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Federal Governmental Relations

SOME GOOD NEWS FOR A CHANGE: 
HOUSE, SENATE VOTE TO REPEAL 3% WITHHOLDING LAW

SOME GOOD NEWS FOR A CHANGE:  HOUSE, SENATE VOTE TO REPEAL 3% WITHHOLDING LAW
After always seeming to be the messenger of gloom and doom, I actually have some good news to report for a change.  Both the House and the Senate have now voted to repeal the 3% non-wage withholding requirement set to begin applying in a little over a year to all Federal and state governments and their agencies, including their pension plans.  (Political subdivisions of a state, as well as their instrumentalities, would be excluded if they made less than $100,000,000 in payments annually.)  The withholding requirement would not apply to pension payments made to retirees and other beneficiaries, but it would apply to all payments made by a pension plan for property or services.

The House of Representatives acted first, approving H.R. 674, legislation introduced by Congressman Wally Herger (R-CA) and cosponsored by 269 members of the House, on October 27, 2011.  The vote was an overwhelming 405 to 16.  The bill was then sent to the Senate, which finally approved the repeal on November 10, 2011, by a vote of 95 to 0.  However, since the legislation was amended to include tax credits for veterans’ hiring, it must now go back to the House for final approval before it can be sent to President Obama, who has said that he would sign the bill into law. 

The House has been in recess, but will return to work on Monday, November 14th.  While the bill could be voted on as early as Tuesday, November 15th, it is more likely that it will be taken up on Wednesday the 16th.

So while actual repeal is yet to be made final, it is looking awfully good right now.  

NCTR has been working for the last several years with a coalition of other governmental organizations, led by the National Association of State Auditors, Comptrollers and Treasurers (NASACT), supporting this repeal.  However, it was not until the Chamber of Commerce and a coalition of business interests made it a top priority this year that repeal began to gain traction.  The Chamber argued that the 3% withholding tax would have a “dramatic, negative impact on millions of honest taxpaying businesses, farmers, doctors and hospitals, as well as state and local governments,” calling the withholding requirement  “an interest free loan” provided to the Federal government “ on the backs of many honest taxpayers.”

The original withholding requirement was adopted several years ago as a last-minute provision (Section 511) added to raise revenue during the 11th hour of conference negotiations on the “Tax Increase Prevention and Reconciliation Act” of 2006.  The withheld amounts were to be a credit against the tax liability of the recipient of the payment, and were to be shown on an information return after the end of the tax year, similar to backup withholding or withholding on wages.  Originally set to take effect in January of 2011, the provision’s application was delayed on several occasions, and it was to begin applying in 2013 absent this expected repeal.

Implementation of the requirement would create a number of significant challenges for State and local governments.  For example, the sophistication of systems necessary to capture and report the required data vary greatly between governmental entities, and many may not have the resources, capacity or staff to undertake the required withholding and remittance.  In addition, there are the costs to purchase or retrofit existing payment and procurement systems, which, given State and local government fiscal situations, were very problematic.

Repeal efforts in the past have run afoul of the Federal revenues that would be lost as a result.  For example, in 2009, the Congressional Research Service (GRS) reported that eliminating the provision would cost close to $11 billion in lost Federal revenues over 10 years.  However, the costs of implementation to businesses and governments were estimated to be much higher.  For example, the Chamber of Commerce claims that a private-sector study has estimated that the 3% withholding requirement could cost Federal, state and local governments as much as $75.2 billion during its first five years of implementation alone. 

Therefore, at the same time the House approved the repeal, it also adopted H.R. 2576, which changes the calculation of modified adjusted gross income for purposes of determining eligibility for certain healthcare-related programs.  This increased Federal revenue that would result is to be used to offset the costs of repeal of the withholding provision, and H.R. 2576 was combined with H.R. 674 when it was sent to the Senate.

In that body, Senator Scott Brown (R-MA), along with Senators Olympia Snowe (R-ME), James Inhofe (R-OK), and David Vitter (R-LA), had been pushing hard for repeal, and the GOP Senate leader, Mitch McConnell (R-KY), introduced his own repeal legislation, S.1726.  However, in October, the Senate rejected, 57-43, efforts to move forward with this McConnell measure, with Senate Majority Leader Harry Reid stating that “The provision will be repealed but it should be done the right way.”  The Majority Leader also said that Senate Democrats had their own plan for repeal which includes an offset with higher taxes on oil and gas companies and eliminating certain foreign tax credits. 

Nevertheless, once the House passed the repeal with specific offsets, and President Obama endorsed a further extension of the provision’s application in his new Jobs bill, Senate Democrats began to look for alternatives.  The problem was that the House-passed revenue offset, changing the 2010 health-care law to include the nontaxable portion of Social Security benefits in the definition of income used to calculate eligibility for government health-care programs, could end up forcing some people out of subsidized healthcare coverage.  So a “sweetener” was required in order to gain the support of wavering Democrats.  This came in the form of an amendment offered by Senator Jon Tester  (D-MT) that would provide tax credits ranging from $5,600 to $9,600 to businesses that hired unemployed veterans.  
This provided both Democrats and Republicans with wins:  the veterans’ provision was in President Obama’s new Jobs bill, and the repeal of the 3% withholding, as noted earlier, was a major legislative goal for the Chamber of Commerce,

And who said Washington couldn’t work in a bipartisan fashion?


TREASURY, IRS MOVE TO DEFINE “GOVERNMENTAL PLAN” 

So much for the good news.  Now back to more potential gloom and doom.

On November 8th, the Internal Revenue Service (IRS) and the Treasury Department published their long-awaited advance notices of proposed rulemaking relating to the definition of the term “governmental plan” under section 414(d) of the Internal Revenue Code (IRC) as well as additional rules regarding the definition of Indian Tribal Government (ITG) governmental plan.   Each notice contains an appendix setting forth a draft of possible proposed regulations. 

Currently, there are no regulations defining the term “governmental plan” under section 414(d), and the IRS, in consultation with the Department of Labor (DOL) and the Pension Benefit Guarantee Corporation (PBGC) , has been working for several years to develop such.   According to the release, Treasury, DOL and the PBGC “have become increasingly concerned with the growing number of requests for governmental plan determinations from plan sponsors whose relationships to State or political subdivisions thereof are increasingly remote and whose arguments for concluding that their plans are governmental plans raise novel issues.”

These proposed regulations are a very big deal.  If the possible proposed regulations are adopted as they now stand, many plans that believed they were governmental plans could lose their governmental status.  Furthermore, it appears that there will be no “de minimus” rule when it comes to non-governmental employees, and the coverage of employees of a non-government entity would cause a plan to lose its governmental status unless these individuals were also union employees/representatives in the case of a collectively bargained plan, or employees of the plan itself.  And if an employee benefit plan fails to meet the definition of a governmental plan, then ERISA titles I (Federal protection of employee benefit rights, administered by the DOL’s Employee Benefits Security Administration) and IV (plan termination insurance, enforced by the PBGC) would technically apply to it.  In addition, the nondiscrimination and minimum participation rules of the Federal tax code would also apply, as would the minimum funding standards.  

Section 414(d) of the IRC generally defines a governmental plan as "a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing."

The proposed regulations would provide guidance on determining whether an entity is an “agency or instrumentality of a State or a political subdivision of a State” based on a facts and circumstances test. Major factors for determining whether an entity is an agency or instrumentality of a State or political subdivision of a State are whether:

  • The entity’s governing board or body is controlled by a State or political subdivision;
  • The members of the governing board or body are publicly nominated and elected;
  • The entity’s employees are treated in the same manner as employees of the State (or political subdivision thereof) for purposes other than providing employee benefits (for example, the entity’s employees are granted civil service protection);
  • A State (or political subdivision thereof) has fiscal responsibility for the general debts and other liabilities of the entity (including funding responsibility for the employee benefits under the entity’s plans); and
  • In the case of an entity that is not a political subdivision, the entity is delegated, pursuant to a statute of a State or political subdivision, the authority to exercise sovereign powers of the State or political subdivision (such as, the power of taxation, the power of eminent domain, and the police power).

Other factors would include:

  • The entity’s operations are controlled by a State (or political subdivision thereof);
  •  The entity is directly funded through tax revenues or other public sources. However, this factor is not satisfied if an entity that is not otherwise an agency or instrumentality is paid from public funds under a contract to provide a governmental service or is funded through grants by the State or Federal government;
  • The entity is created by a State government or political subdivision of a State pursuant to a specific enabling statute that prescribes the purposes, powers, and manners in which the entity is to be established and operated. However, a nonprofit corporation that is incorporated under a State’s general corporation laws is not created under a specific enabling statute;
  • The entity is treated as a governmental entity for Federal employment tax or income tax purposes (such as, the authority to issue tax-exempt bonds under section 103(a)) or under other Federal laws;
  • The entity is determined to be an agency or instrumentality of a State (or political subdivision thereof) for purposes of State laws. For example, the entity is subject to open meetings laws or the requirement to maintain public records that apply only to governmental entities, or the State attorney general represents the entity in court under a State statute that only permits representation of State entities;
  • The entity is determined to be an agency or instrumentality of a State (or political subdivision thereof) by a State or Federal court;
  • A State (or political subdivision thereof) has the ownership interest in the entity and no private interests are involved; and
  • The entity serves a governmental purpose.

The proposed regulations include a variety of examples to illustrate whether an entity is an agency or instrumentality of a State or political subdivision thereof.   Careful attention should be paid to these examples.

Turning to determining whether a governmental entity has established and maintained a governmental plan for purposes of section 414(d), the proposed regulations would provide that a plan is established and maintained for the employees of a governmental entity if the following requirements are satisfied:

  • The plan is established and maintained by an employer within the meaning of §1.401-1(a)(2) of the Income Tax Regulations;
  • The employer is a governmental entity; and
  • The only participants covered by the plan are employees of the governmental entity.

With the exception of employees of a labor union or of the plan (i.e. representatives described in IRC section 413(b)(8)) the proposed regulations do not include special rules addressing existing practices under which a small number of private employees participate in a plan that would otherwise constitute a governmental plan, such as when a governmental plan continues to cover private employees who were formerly governmental employees.  Thus, it would appear that, as currently drafted, a governmental plan that includes a small percentage of non-governmental employees could no longer still qualify as a governmental plan -- unless these employees were employees or employee      representatives of a union or employees of the plan itself, in which case they are to be treated as employees of the governmental plan sponsor.

NCTR and NASRA are planning on preparing joint comments, and would very much like to hear your views on these proposed regulations.  Comments are due by February 6, 2012.  The IRS also plans to “conduct outreach including listening meetings with interested taxpayers in different geographic locations.”   

TEACHER BENEFITS UNDER THE MICROSCOPE – AND THE GUN

Two new studies were recently released within a day of each other that presented starkly different views of teachers and their benefits.  The first, released on October 31st, was from the National Institute on Retirement Security (NIRS), while the second was a joint study conducted by the American Enterprise Institute (AEI) and the Heritage Foundation.

The NIRS issue brief, entitled “The Three Rs of Teacher Pension Plans: Recruitment, Retention, and Retirement,” finds that pensions play a critical role in school effectiveness and save money by reducing teacher turnover costs.

 Specifically, the NIRS study found that defined benefit (DB) pension plans help to recruit high quality teachers, and to retain highly productive teachers longer, as compared with defined contribution (DC) individual retirement accounts.  Specifically, according to NIRS, DB pensions helped to retain an additional 22,000 teachers nationwide, saving school districts $273.2 million nationally in teacher turnover costs in 2003.

Ilana Boivie, report author and NIRS economist, said, “These cost savings are a particularly important consideration for state and local policymakers striving to improve education, yet continuing to struggle with highly strained budgets.”

A markedly different opinion of teachers and their pensions was presented the next day by Andrew Biggs, a resident scholar at AEI, and Jason Richwine, a senior policy analyst in the Center for Data Analysis at The Heritage Foundation.  Their paper, “Assessing the Compensation of Public-School Teachers,” was presented at an event entitled “Are Public School Teachers Overpaid?” on November 1st, and it found that, on the contrary, due to “generous fringe benefits for public-school teachers” such as their pensions and “greater job security,” total teacher compensation was 52 percent greater than fair market levels, and was “equivalent to more than $120 billion overcharged to taxpayers each year.”

Public-school teachers earn less in wages on average than non-teachers with the same level of education, Biggs and Richwine found, but they claim that “teacher skills generally lag behind those of other workers with similar ‘paper’ qualifications.”   According to their study,

  • The wage gap between teachers and non-teachers disappears when both groups are matched on an objective measure of cognitive ability rather than on years of education.
  • Pension programs for public-school teachers are significantly more generous than the typical private sector retirement plan, but this generosity is hidden by public-sector accounting practices that allow lower employer contributions than a private-sector plan promising the same retirement benefits.
  • Job security for teachers is considerably greater than in comparable professions, and is worth about an extra 1 percent of wages, rising to 8.6 percent when considering that extra job security protects a premium paid in terms of salaries and benefits.

In arriving at these conclusions, Biggs and Richwine make a number of other assertions about teachers.
For example:

  • “Given the relative lack of rigor of education courses, many teachers have not faced as demanding a college curriculum as other graduates.”
  • “On average, teachers do not have the same cognitive skills as other college graduates.”
  • “Holding a degree in education should signal less knowledge than a degree in an alternate subject.”

As for teacher pensions, the AEI/Heritage Foundation study claims that:

  • “Public-sector pensions finance their benefits with a more aggressive funding strategy than private-sector plans. … An aggressive funding strategy implies lower contributions invested in higher risk assets, such as stocks, private equity, and hedge funds.”
  • “The average public worker is effectively guaranteed an 8 percent return [on their contributions]…. We assume a 4 percent interest rate on 401(k) contributions to match the guaranteed nature of DB pension benefits. …Therefore, assuming equal employee contributions, the teacher can expect to receive retirement benefits that are roughly 4.5 times higher than she would receive from a typical private-sector pension.”
  • “In addition to DB pensions, teachers receive average employer contributions to DC pension plans of 1.2 percent of wages, for a total employer contribution toward retirement and savings of 32 percent.  In contrast, the typical private-sector retirement and savings component of compensation equals only 6.2 percent of wages, even after adjusting private-sector DB contributions in a similar manner to public-sector DB plans above.”

Biggs’ and Richwine’s research was used by the Ohio Business Roundtable to claim that public workers make 43 percent more in total compensation than their private-sector colleagues in Ohio.  This in turn was refuted by Jeffrey H. Keefe, an associate professor of labor and employment relations at the School of Management and Labor Relations, Rutgers University.  Keefe found that the AEI/Heritage Foundation paper was “flawed because they projected a very low rate of return on public pension fund assets and committed other errors and obfuscations” which he details at great length.

Another interesting take on the Biggs/Richwine study was recently provided by Shaun Johnson, Assistant Professor of Elementary Education, Towson University, Maryland, who wrote an item entitled “Who's Overpaid, Teachers or the Wonks Who Write About Them?”   He asks, with regard to Andrew Biggs, whose AEI salary is $140,100 according to Johnson’s research, “how can a market that should value expertise pay someone like Mr. Briggs so much money to do work in an area that he seems to know so little about?” 

NCTR'S Federal Relations Director:

Leigh Snell
Email: lsnell@nctr.org
Phone: (540) 333-1015