employer’s statement of net assets. 
• Preliminary Views about Measuring a Government’s Total Pension Liability:  Projection of Benefits
  GASB would keep the general current practice of incorporating expectations of future employment-related events (such as salary increases and years of continuing employment until retirement) into projections of pension benefit payments.  Currently, automatic COLAs are included in such benefit projections, but ad hoc COLAs are not.  GASB’s Preliminary Views are that ad hoc COLAs should also be included “when relevant facts and circumstances indicate that such COLAs are not substantively different from automatic COLAs.” 
• Preliminary Views about Measuring a Government’s Total Pension Liability: 
  Discounting Projected Benefits
  Currently, GASB requires governments to apply a discount rate that is based on their long-term expected future rate of return on investments.  However, GASB is concerned that in some cases, the assets held by a pension plan over time (including future contributions and investment earnings) might not be expected to fully cover projected benefit payments, and in such cases, GASB “does not believe that it is appropriate to use the long-term expected rate of return on plan assets to calculate the present value of future benefit payments for which plan assets will not be available.”  Therefore, GASB’s current thinking is that the discount rate should be “the single rate that reflects both (a) the long-term expected rate of return on plan investments to the extent that current and expected future plan net assets available for pension benefits are projected to be sufficient to make benefit payments, and (b) a high-quality municipal bond index rate beyond the point when plan net assets available for pension benefits are projected to be fully depleted.”  Thus, generally speaking, it would appear that as long as plans are being funded in an actuarially sound manner, they could continue to use their long-term expected future rate of return on investments as their discount rate, even if they were less than 100% funded.
• Preliminary Views about Measuring a Government’s Total Pension Liability: 
  Attributing Present Value of Projected Benefits
  Instead of the six actuarial cost allocation methods currently permitted (entry age; frozen entry age; attained age; frozen attained age; projected unit credit; and aggregate), GASB believes that all employers should use entry age normal and allocate the present value of benefit payments as a level percent of payroll because entry age is “a better representation of how pension benefits are earned,” and level percentage of payroll, as compared to the “level dollar” approach, which is currently also permitted” reflects the GASB’s view that projected pension benefits incorporate the effects not just of inflation, but also salary adjustments and other changes over time.”
• Preliminary Views about Reporting Changes in a Government’s Net Pension Liability
  With regard to the recognition of gains and losses, GASB would make major changes.  Instead of allowing these to be amortized over as long as 30 years, as is currently the case, GASB is now considering treating such changes differently depending on their nature:  (1) changes in the amount of the net pension liability that result from new pension benefits earned and interest on the start-of-year balance of the net pension liability would be reported as expenses each year as they occur; (2) non-investment gains and losses would be reported as expenses over a period approximately equal to the remaining service periods of employees, with the cost of retroactive benefit increases that apply to former employees therefore being reported as expenses immediately; and (3) differences between assumed returns on pension plan investments and actual returns would be deferred, not expensed, as long as the accumulated deferred inflows or deferred outflows do not exceed the equivalent of 15 percent of the fair value of plan investments Any amount exceeding 15 percent would be incorporated into the calculation of pension expense immediately.
• Preliminary Views about Governments in Cost-Sharing Multiple-Employer Pension Plan
  GASB believes that, similar to the tentative conclusion it has reached that the unfunded portion of the pension obligation of a single or agent employer is a liability of the government that should be reported in its financial statements, the unfunded portion of a cost-sharing pension plan’s obligation is the primary responsibility of the participating governments as a group.  Therefore, each participating government should report a net pension liability based on its proportionate share of the unfunded obligation of all of the participating governments.   GASB says that some users of government financials “find it frustrating that they cannot obtain pension information that is specific to a government that participates in a cost-sharing plan,” and that this change is needed in order to provide such users with liability data about individual governments in such plans.
• Preliminary Views about the Timing and Frequency of Pension Measurements
  It is GASB’s preliminary view that the net pension liability should be measured as of the end of a government’s fiscal year, and that an actuarial valuation of the pension obligation needs to be performed at least once every two years.   GASB is concerned that the underlying actuarial valuation on which a government’s pension expense is based could be three years old if a government has valuations done every other year, and that more up-to-date information about a government’s pension costs and net pension liability is needed.
  

Potential Impact 

There is both good news and bad news regarding the GASB PV.  First, it is very significant that GASB has yet to agree with proponents of financial economics that the current approach to the discount rate should be abandoned and that a so-called “risk-free” rate should be used instead of the long-term expected rate of investment return. 

However, the new blended rate could increase the measurement of liabilities for some plans whose past funding pattern has been problematic, and this in turn could produce a net pension liability on the employer’s balance sheet that is larger than the unfunded accrued liability that is used for funding purposes.   The result could be confusion on the part of the public and others, who will not be certain as to the employer’s real liability with regard to the plan.  This in turn could generate potential “mischief” when it comes to decision-making as to how best to address any funding problems.

Unfortunately, even for plans that are not required to use a blended discount rate, the abandonment of the NPO as the measure of liability on the employer’s balance sheet, and the de-linking of pension expenses from the actuarial measurement of needed funding, will mean that the balance sheet will no longer provide a ready means of viewing any cumulative underfunding in the context of actuarially required contributions.  In short, the funding discipline that the ARC helped to impose on employers – which, from an overall perspective, has been very successful -- will be lost.  Perhaps a “new ARC” can be created, but, in the words of my mother, “Why fix it if it isn’t broken?” 

Then there is the potential impact on the estimated 25 percent of public plans that do not now use the entry age cost method for funding purposes.  In some cases, this required change could also serve to undercut funding discipline.

Also, the major changes in amortization of non-investment gains/losses, the potential triggering of immediate recognition of investment earnings outside a 15% corridor, and the loss of the ability to smooth asset values could all contribute to much higher levels of volatility in the measurement of net pension liability and pension expense.   

Finally, for employers in cost-sharing multiple-employer plans, if the changes that GASB is contemplating become effective, the increase in these employers’ pension liability and pension expense will likely be substantial.  Volatility will also increase.  The overall impact could be very serious. 

Next Steps 

It is important to recognize that this Preliminary Views document, while a step toward an Exposure Draft of a revised Statement of Governmental Accounting Standards, is just that: a preliminary views document and not an Exposure Draft.   That is, the process is still at an early enough stage that minds can potentially be changed.  As GASB itself notes, “A Preliminary Views generally is issued when the Board anticipates that respondents are likely to be sharply divided on the issues or when the Board itself is sharply divided on the issues.”   Furthermore, while the PV represents the Board’s current views on the issues discussed, “some Board members may disagree with certain aspects of the Preliminary Views and some may feel more strongly about certain provisions than others do.”

In short, there is still hope that some of the more problematic aspects of the PV can be changed.  To this end, NCTR and NASRA will once again be working together on a joint statement that will be made available to individual systems and their trustees to sign onto.  NCPERS has also indicated an interest in working together on this project.

The goal is not to oppose any changes whatsoever to current standards – for changes are certainly on the way -- but to try to avoid those modifications that do not truly enhance the accountability of government in providing constituents with an accurate accounting of financial transactions; that fail to improve the decision-usefulness of financial reports and only provide users with confusing and seemingly conflicting information; and that threaten true interperiod equity.

Written comments are due by September 17, 2010, and GASB also plans to hold public hearings on October 13th in Dallas; October 14th in San Francisco; and October 27th in New York City.

We must not give up.  The governmental plans community, supported by dedicated public actuaries and others, has had a significant impact to date on the course of this project, but there is still more to be done.  If you haven’t educated yourself as to the potential impact on your plan of the possible changes that are in the works, please do so ASAP.  Employers in particular need to appreciate the implications of GASB’s efforts, and to make sure that their concerns are heard.  Those with funding responsibilities need to understand and assess whether the proposed modifications will enhance their decision-making, or make it more difficult for them to make prudent choices regarding their pension plans.

• GASB Preliminary Views Document
• GASB “Plain Language” Supplement to PV
• GASB “User’s Perspective” on PV        

Financial Markets Reform on Brink of Enactment; Number of Items of Special Interest to Public Plans Included

What is being hailed as the most significant reform of financial markets since the Great Depression finally appears to be headed to President Obama for his signature.  The massive reworking of the financial regulatory system creates a number of new Federal entities designed to identify and deal with so-called “systemic risk” to help avoid another financial crisis like that of 2008, and to protect consumers.   In addition, the measure would impose new regulation and oversight on the derivatives marketplace, including several items that specifically implicate public pension plans.  Important new corporate governance reforms are also included, despite last-minute efforts to effectively gut meaningful proxy access reform. 

After a number of fits, starts and filibusters, the Senate was finally able to pass its version of financial reform on May, 20, 2010.  The final vote was 59-39, with four Republicans – Scott Brown (MA), Olympia Snowe (ME), Susan Collins (ME) and Chuck Grassley (IA) – joining all but two Democrats -- Russ Feingold  (WI) and Maria Cantwell (WA) --  in voting for final passage.   The House had previously passed its version of the legislation last December.

Although similar in a number of ways to the House-passed bill, procedural maneuvering at the last minute prevented the adoption of a so-called “Managers’ Amendment,” which would have contained a number of agreed-upon compromises worked out collaboratively with the House leadership in order to avoid a formal conference between the House and Senate.  Therefore, the bill has been involved in protracted conference committee negotiations for over a month. 

Now, the final conference version of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, has passed the House of Representatives on June 30th by a vote of 237 to 192, with the support of three House Republicans -- Anh Joseph Cao (LA), Michael Castle (DE), and Walter Jones (NC).  Nineteen Democrats voted against it.  Senate consideration of the conference agreement, however, has been delayed.  First, there were problems with a $19 billion fee on big banks that was included in the bill at the last minute, but which was stripped out before the final House vote in order to regain the support of Senator Brown (R-MA), who opposed the fee and threatened to vote against the conference agreement unless the provision was removed.  The death of Senator Robert C. Byrd (D-WV) has further complicated Senate efforts to overcome a promised GOP filibuster, and final Senate action on the conference agreement - which would clear the bill for the President's signature - has now been postponed until the Senate returns from its Independence Day recess the week of July 12th.

The major features of the legislation are as follows:

• The Financial Stability Oversight Council
  This new Council will be charged with identifying and responding to emerging risks throughout the financial system.  It will be made up of 10 Federal financial regulators, including the Federal Reserve, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC), as well as an independent appointee with insurance expertise and 5 nonvoting members, including state banking, insurance, and securities regulators.  Chaired by the Secretary of the Treasury, the Council will make recommendations to the Federal Reserve for rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity; have the power to impose regulation on nonbank financial companies; and can approve a Federal Reserve decision to require a large, complex company to divest some of its holdings if it poses a grave threat to the financial stability of the United States
• Orderly Liquidation Authority
  In place of “Too Big to Fail” Federal bailouts, an orderly liquidation mechanism will be created whereby, if the Treasury, FDIC and the Federal Reserve all agree that it is necessary to mitigate serious adverse effects on financial stability, the FDIC will have the authority to unwind failing systemically significant financial companies.  It will do so by borrowing funds to liquidate a company, but only in an amount that it expects can be repaid from the assets of the company being liquidated.  Funds not repaid from the sale of the company’s assets will be repaid first through the claw back of any payments to creditors that exceeded liquidation value and then assessments on large financial companies.   Most large financial companies that fail are expected to be resolved through the bankruptcy process.
• The Consumer Financial Protection Bureau (CFPB)
  The new CFPB will be housed within the Federal Reserve System with a dedicated budget paid by the Fed.  It will be led by an independent director appointed by the President and confirmed by the Senate, and will be able to autonomously write rules for consumer protections governing all financial institutions – banks and non-banks – offering consumer financial services or products.  However, such rules can be vetoed by a two-thirds vote of the new Financial Stability Oversight Council if it deems them to pose a threat to the country’s financial system.   The CFPB would have authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion and all mortgage-related businesses (lenders, servicers, and mortgage brokers), payday lenders, and student lenders as well as other non-bank financial companies that are large, such as debt collectors and consumer reporting agencies.  Auto dealers, however, will be exempt.
• Derivatives Regulation
  The SEC and the CFTC will be given authority to regulate over-the-counter derivatives, including the authority to impose capital and margin requirements on swap dealers and major swap participants, but not end users.  Central clearing and exchange trading for derivatives that can be cleared will also be required, and data collection and publication through clearing houses or swap repositories will be mandated in order to improve market transparency.   The provision in the original Senate bill that would have forced banks to spin off their derivatives trading or risk the loss of Federal deposit insurance was substantially modified so that banks would continue to be permitted to deal in interest rate and foreign exchange swaps, "credit derivatives referencing investment-grade entities that are cleared," and derivatives referencing gold and silver.  However, banks would be required to spin off other derivatives, such as those referencing cleared and uncleared commodities, energies and metals (with the exception of gold and silver), agriculture, credit derivatives referencing non-investment grade entities and all equities, and any uncleared credit default swaps.
• Hedge Funds
  Hedge funds and private equity advisors will be required to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk.  The assets threshold for Federal regulation of investment advisers will also be raised from $30 million to $100 million, which is intended to significantly increase the number of advisors under state supervision and permit the SEC to focus its resources instead on newly registered hedge funds.  With regard to the ability of banks to invest their own money in hedge funds and conduct other proprietary trading, a modified version of the so-called “Volker Rule” was adopted that would ban such investments in hedge funds, but with a “de minimus” exception permitting  banks to provide up to 3 percent of a hedge fund or private equity fund's equity, with an overall cap of  no more than  3 percent of the bank’s Tier 1 capital; proprietary trading restrictions would be further studied by the new Financial Stability Oversight Council.
• Credit Rating Reform
  Compliance officers of Nationally Recognized Statistical Ratings Organizations (NRSROs, a/k/a credit rating agencies) will be prohibited from working on ratings, methodologies, or sales.  Investors will be allowed to bring private rights of action against ratings agencies for a “knowing or reckless” failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source, and NRSROs will now be subject to “expert liability” by making credit ratings provided by NRSROs no long exempt from being considered a part of the registration statement.  Finally, the SEC is directed to conduct a study, report to Congress, and then create a new mechanism to prevent issuers of asset backed-securities from picking the agency they think will give the highest rating.
• Corporate Governance 
  Shareholders would be given the right to a non-binding vote on executive pay and golden parachutes, and standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants.  Also, the SEC’s authority to grant shareholders proxy access to nominate directors was reaffirmed.  A last-minute effort to require shareowners to hold at least a 5 percent stake in a company in order to be able to nominate a board candidate -- a level of ownership that even the 10 largest public pensions plans, combined, would be unlikely to meet -- was unsuccessful, leaving any such thresholds or minimum holding periods up to the SEC to determine as part of its on-going rulemaking in this area.
• SEC
  The SEC will be given the authority to impose a fiduciary duty on brokers who give investment advice.   A proposal in the Senate bill to permit self-funding of the SEC by means of fees it charges corporations was rejected.  In its place, the SEC will be allowed to establish an emergency reserve fund, and it will be able to submit its budget directly to Congress without the need for prior White House approval.
• Securitization
  Companies that sell products like mortgage-backed securities will be required to retain at least 5 percent of the credit risk, unless the underlying loans meet standards that reduce riskiness. Also, issuers must disclose more information about the underlying assets and their quality.

In addition to the corporate governance provisions, which were of great importance to a number of public plans who worked extensively to keep the proxy access provision intact, there were other issues that specifically dealt with public pension plans: 

• “Major Swap Participant” Status 
  Pension plans, public and private, that use swaps for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan will be excluded from the definition of “major swap participant.”  In addition, such a pension plan could also opt out of mandatory clearing if it "generally meets its financial obligations associated with entering into non-cleared swaps."  
• Swap Dealer Duties to Public Pension Plans
  Special requirements and business conduct rules (rather than fiduciary requirements) will be imposed on swap dealers advising or engaging in trades with pension funds or state and local government entities.  Initially, the Senate bill would have imposed a strict fiduciary duty on swap dealers in such circumstances.  However, swaps dealers protested that since they would be the “opposing” party to the transaction, as such they would therefore have a conflict of interest that would preclude them from fulfilling their fiduciary duty under the law. Thus, it was feared that the provision could have had the unintended result of discouraging swap dealers from agreeing to do business with pension plans, and private sector pensions strongly objected to the Senate language.  Although unions and consumer groups just as strongly opposed any weakening of the original Senate language, claiming that there was “overwhelming evidence that most pensions and government entities lack the financial sophistication to protect their own interests in these transactions," the final bill was modified.  It now provides that a swap dealer that acts as an advisor to a public plan regarding a swap would have a duty to act "in the best interests" of the plan and to make a reasonable determination that any swap it recommends is in the best interests of the plan; however, a swap dealer that simply enters into or offers to enter into swap must only have a reasonable basis to believe that the plan has "an independent representative" that, among other things, is independent of the swap dealer and has a duty to act in the best interests of the plan.
• Stable Value Funds
  The definition of a swap contract in the reform bill would appear to apply to benefit responsive investment wrap contracts issued with respect to stable value funds offered through Section 457 eligible deferred compensation plans.   According to the National Association of Government Defined Contribution Administrators (NAGDCA), treating these wrap contracts as swaps will result in higher costs and a commensurate lower return for investing plan participants.  In addition, because there are only a limited number of banks and insurance companies which currently write wrap contracts, according to NAGDCA, imposing additional requirements on wrap contract providers may cause some of those providers to exit the market, leading to further cost increases and investment restrictions.  In response to these concerns, conferees agreed to delay the application of the Act’s swaps treatment to stable value fund wrap contracts, and called for a study to be conducted by the CFTC/SEC as to whether they should be treated as swaps or exempted.  The study must be completed in 15 months, and unless an affirmative decision is made to exempt such wrappers from regulation, they will then be regulated like traditional swaps.
• Municipal Finance/GASB
  The conference agreement also makes a number of changes in the municipal finance area, including a provision allowing the SEC to require a national securities association (FINRA) to establish a reasonable annual accounting support fee to adequately fund the annual budget of the Governmental Accounting Standards Board (GASB).  Originally, the Senate bill would have required the SEC to conduct a study of GASB funding.  Now, the study is to be conducted by the GAO instead.  Another study to be conducted by GAO deals with disclosures in the municipal market.  This latter study is to include an examination of the feasibility of repealing the so-called “Tower amendment,” which currently prohibits the SEC and the Municipal Securities Rulemaking Board (MSRB) from directly or indirectly requiring issuers to file municipal securities documents with them before the securities are sold.  Finally, the conference agreement creates a new Office of Municipal Securities within the SEC; requires municipal advisors to have a fiduciary duty to municipal entities; and requires the registration of municipal financial advisors and subjects them to rules to be promulgated by the MSRB, which will be enforced by the SEC. The MSRB will be reconstituted, so that a majority of members are independent of the municipal securities industry. 

Despite a planned filibuster by Republicans, it is still expected that the Senate will also approve the conference agreement and that President Obama will sign it into law before lawmakers leave Washington at the end of July for their month-long August recess.  On balance, regardless of whether you believe that the reforms the measure contains will improve the security and stability of financial markets overall, public plans were able to avoid any attempts to directly limit or otherwise restrict their investment options.  While some think the reform effort could have been much better – for example, credit rating agencies received little more than a slap on the wrist in the view of many – for public plans, it also could have been much worse. 

• Conference Version of H.R. 4173
• Summary of Legislation

SEC Finalizes “Pay-to-Play” Rule; Eases Ban on Third Party Marketers

The Securities and Exchange Commission (SEC) has formally adopted new “Pay-to-Play” rules that would limit the ability of investment advisers, who make political contributions to elected officials in a position to influence the selection of the adviser by a governmental pension plan, to provide advisory services for compensation to the fund.  SEC Chairman Mary Shapiro warned that the cost of Pay-to-Play “is borne by retired teachers, firefighters and other government employees relying on expected pension benefits, “ and that there “should be no place for such practices in an investment advisory industry subject to high fiduciary standards.”  The original rule proposal would also have totally banned the use of third party placement agents to solicit government entities for business on behalf of an investment adviser, but this portion of the proposed rule was substantially modified. 

The SEC’s unanimous approval of the new rule comes 11months after it was first proposed.   At that time, NCTR joined with the National Conference of State Legislatures, National Association of Counties, National League of Cities, International City/County Management Association, National Association of State Auditors, Comptrollers and Treasurers, Government Finance Officers Association, NASRA, and NCPERS in filing a comment letter concerning the rulemaking. 

This letter, while supporting rules against pay-to-play,  raised concerns with the potential impact of the “time-out” approach on state and local government entities ”arising from the abrupt termination of long-standing investment adviser relationships that would likely take place as a result of the implementation of the two-year time-out as currently set forth in the proposed rule.” 

Therefore, the letter strongly encouraged the Commission to explore alternatives to an approach modeled on rules of the Municipal Securities Rulemaking Board (MSRB) and consider instead a rule that reflects that investment adviser services are ongoing, often long-standing relationships that provide important stability and continuity in the investment functions of government.”   As the national public sector organizations’ letter pointed out, “The abrupt termination of an investment adviser will interfere with such continuity and may, for a period of time, leave the plan or government without the adequate professionals needed to focus on investing billions of dollars of employee and taxpayer money.”  This would be particularly true for the many public plans that do not have internal investment staff and therefore rely on professional investment advisers to assist in investing their funds, the letter warned.

However, the SEC was not convinced that the long-term nature of advisory relationships is so fundamentally different from discrete municipal underwriting transactions that different rules are appropriate.  The Commission acknowledged that some commenters believed that the two-year time out is more disruptive and severe for advisers and the governments that retain them than for municipal securities dealers who are simply banned from obtaining ‘new’ business as opposed to terminating a long-term relationship.  “Some commenters asserted that the relationships are different because advisers provide ongoing and continuous advice as a fiduciary, rather than a one-time transaction such as an underwriting,” the SEC also noted. 

But, in the end, the SEC said that it disagreed “that the differences between municipal securities underwriting and money management are sufficient" to warrant an alternative methodology. While it conceded that municipal securities underwriters provide episodic services rather than ongoing services often provided by money managers, the SEC pointed out that underwriters also seek to provide repeated, if not ongoing, services, and if the imposition of a two-year time out is deemed appropriate for them, then there should be “at least as significant consequences for participation in pay to play practices”  for advisers who are “in a fiduciary relationship with their public pension plan clients.”

Therefore, the SEC final rule closely tracks the rules governing municipal underwriting.  In summary, under the new rule:

• An investment adviser, as well as certain of its executives and employees, who makes certain political contributions to an elected official (incumbents as well as candidates) in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.  There is a de minimis provision that permits an executive or employee to make contributions of up to $350 per election per candidate if the contributor is entitled to vote for the candidate.  An exemption was also added for up to $150 per election per candidate even if the contributor is not entitled to vote for the candidate.  The SEC will also have the power to grant additional exemptions (see below).
• An adviser and certain of its executives and employees would be prohibited from asking another person or political action committee (PAC) to make a contribution to an elected official (or candidate for the official's position) who can influence the selection of the adviser, or to make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.
• An adviser and certain of its executives and employees would be prohibited from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

Pay to Play “Time Out”

The rule makes it unlawful for an “investment adviser” to receive “compensation” for providing advisory services to a “government entity” for a two-year period after the adviser or any of its “covered associates” makes a political “contribution” to a “public official” of a government entity or candidate for such office who is or will be in a position to influence the award of advisory business.

• Investment Adviser
  The proposed rule would apply to any investment adviser registered (or required to be registered) with the SEC, as well as to unregistered investment advisers who are exempt from registration because they do not hold themselves out to the public as an investment adviser and had fewer than 15 clients during the last 12 months. The SEC says that it is including this category of exempt advisers within the scope of the rule “in order to make the rule applicable to the many advisers to private investment companies that are not registered under the Advisers Act.” The rule would not apply, however, to most small advisers that are prohibited from registering with the SEC but instead are registered with the State securities authorities, as well as others such as intrastate investment advisers.
• Compensation
  The SEC notes that investment advisers subject to the new rule “are not prohibited from providing advisory services to a government client, even after triggering the two-year time out,” as long as they are not compensated.    “The prohibition applies to the receiving of compensation for providing advisory services to the government client during the time out,” the SEC underscores.  NCTR and the other national organizations had argued in their letter that “While the Commission suggests an adviser might continue providing advisory services on an uncompensated basis until the plan or government obtains a new adviser, we do not believe this is reasonable or practical,” and that it was “unlikely that a Board of Trustees or government officials would accept uncompensated services, even if an adviser was willing to continue advisory services on that basis."

However, the SEC pointed out that commenters representing advisers took the opposite view, “expressing concern that they would be locked into providing uncompensated services for extended periods of time as a result.”  Furthermore, the SEC said that “because restrictions on governments receiving services without payment would be a function of particular state or local laws, we believe government entities and their advisers are in the best position to work out arrangements that are consistent with both state and local law and the compensation prohibition of our rule.”  Finally, the SEC explained that it had taken this approach to uncompensated work “to enable an adviser to act consistently with its fiduciary obligations so it will not have to abandon a government client after making a triggering contribution, but rather may provide uncompensated advisory services for a reasonable period of time to allow the government client to replace the adviser.” 

• Government Entity
  A “government entity” under the proposed rule would include all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective government funds, including participant-directed plans such as 403(b), 457, and 529 plans.
• Official 
  An “official” would include an incumbent, candidate or successful candidate for elective office of a government entity “if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser.” Thus, not only would elected executive or legislative officials who actually sit on boards (i.e., hold a position that could influence the hiring of an investment adviser) be considered “government officials” under the proposed rule, but it would appear that trustees who are elected to their board seats would also be covered, and a “contribution” to them would trigger the two-year “time out.” Furthermore, the prohibition would be triggered if the contribution were made, for example, to a governor who does not serve on a board but who has the power to appoint a board member(s).  Finally, the SEC says that “we would not interpret the definition of ‘official’ as covering an individual who is also a ‘covered associate’ of the adviser,” and that, “Accordingly, under the rule, a covered associate who is an incumbent or candidate for office is not limited to contributing the de minimis amount to his or her own campaign.”
• Contribution 
  As for what constitutes a “contribution,” it would generally include “any gift, subscription, loan, advance, deposit of money, or anything of value made for the purpose of influencing an election for a Federal, state or local office, including any payments for debts incurred in such an election.”  The letter from the national public sector organizations had urged that the definition of compensation “should remain limited to political contributions and should not be extended to cover expenditures other than those made for the purpose of influencing an election.”  However, the SEC said that “We are not narrowing our definition.”  The Commission did make some clarifications:  a donation of time by an individual will not be considered to be a contribution, provided the adviser has not solicited the individual’s efforts and the adviser’s resources, such as office space and telephones, are not used; and a charitable donation made by an investment adviser to an organization that qualifies for an exemption from Federal taxation or its equivalent in a foreign jurisdiction, at the request of an official of a government entity, will also not be considered to be a contribution for purposes of the new rule.
• Covered Associates
  The proposed prohibition would apply to contributions made by an investment adviser and its “covered associates,” which would include (i) any general partner, managing member or executive officer, or other individual with a similar status or function; (ii) any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and (iii) any political action committee controlled by the investment adviser or by any of its covered associates. 
• “Look Back” Provision
  The rule as proposed would have attributed to an adviser contributions made by a person within two years of becoming a covered associate of that adviser.  That is, when an employee becomes a covered associate, the adviser would have been required to “look back” in time to that employee’s contributions to determine whether the time out applies to the adviser.   If, for example, the contribution were made less than two years from the time the person became a covered associate, then the rule as proposed would have prohibited the adviser that hires or promotes the contributing covered associate from receiving compensation for providing advisory services from the hiring or promotion date until the two-year period has run.   However, the final rule was modified to create an exception so that the two year time out will not be triggered by a contribution made by a natural person more than six months prior to becoming a covered associate, unless he or she, after becoming a covered associate, solicits clients.  Thus, the two-year look back will now only apply to covered associates who solicit for the investment adviser.

Ban on Third Party Solicitors

The rule as originally proposed would have made it illegal for any investment adviser to hire (or otherwise compensate) any person to solicit government clients for investment advisory services on its behalf.  The prohibition was to be limited to third-party solicitors, and would not have applied to any of the adviser’s employees, general partners, managing members, or executive officers. 

However, the SEC said it received numerous comments on this absolute ban on the use of third party marketers, which argued that “the rule would favor larger investment advisers (which have internal marketing departments) over smaller firms,” and that “the ban would harm smaller pension funds that do not have the resources to conduct a search for advisers on their own, and harm advisers that rely on the services that placement agents provide.”  The SEC also noted that a number of commenters argued that the prohibition “would reduce competition by reducing the number of advisers competing for government business, and limit the universe of investment opportunities presented to public pension funds.”

While the SEC said that it did not necessarily agree with these arguments, it nevertheless decided to provide for an exception from its original absolute ban.  Specifically, the final rule will permit advisers to make payments to certain “regulated persons” to solicit government clients on their behalf.  Such regulated persons will include certain broker-dealers and registered investment advisers that are themselves subject to prohibitions against participating in pay to play practices and are subject to SEC oversight and, in the case of broker-dealers, the oversight of a registered national securities association, such as the Financial Industry Regulatory Authority (FINRA), that has pay-to-play prohibitions.

Thus, for a broker-dealer to be a “regulated person” under the SEC’s new rule and exempt from the absolute ban, the broker-dealer must be (1) registered with the SEC and (2) be a member of a registered national securities association whose rules  prohibit members from engaging in distribution or solicitation activities if certain political contributions have been made and that the SEC finds to impose substantially equivalent or more stringent restrictions on broker-dealers than the SEC’s new rule imposes on investment advisers

According to the SEC, FINRA is preparing rules that would prohibit its broker dealer members from soliciting advisory business from a government entity on behalf of an adviser unless they comply with requirements prohibiting pay to play activities, and that these rules’ requirements would be “as rigorous and as expansive” as those that would be imposed on investment advisers by the SEC’s new rule.  In order to give FINRA time to propose such a rule, the SEC is therefore delaying application of the prohibition on compensating third-party solicitors for one year from the effective date of their new rule. 

As for investment advisers, those that are registered with the SEC under the Advisers Act will also be exempt from the ban as long as they have not, within two years of soliciting a government entity, made a contribution to an official of that government entity (other than a de minimis contribution, as permitted by the rule).

Pooled Investment Vehicles

The SEC’s new rule also includes a provision that applies to an investment adviser that manages assets of a government entity through a hedge fund or other type of pooled investment vehicle, including private equity funds, venture capital funds and collective investment trusts.  Thus, a political contribution to a government official that would, under the rule, trigger the two-year time out from providing advice for compensation to the government entity would also trigger a two-year time out from the receipt of compensation for the management of those assets through a covered investment pool. 

Also included are registered pooled investment vehicles, such as mutual funds, but only if those registered pools are an investment option of a participant-directed plan or program of a government entity, such as 529 plans, 403(b) plans, and 457 plans.

The SEC acknowledges that the two-year time out may present different issues for covered investment pools than for separately managed accounts due to various structural and legal differences. Nevertheless, it feels that there are multiple options available for such advisers to select in order to comply with the rule in light of their fiduciary obligations and the disclosure they have made to investors, noting “our rule does not require an adviser that has triggered the time out to redeem the interests of a government investor or cancel its commitment.”  Instead, for example, the SEC notes that the adviser may comply with the rule by waiving or rebating the portion of its fees or any performance allocation or carried interest attributable to the government client.

Exemptions

The final rule provides the ability for an adviser to apply to the SEC for an order exempting it from the two-year compensation ban.  The SEC will grant such an exemption “ where the adviser discovers contributions that trigger the compensation ban only after they have been made, and when imposition of the prohibition is unnecessary to achieve the rule’s intended purpose.“   However, the rule will not be suspended while the application for an exemption is pending.  The SEC says that this would “encourage frivolous applications” and says that an adviser seeking an exemption could place into an escrow account any advisory fees earned between the date of the contribution triggering the prohibition and the date on which the SEC determines whether to grant the exemption.

Effective Dates 

The SEC’s new Pay-to-Play rule will take effect 60 days after its publication in the Federal Register.   Investment advisers subject to the new rules must be in compliance six months after the effective date. One year after the effective date, investment advisers may no longer use third parties to solicit government business unless  in compliance with the new rule’s exceptions.  Advisers to registered investment companies that are covered investment pools must comply with the rule one year after the effective date.

One Final Note:  Conference Sponsorships 

In its initial rule proposal in 2009, the SEC asked if it should broaden the definition of “contribution” to include “the expenses an investment adviser would incur in organizing or sponsoring a conference at which a government official is invited to attend or is a speaker.”  While this could potentially cover a wide range of events and sponsorships, it appeared that the SEC was more interested in payments of “expenses” that could be subterfuges for the making of contributions, since the SEC’s request for comments also asked, if it decides to include such activities, how its rule should “distinguish legitimate conferences or meetings from those that are more akin to fundraising events.”

In the comment letter filed by NCTR and the other national public sector organizations noted above, the recommendation was made that such expenses should be subject to the approach of the MSRB, which applies a facts-and-circumstances test on a case-by-case basis, and that the SEC should follow this instead of addressing meetings and conferences of this nature directly in its rules. 

In the comments accompanying its final rule, the SEC agreed.  It stated that an adviser that sponsors a meeting or conference which features a government official as an attendee or guest speaker and which involves fundraising for the government official would be considered to be soliciting contributions for that government official.   However, whether a particular activity involves a solicitation or coordination of a contribution or payment for purposes of the rule “will depend on the facts and circumstances,” the SEC announced, saying that “[W}e have not attempted to draw a bright line.”

• SEC “Pay-to-Play” Final Rule
• SEC Press Release on “Pay-to-Play” Rule
• NCTR and Other National Organizations’ Comment Letter

New $5 Billion Reinsurance Program Takes Effect for Pre-Medicare Retirees

Applications are now being accepted for the new $5 billion Early Retiree Reinsurance Program (ERRP), one of the new features of the national healthcare reform legislation that was signed into law in March of this year.  The new program provides reimbursement to sponsors of employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents.  The program is especially attractive to the public sector, which has a large number of pre-Medicare eligible retirees, but funding is limited and claims will be processed on a first-come, first-served basis, so employers, retirement systems and other retiree health plan sponsors eligible to participate should file their application forms and begin submitting claims ASAP. 

On June 29, 2010, the U.S. Department of Health & Human Services (HHS) began accepting applications for the ERRP, with the program application, official ERRP application instructions, and application submission “FAQ’s” published on the HHS website.   The purpose of the reimbursement program is to help employers, unions and State and local governments maintain coverage for early retirees age 55 and older who are not yet eligible for Medicare.

The new program will 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. 

Applications will be processed in the order in which they are received, but payments will be made based on when claims are submitted, not when the employer's application for the program was submitted.  According to HHS, all employers who are accepted into the ERRP are eligible to receive reimbursement for costs incurred on or after June 1st, regardless of the date on which the employer was accepted into the program.  However, once an employer is accepted into the program and begins submitting claims for their retirees, these claims will also be processed in the order in which they are received.

It is very important to note that this reinsurance program is temporary, and expires on January 1, 2014, when early retirees will be able to choose from the additional coverage options that will be available in the health insurance Exchanges established as part of the healthcare reform law -- or whenever the $5 billion is exhausted, whichever comes first.   Furthermore, based on recent conversations with Hill staff, there are currently no plans to appropriate additional funds for the program when it runs out, even if this happens very early in the process -- which is thought to be very likely.  In fact, the HHS Secretary has the authority to stop accepting applications if it appears that the $5 billion in Federal funding is insufficient, as program reimbursements are being paid out.

Therefore, please be sure to understand that, as HHS stresses, the “critical step in receiving reimbursement is actually the submission of the request for claims reimbursement. “   That is, even if a sponsor is the first one to submit an application to participate, but waits a significant amount of time after its application is approved to request reimbursement, “then the sponsor may, in fact, not receive the reimbursement if funds are exhausted,” according to HHS.  Also, be sure to keep in mind that claims incurred between the start of the plan year (often January 1) and June 1 are credited towards the $15,000 threshold for reimbursement.  However, only medical expenses incurred after June 1, 2010, are eligible for reimbursement under this program.

So when can sponsors begin submitting claims data and reimbursement requests?  HHS says that it is currently developing the infrastructure necessary to accept these, and that it will announce instructions detailing the manner and timing for submitting this information “in the near future.“  

Finally, there are a few strings attached that must also be kept in mind in seeking reimbursement.  First, to be eligible, plans must implement programs and procedures to generate cost savings for participants with chronic and high-cost conditions.   (A chronic and high-cost condition is defined as a condition for which $15,000 or more in health benefit claims are likely to be incurred during a plan year by any one plan participant.)  Furthermore, according to HHS, a plan’s programs and procedures for such have to be in place at the time the sponsor submits its application. 

Specifically,  the applicant must include a summary of the programs and procedures it has in place that have generated, or have a potential to generate, cost-savings with respect to participants with such conditions.  HHS also says that as part of the summary, it would be helpful to explain how the applicant determined that the chronic and high-cost condition it has chosen to address has generated, or is likely to generate, $15,000 in claims in a plan year; how the program and procedures will generate cost savings with respect to plan participants with these conditions; a description of the programs and procedures; and who benefits from the cost savings (i.e. the plan sponsor and/or plan participants). 

Second, in order to be eligible, proceeds from the ERRP cannot be used as general revenue of the sponsors.  That is, a sponsor must use the proceeds under this program (1) to reduce the sponsor’s health benefit premiums or health benefit costs; (2) to reduce plan participants’ health benefit premium contributions, copayments, deductibles, coinsurance, or other out-of-pocket costs, or any combination thereof; or (3) to reduce any mixture of these two. 
    
If the ERRP proceeds are used to reduce sponsor costs, sponsors must maintain their level of financial effort in supporting the applicable plan or plans.  “In other words,” HHS explains, “to the extent a sponsor decides to use the reimbursement for its own purposes, it can use the reimbursement only to offset increases in the sponsor’s health benefit premiums or health benefit costs.”

In this regard, one matter to consider is the impact of state budget cuts for funding health benefits.  In cases where such cuts have already been approved, will it be possible for such a state (or political subdivision that is an ERRP plan sponsor) to be able to show that it is maintaining its level of effort? 

HHS advises that in such instances, it could indeed be problematic for the State or political subdivision to use the reimbursement for its own purposes because it would not be maintaining its level of effort, as required by HHS regulations.  Furthermore, because private companies may also be in the same budgetary situation as a State or political subdivision, HHS was concerned that “to carve out an exception for a State or political subdivision would create an unlevel playing field between States, political subdivisions and private entities.” Therefore, HHS advises that “[i]n instances when a sponsor, whether a State, political subdivision or a private entity, has finalized a budget before the start of the Early Retiree Reinsurance Program, the baseline for showing level of effort will be the finalized budget provided it was finalized before June 1, 2010.”
  
Also, be aware that, generally speaking, sponsors cannot use the ERRP reimbursements to pay increased administrative costs related to the plan.  This includes administrative expenses that are created by participation in the ERRP.  However, there is an exception when (1) a sponsor maintains an insured plan; (2) the premium it pays the insurer for health benefits includes administrative costs; and (3) the insurer does not quantify for the sponsor the portion of the premium that is allocated to such costs.   In such cases (i.e., when all three of these circumstances exist), the sponsor can use program funds to offset increases in its health benefit premium costs or to reduce, or offset increases in, plan participants’ health benefit premiums, even though the premium includes administrative costs. 

If, instead of using the proceeds to lower its costs, the plan sponsor wants to use some or all of the proceeds it receives under the new program to reduce plan participants’ health benefit premium contributions, copayments, deductibles, coinsurance, or other out-of-pocket costs, it must do so for all plan participants, and not just for early retirees. 

Finally, it is important to note that HHS questions whether ERRP reimbursements can be placed into ongoing reserves established by self-funded plans to fund the health benefits of plan participants.  Specifically, HHS says that “[w]e are unsure” that a plan sponsor, if audited, would be able to show that, in such cases, it used the reimbursement funds as is required under the program (and as it said it would use the reimbursement in its application to participate in the program) if the reimbursement is placed into such an ongoing pool of funds.   However, HHS also says that “[i]f sponsors could make such a showing, for instance by placing the funds into a separate account so that, when audited, it could show how and when the reimbursement was used,” then it is possible that “this arrangement could be consistent with program requirements.” 

Clearly this is an area where one needs to proceed with caution.  Other features of the new program dealing with the definitions of “early retiree” and “benefit option,” as well as the effect of multiple health benefit arrangements, also need to be carefully considered. 

 A lot of complicated rules, but potentially a lot of money at stake.  Be sure to closely monitor the HHS website dealing with “Answers to Frequently Asked Questions” concerning the ERRP for updated information. 

• Official ERRP Application
• Official ERRP Application Instructions
• ERRP Program FAQ’s
• ERRP Regulations

Iran Divestment Bill Becomes Law

Congress recently approved legislation making amendments to the Iran Sanctions Act and which also includes a legal framework for States, local governments, and certain other investors to use to divest their portfolios of foreign companies involved in Iran’s energy sector.  The Iran divestment provisions track similar divestment procedures contained in the Sudan Accountability and Divestment Act of 2007, signed into law in December of that year.  Divestment actions by State and local governments would be authorized, but not mandated, and are not to be pre-empted by any Federal law or regulation,  provided the actions follow certain procedural safeguards outlined in the law, including notice requirements to affected firms.

On July 1, 2010, President Obama signed into law H.R. 2194, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010.  Final action on the measure, which cleared the House of Representatives in December of last year by a vote of 412 to 12 and was approved in the Senate by unanimous consent in March of this year, was delayed until the United Nations’ Security Council completed action on sanctions against Iran’s nuclear program in early June and the European Union subsequently approved its own new set of sanctions targeting Iran later in the month.

The new law (Public Law No: 111-195) would bolster the Iran Sanctions Act (ISA) with new economic penalties aimed at persuading Iran to change its conduct regarding its nuclear program.  As supporters of the legislation describe it, “In effect, the Act presents foreign banks doing business with blacklisted Iranian entities a stark choice— cease your activities or be denied critical access to America’s financial system. “  The Act also would also hold U.S. banks accountable for actions by their foreign subsidiaries.  In summary, the new law would: 

• Impose sanctions on foreign companies  -- including insurance, financing and shipping companies -- that sell Iran goods, services, or sensitive technologies that assist Iran in developing its energy sector;
• Ban U.S. banks from engaging in financial transactions with foreign banks doing business with the Islamic Revolutionary Guard Corps (IRGC) or helping Iran’s nuclear program;
• Create three new sanctions under the ISA, including: (1) a prohibition on access to foreign exchange in the U.S.; (2) a prohibition on access to the U.S. banking system; and (3) a prohibition on property transactions in the U.S.
• Require certification from companies bidding on U.S. government procurement contracts that they are not engaged in sanctionable conduct.
• Strengthen the U.S. trade embargo against Iran by codifying longstanding executive orders and limiting the goods exempted from the embargo.

The new law would also clearly authorize States and local governments to divest from firms conducting business operations in Iran’s energy sector.  Specifically, the law states that it is the sense of Congress that “the United States should support the decision of any State or local government that for moral, prudential, or reputational reasons divests from, or prohibits the investment of assets of the State or local government in, a person that engages in investment activities in the energy sector of Iran, as long as Iran is subject to economic sanctions imposed by the United States.”  The term ‘‘energy sector of Iran’’ refers to activities to develop petroleum or natural gas resources or nuclear power in Iran.

The new law specifically provides the authority to divest the assets of the State or local government from, or prohibit investment of the assets of the State or local government in, any person that the State or local government determines has an investment of $20 million or more in the energy sector of Iran, including in a person that provides oil or liquified natural gas tankers, or products used to construct or maintain pipelines used to transport oil or liquified natural gas, for the energy sector of Iran; or is a financial institution that extends $20 million or more in credit to another person, for 45 days or more, if that person will use the credit for investment in the energy sector of Iran.

Any determination that a company falls into one of the targeted groups is to be made utilizing “credible information available to the public,” and State or local governments must make every effort to avoid erroneously targeting companies and must “verify” that the person engages in the investment activities in Iran specified in the new law. 

The new Federal law’s divestiture authorization applies to past State and local government divestment efforts.  In fact, a State or local government may enforce such a measure adopted before the new law’s date of enactment that provides for divestment or prohibits the investment of the assets of the State or local government in any person that the State or local government determines engages in investment activities in Iran that are determined without regard to the $20 million threshold related to the energy sector as contained in the new law. 

However, in order for divestment actions taken after the date of enactment to receive the Federal government’s “blessing,” they must meet several new requirements similar to those contained in the Sudan divestment law.  First, as noted above, they must apply only to persons who invest $20 million or more in the energy sector in Iran, or extend $20 million or more in credit to be used for investment in that sector.  Then, not later than 30 days after adopting a divestment measure, written notice must be submitted to the U.S. Attorney General describing such measure. Next, written notice must also be provided to any target of such divestment, with an opportunity for them to comment in writing.  (If they can demonstrate to the State or local government that they do not fall into the target group, then the divestment measure is not to apply to them.)  Finally, actual divestment cannot take place earlier than 90 days after such written notice is provided.

With regard to the identification of companies potentially subject to such divestment activity, the Government Accountability Office (GAO) released a report in March of this year that identified 41 foreign firms that had commercial activity in the development of the Iranian oil, gas, and petrochemical sectors from 2005 to 2009. The firms were identified based on GAO’s review of "open source" information, which, according to the report, “stated that these firms supported activities throughout Iran that involved the exploration and development of oil and gas, petroleum refining, or petrochemicals, including the construction of pipelines and tankers for the transport of oil or gas.”

GAO said that the information they used was “gathered from reputable industry standard publications and firms’ public statements.”  Specifically, GAO relied only on government reports and information, energy industry trade publications from around the world, corporate web site information, and professional trade association analysis.  

While this open source information indicates that “the firms provide technical expertise, equipment, or funding that enables Iran to increase the productive capacity and profitability of its oil, gas, and petrochemical sectors,” the GAO cautions that “We did not attempt to determine whether the firms in this list meet the legal criteria specified in the Iran Sanctions Act.”  

• HR 2194 Conference Report  
• GAO Report Identifying 41 Firms Doing Energy Business in Iran 

New CPI for Seniors Proposed 

A bill has been introduced in the House that would create a new CPI specifically for senior citizens. While it would not replace the current measure used for Social Security COLAs, it seems clear that the intention is to be able to use such information to better inform decisions regarding Social Security.  While the bill does not appear to be going anywhere at the present time, its supporters believe that a better, more accurate measure of seniors’ expenses would be very important and useful to have before the Congress begins to look at policies or programs that directly affect seniors – such as changes to Social Security that some believe could be in the works as part of the work of the new National Commission on Fiscal Responsibility and Reform.

Legislation was introduced in the House of Representatives in May that would mandate the monthly formulation and publication of a consumer price index (CPI) specifically for senior citizens.   The bill, H.R. 5305, was introduced by Congressman John Duncan (R-TN), and cosponsored by Congressmen Daniel Lipinski (D-IL), Gregg Harper (R-MS), and Michael Arcuri (D-NY), and Congresswoman Marcia Fudge (D-OH).

Currently, the Social Security COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is a subset of the population covered by the Consumer Price Index for All Urban Consumers (CPI-U).  However, in 1987, Congress directed the Bureau of Labor Statistics (BLS) within the U.S. Department of Labor to begin calculating a consumer price index for the elderly.   This so-called CPI-E is an experimental consumer price index for Americans 62 years of age and older, and is derived from the CPI-U.

Based on data for the 25 year period from December, 1982, through December, 2007, this index has behaved differently than the CPI-U and the CPI-W.  Specifically, the experimental CPI-E rose 126.5 percent, compared with increases of 115.2 percent for the CPI-U and 110.0 percent for the CPI-W.  That translates into average annual increases of 3.3 percent for this experimental consumer price index for Americans 62 years of age and older, compared to 3.1 percent for the CPI-U and 3.0 percent for the CPI-W.

Therefore, the sponsors of the new legislation believe that the present methods used to measure inflation are “flawed and deficient in measuring the average price of consumer goods and services purchased by senior citizens, and the overall impact of inflation on such citizens.”  This includes the CPI-E, since it is based on the CPI-U.  Specifically, they believe that: 

•  Prices used under the current CPI methods are based on geographic areas, retail outlets, and sample items used and purchased by younger consumers and are not necessarily representative of the geographic areas, retail outlets, and sample items used and purchased by senior citizens.
• The locations used under current methods are urban locations that do not reflect the economic challenges faced in rural communities, which often have a far larger demographic segment of senior citizens.
• Senior citizens neither have the flexibility or the ability that younger consumers have to substitute necessary purchases in response to changes in prices, nor the same options as younger consumers have to supplement their income.
• Premium increases for part B of Medicare, part D of Medicare, and other health care costs affecting senior citizens are not adequately considered under the current CPI methodology.
• The cost of taxes on Social Security income is not considered under the current methods, thus putting senior citizens at a greater economic disadvantage each year. 

Under the new proposed legislation, the BLS would prepare and publish a monthly index, to be known as the Consumer Price Index for Seniors (CPI-S), that indicates monthly changes in expenditures for consumption that are typical for individuals in the United States who are 62 years of age or older. 

However, the bill language does not specifically require that such a new CPI-S be used for Social Security COLAs.  Furthermore, as a 2008 article in the BLS Monthly Labor Review points out, many Social Security beneficiaries are younger than 62 years of age and receive benefits because they are surviving spouses or minor children of covered workers or because they are disabled.  This could suggest that a Social Security COLA strictly linked to a CPI solely for individuals 62 years of age or older may not be as appropriate as might first appear.  Nevertheless, Congressman Duncan believes that “Before the Congress begins to look at policies or programs that directly affect seniors, I think it is important that we have a CPI that accurately reflects their expenses.” 

The bill has been referred to the House Committee on Education and Labor, where no further action has been taken.  There is no companion bill in the Senate.  Of the five sponsors of the legislation, only Congresswoman Fudge is a member of the Education and Labor Committee.

• Text of HR 5305 
• BLS Monthly Labor review Article on CPI-E

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.

Private Sector Pension Funding Relief Approved

Roth 457 Provisions Moving in Senate

Small Companies Get Permanent Exemption from SOX Section 404(b)

NCSL Releases New Report on DC, Hybrid Plans

Number of Fortune 100 Companies Offering Only DC Plan to New Hires Continues to Grow

Study Says Quarter Million Dollars Needed for Medical Expenses in Retirement

PCAOB Survives Supreme Court Ruling

New SLGE Issue Brief Endorses MVL for Public Pensions

Are Higher Retirement Ages Necessary in the Future?

What States are Doing to Restore, Preserve Pension Plan Sustainability

Infrastructure Investment Bank Debated

GAO Looks at Retirement Income Options

State Legislators' Organization Continues Assault on Public Pensions

Pew Study Looks at Impacts on Recession on Big City Pensions

FSLG to Hold Free Webinar on Fringe Benefits

Private Sector Pension Funding Relief Approved

On June 24, 2010,both the House and Senate finally approved legislation to provide relief for private sector defined benefit plans from the funding requirements imposed on them by the Pension Protection Act of 2006 (PPA).  The legislation, H.R. 3962, which was signed into law by President Obama the next day (Public Law No: 111-192), provides temporary funding relief to single employer and multi-employer defined benefit pension plans that suffered significant losses in 2008 by permitting  plan sponsors more time to make up those investment losses. 

Specifically, under the new law, single employer private sector plans will be allowed to elect extended amortization periods for any two plan years during the four-year period of 2008-2011, allowing them to choose amortization periods of nine or 15 years instead of the seven years required by the PPA.  Multi-employer plans will also be provided with similar relief.

The new law, which also raises the Medicare payment rate for physicians -- hence the title:  “The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act” -- does not contain any provisions affecting public sector DB plans.   Some think the changes to the PPA may reflect a consensus that the current pension funding rules for private sector employers, whose pension contributions are tied to MVL-type bond yields, are too harsh. 

• NIRS Commentary:  Pension Breathing Room

Roth 457 Provisions Moving in Senate

The Senate substitute for the Small Business Lending Fund Act of 2010 (H. R. 5297) contains Roth 457 provisions.  The bill, to which is also attached H.R. 5486, the Small Business Jobs Tax Relief Act of 2010, which was passed by the House earlier in June and contains a number of tax changes, had been the subject of a GOP filibuster, but the Senate invoked cloture on June 29, 2010.  However, final action on the bill was not completed before the Senate left town for the Independence Day recess. 

Unlike the original House bill, the Senate measure includes a provision permitting Roth-like contributions to governmental 457 plans. Another provision would raise $5.1 billion by allowing individuals with 401(k), 403(b), and governmental 457(b) plans to roll their pre-tax account balances into Roth individual retirement accounts.  Senate Finance Committee staff were reported as stating the amount of the rollover would be included in taxable income (except that portion that is a return of after-tax contributions).  However, if the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. 

It is not yet certain if the House, which has opposed the Roth 457 treatment in the past, will accede to the provision this time around.  The need for revenue to pay for other small business tax breaks in the bill may end up being the deciding factor.

Small Companies Get Permanent Exemption from SOX Section 404(b)

A provision in H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act (see related story, above) will provide a permanent exemption from compliance with Section 404(b) of the Sarbanes-Oxley Act (SOX) for companies with less than $75 million in market capitalization.

Section 404(b) of SOX requires independent auditors to report on the assessment by management of all public companies of the effectiveness of their internal controls over financial reporting.  Its application to smaller companies has been in contention since SOX was adopted, and there have been repeated delays in its application to the smallest companies.  The most recent was approved by the Securities and Exchange Commission (SEC) in October  of last year, but it was set to expire with annual reports filed for fiscal years ending on or after June 15, 2010.  Furthermore, the SEC made it clear at that time that it was not going to approve any further extensions. 

The exemption only applies to the so-called “auditor attestation” requirement; disclosure of management attestations on internal control over financial reporting under existing Section 404(a) would continue to be required for smaller companies.   Supporters of the exemption argue that the requirement has had a disproportionately negative impact on small and medium sized companies, and that the pending compliance burden has resulted in many companies deciding not to go public in the United States.  However, others argue that the smallest companies are the ones most in need of sound internal controls over financial reporting, given that they are more prone to misstatements and restatements of financial information.  The Council of Institutional Investors (CII) has also previously called such an exemption “unwarranted, unwise and unacceptable to investors.”

In addition to the small business exemption, the new financial reform legislation would require the SEC to conduct a study to determine how the Commission could reduce the burden of complying with section 404(b) for companies whose market capitalization is between $75 million and $250 million while maintaining investor protections for such companies.   The study is also required to consider “whether any such methods of reducing the compliance burden or a complete exemption for such companies from compliance with such section would encourage companies to list on exchanges in the United States in their initial public offerings.”

NCSL Releases New Report on DC, Hybrid Plans

In June, the National Conference on State Legislatures (NCSL) issued a new study that examines state governments' defined contribution retirement plans that are designed as primary coverage for a group or class of state employees or state teachers.  As the report explains, this “includes plans that eligible employees are required to join, or that are one of two or three alternative plans that employees choose among.” 

Noting that some states provide hybrid plans, in which employees are covered by both a defined benefit and a defined contribution plan, the report also offers details on the different structures of such hybrids where they exist.  The report does not include optional deferred compensation plans, like Section 457 plans, which all states offer employees and teachers as a means of augmenting primary pension coverage.  Nor does it include all defined contribution plans offered to higher education faculty. 

• NCSL Report on DC, Hybrids

Number of Fortune 100 Companies Offering Only DC Plan to New Hires Continues to Grow

A new analysis conducted by Towers Watson and released in May finds that the number of large U.S. companies replacing their defined benefit plans with defined contribution plans and hybrids -- typically cash balance plans -- continues to increase.  A total of 58 companies in the Fortune 100 currently offer only a DC plan to new hires, according to the Towers Watson examination.  This compares to 55 companies at the end of 2009, and 51 companies at the end of 2008.  Conversely, only 17 companies currently continue to offer a traditional (as compared to a hybrid) DB plan to new hires, down from 20 at the end of last year and 24 the year before that. 

In 1985, the number of Fortune 100 companies offering traditional DB plans to their new employees stood at 89. 

• Towers Watson Analysis of Fortune 100

Study Says Quarter Million Dollars Needed for Medical Expenses in Retirement

Fidelity Investments’ latest annual “Retiree Health Care Costs Estimate” found that a 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout retirement, not including nursing-home care.

The nationwide survey found that retiree health care costs average $535 a month, or about one-fifth of an average couple's total monthly expenses of $2,842, with 11 percent of those surveyed saying that their health care costs are $1,000 a month or higher.  The largest expense is for food, which averaged $659 a month; housing-related costs averaged $494 monthly.

The Fidelity 2010 retiree health care costs estimate is 4.2 percent higher than 2009’s estimate of $240,000 and 56 percent higher than in 2002, when Fidelity first calculated retiree health care costs at $160,000.

The survey assumes individuals do not have employer-provided retiree health care coverage, but do qualify for Medicare. 

• 2010 Fidelity Retiree Health Care Costs Estimate

PCAOB Survives Supreme Court Ruling

In a narrowly drawn opinion, the U.S. Supreme Court ruled on June 28, 2010, that although the 2002 Sarbanes-Oxley Act (SOX) contravened the separation of powers clause of the Constitution by conferring executive power on the Public Company Accounting Oversight Board (PCAOB) members without subjecting them to Presidential control, the unconstitutional tenure provisions are severable from the remainder of the statute.

Thus, once these unconstitutional restrictions are removed as invalid, and the PCAOB thereby becomes removable by the Securities and Exchange Commission (SEC) at will, the High Court ruled that SOX remains “fully operative as a law.”  Nothing in the Act’s text or historical context makes it evident that Congress would have preferred no Board at all to a Board whose members are removable at will, according to the Court.  Therefore, the PCAOB may continue to function as before, but its members may be removed at will by the SEC. 

The PCAOB is seen by many as the cornerstone of the SOX reforms in response to the revelations of financial fraud in 2001 at Enron and at WorldCom and many other public companies.  “The PCAOB has played a vital role in improving the quality of public company financial reports,” said Ann Yerger, executive director of the Council of Institutional Investors (CII), in commenting on how pleased CII was that the Supreme Court held that the PCAOB may continue to operate as before, with only a minor change to its existing structure.

Chief Justice Roberts wrote the majority opinion, joined by Justices Scalia, Kennedy, Thomas and Alito.  Justice Breyer dissented, joined by Stevens, Ginsberg, and Sotomayor. 

• Free Enterprise Fund v. Public Company Accounting Oversight Board
  

New SLGE Issue Brief Endorses MVL for Public Pensions

A recent Issue Brief from the Center for State and Local Government Excellence (SLGE) entitled “Valuing Liabilities in State and Local Plans,” examines the debate between economists and actuaries over what discount rate should be used to value pension liabilities in the public sector.   Written by Alicia H. Munnell, Richard W. Kopcke, Jean-Pierre Aubry, and Laura Quinby of the Center for Retirement Research at Boston College, the paper concludes that if public pension plans used a “riskless rate” of return to value liabilities -- often referred to as the so-called “market value of liabilities,” or MVL -- instead of the assumed return on assets, it would more accurately reflect the guaranteed nature of public sector benefits and “increase the confidence of private sector observers in the reports of state and local pension funds.”

The Issue Brief also finds that reducing the discount rate would raise the unfunded liability of public pension plans by $1.5 trillion, which would have a large impact on reported funding status.  However, according to the Issue Brief, this would not have immediate implications for funding or investments.  Finally, “it could well forestall unwise benefit increases when the stock market soars,” according to Ms. Munnell and her co-authors. 

• Valuing Liabilities in State and Local Plans
  

Are Higher Retirement Ages Necessary in the Future?

According to Beth Almeida, the Executive Director of the National Institute on Retirement Security (NIRS), longer lives do not necessarily require longer careers.  Writing for the New York Times online feature titled “Room for Debate” on the subject of how high can the retirement age go, Ms. Almeida points out data demonstrating that “the steady nature of longevity increases makes it easy to plan financially for longer lives.”   She notes that a recent study shows that longer life-spans add only about 0.2 percent to 0.3 percent to the cost of a typical pension plan each year.

Policy choices that decide to balance budgets by raising retirement ages are judgment calls, the NIRS chief observes.  “But in no way are higher retirement ages a preordained economic or demographic necessity,” Beth reminds us.   

• Beth Almeida:  “We Can Afford Early Retirement”

What States are Doing to Restore, Preserve Pension Plan Sustainability

NASRA’s Director of Research, Keith Brainard, has prepared a table showing selected approved changes to State public pensions to restore or preserve their sustainability.   The information contained in the chart is based on input from NASRA members and their staff and the National Conference of State Legislatures. 

Categories of change include contributions; benefits; early retirement; actuarial methods/processes; and study commission.  Details of the specific changes in these areas are included.

• NASRA Summary of Sustainability Changes

Infrastructure Investment Bank Debated

On May 13, the House Ways and Means Select Revenue Measures Subcommittee held a hearing on proposals to establish an infrastructure bank, which would be a possible mechanism for funding America’s growing infrastructure challenges.  The idea of a “National Infrastructure Reinvestment Bank,” was raised as part of President Obama’s 2008 Presidential campaign, and the President’s FY 2010 budget included the creation of a National Infrastructure Bank to invest in large infrastructure projects with significant national or regional economic benefit.   In addition, in December of 2009, the President’s Economic Recovery Advisory Board also recommended the creation of such a bank.  Finally, several legislative proposals have been filed.

In 2008, when the Obama campaign was advancing the idea of such a bank, two top Obama supporters at the time floated an idea that was directly aimed at public pension plans.  Specifically, in a column appearing in The Christian Science Monitor in May of 2008, then- Kansas Governor Kathleen Sebelius -- who is now a member of Mr. Obama’s cabinet, serving as Health and Human Services Secretary -- and Andy Stern, then president of the Service Employees International Union (SEIU), proposed that public pension funds pool their assets and invest directly in projects to build new roads and bridges, thereby “bypassing the Wall Street firms that want to siphon off profits.” In their view, the revenue streams generated by tolls and other sources “would deliver stable, long-term returns to working Americans, while creating well-paying construction and service jobs connected to each project” that will “[e]nsure that billions of dollars stay in our communities instead of going to big financial firms.”

The involvement of public pension plans is still being discussed.  Congresswoman Rosa DeLauro (D-CT), who testified in support of her legislation, H.R. 2521, the National Infrastructure Development Bank Act, specifically talked about the potential of a national infrastructure bank to “channel” dollars from pension funds to create a U.S. infrastructure development market.   She spoke of CalPERS’ announcement in April that it had already made $700 million in infrastructure commitments and is looking to make more direct investments in infrastructure.  “So the money is out there, even despite the current crisis, and we need to make sure it gets put to work for America,” she said. 

For those interested in the investment opportunities that an infrastructure investment bank could potentially offer, the hearing record provides a good summary of current thinking on the topic. 

• Infrastructure Investment Bank Hearing:  Links to Witness Statements

GAO Looks at Retirement Income Options

At the request of Senator Herb Kohl (D-WI), the Chairman of the Senate Special Committee on Aging, the Government Accountability Office(GAO) recently examined (1) options retirees have for drawing on financial assets to replace preretirement income and options retirees choose, and (2) how pensions, annuities and other retirement savings vehicles are regulated.

The report found that while several lifetime income options are available for retirees with retirement savings, most opt to invest savings.  As a result, “Workers are increasingly finding themselves depending on retirement savings vehicles that they must self-manage, where they not only must save consistently and invest prudently over their working years, but must now continue to make comparable decisions throughout their retirement years,” the report stated.   GAO concluded that “Poor or imprudent investment decisions may mean the difference between a secure retirement and poverty, “ and that “[h]ow we address this issue for the already large segment of the population depending on limited retirement savings to ensure income adequacy throughout retirement continues to be one of the key policy challenges facing the Congress and the nation.”

• GAO Report on Retirement Income: Challenges for Ensuring Income throughout Retirement

State Legislators' Organization Continues Assault on Public Pensions

The American Legislative Exchange Council (ALEC) continues its attacks on public pensions with a 2010 report entitled “State Pension Funds Fall Off a Cliff.”  This report contains two “case studies” that, according to ALEC “are examined in greater depth to explore some fatal flaws that have caused funding crises” at the Public Employee Retirement Association of Colorado and the Kansas Public Employee Retirement System. 

ALEC concludes that “The financial crisis encountered over the past decade reveals that many state pension plans are fundamentally flawed,” and that “The solution to the funding crises in state pension plans will require fundamental reform.”  ALEC says that everything should be on the table, including changes in benefits and increased employee contribution rates, as well as employer contribution rates, and that “These plans should consider replacing their defined benefit plans with defined-contribution plans for new employees.“

ALEC is a nonpartisan membership association for conservative state lawmakers who, according to their website, share a common belief in limited government, free markets, federalism, and individual liberty.

• State Pensions Fall Off a Cliff

Pew Study Looks at Impacts on Recession on Big City Pensions

A May 26, 2010, study by the Pew Charitable Trusts’ Philadelphia Research Initiative entitled “Not Out of the Woods:  The Recession’s Continuing Impact on Big City Taxes, Services and Pensions,” examines the budget issues of Philadelphia and 12 comparable cities: Atlanta, Baltimore, Boston, Chicago, Columbus (Ohio), Detroit, Kansas City (Missouri), Los Angeles, New York, Phoenix, Pittsburgh and Seattle.

According to Pew, their median pension funded ratio decreased from 79.1% in 2008 to 64.0% in 2009.  The report found that Seattle had the biggest decline in the funding ratio for its pension system, down 22 percentage points to 64 percent. Pittsburgh’s pension was in the worst shape with a 34 percent funded ratio, and Los Angeles’ pension was in the best shape at 90 percent.

Pew reports that many cities are proposing some type of pension reform, such as less generous pension plans for new hires. 

• Not Out of the Woods: The Recession's Continuing Impact on Big City Taxes, Services and Pensions

FSLG to Hold Free Webinar on Fringe Benefits

The Internal Revenue Service (IRS) Office of Federal, State and Local Governments (FSLG) will be holding a free webinar directed to State and local government employers on August 25, 2010, to address fringe benefit issues; pre-registration is required.   According to FSLG, the discussion will address the taxability of various benefits; how to report; accountable plan rules; and withholding requirements.

FSLG is responsible for ensuring Federal tax compliance by Federal, quasi-governmental and State agencies as well as city, county, and other units of local government.  The webinar will try to address e-mail questions that are sent in prior to the event, but all such questions must be received prior to August 2, 2010 to be considered. 

• FSLG Webinar Flyer