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Federal
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December 2006
Dog Catches Car: Democrats Win Control of Congress; Change Presents New Leaders, New Challenges for Public Pension Issues As widely predicted, Democrats won control of the House of Representatives on November 7th. However, the GOP loss of the Senate came as more of a surprise and official Washington is still absorbing the implications of a Democratically-controlled 110th Congress, set to convene on January 4th. With new leadership on both sides of Capitol Hill, and new budgetary rules in play, the new Congress will present a number of new challenges for public pension advocates. Democrats will hold a 233-202 advantage in the House of Representatives next year. The Senate will be much more evenly divided, 51 to 49, assuming that both Senator Joe Lieberman, who won as an independent in Connecticut, and Senator Bernie Sanders, independent of Vermont, will caucus with the Democrats, as expected. In addition to new Committee leadership, and the differences in approach to specific issues within a Committee’s jurisdiction that such changes can bring, perhaps the most significant new factor in terms of overall advocacy will be the Democrats’ determination to reinstate the so-called “PAYGO” rules. PAYGO is shorthand for pay-as-you-go, which is a budget rule that mandates that any new spending or tax changes cannot increase the Federal deficit. Thus, a new proposal must either be "budget neutral" or offset with savings derived from existing funds. While the details of PAYGO as it affects the Congressional budget process can be complicated, simply put, Congress will have to “pay” for any increases in spending or tax cuts by adopting corresponding spending cuts or tax increases. Typically, such offsets are derived from the same budget categories affected by the spending increase or tax cut. PAYGO rules can have a major impact on issues of importance to NCTR. For example, the provision in the new Pension Protection Act (PPA) making the pension and retirement provisions of the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) permanent – a provision which NCTR strongly supported – will result in an increase in the Federal deficit of about $30 billion dollars over the next ten years. If PAYGO had been in place in the 109th Congress, this $30 billion “cost” would have to have been offset by $30 billion in either new revenue or cuts in other areas of spending. PAYGO rules will therefore clearly affect the likelihood of success of any new pension proposals that would have a cost attached to them, such as the proposed expansion of the new public safety retiree health benefit (see story below on NCPERS proposal). In addition, the search for new revenues to pay for such Democratic priorities as expanded health care coverage, affordable housing, and increased student loans, to name a few, will place intense pressure on Congress to find potential sources of new funding. One such possible source could be reductions in the current level of subsidization of retirement savings via the tax code through the use of so-called “tax expenditures” (see the following story on possible Social Security reform). Given that upper-income families are currently much more likely to benefit from the exclusion of pension earnings and contributions from taxation than lower-income families, making modifications in this area could not only raise significant revenues but would also level the playing field – an approach Democrats could find very appealing. Finally, don’t forget that it was a Democratically-controlled Congress that entertained the idea of imposing a Federal law similar to ERISA on public plans. (Remember PERISA and PEPPRA?) With concern already growing in Congress about inadequate funding of public pensions -- fueled by continued negative press coverage and evidenced by the Grassley/Baucus study request of the GAO (see August NCTR Federal E-news) and the field hearings on pension funding in Illinois earlier this year (see September NCTR Federal E-news) -- Democratic control of Congress may result in such proposals being resurrected. In short, it will be a whole new ballgame in Washington, D.C., in 2007 – for better or for worse. NCTR and its members must continue their efforts to educate the Congress, member by member, about the benefits of the public pension defined benefit structure, the role we play in assuring retirement security for millions of Americans, and the responsible manner in which our systems are governed and funded. To help in planning your part in this ongoing undertaking, here is
a more detailed breakdown of the shape the new Congress will take, with
a focus on areas of interest and concern to NCTR: House of Representatives As widely reported, the new leaders of the House will be Speaker Nancy Pelosi (D-CA), replacing Dennis Hastert (R-IL), and Majority Leader Steny Hoyer (D-MD). The new Majority Whip will be James Clyburn (D-SC). Other top House leadership posts include Democratic Caucus Chair Rahm Emanuel (D-IL) and Caucus Vice-chair John Larson (D-CT). GOP leaders will be Minority Leader John Boehner (R-OH), Minority Whip Roy Blunt (R-MO), Conference Chair Adam Putnam (R-FL), Conference Vice-chair Kay Granger (R-TX), Policy Committee Chairman Thad McCotter (R-MI), Conference Secretary John Carter (R-TX), and Chairman of the Republican Congressional Campaign Committee Tom Cole (R-OK). Key House Committee restructurings, including new Chairmen, top Republicans (also known as the “Ranking Member”) and new members, where known, are as follows: Ways and Means – The new Chairman is Charles Rangel (D-NY), replacing Bill Thomas (R-CA), who retired. The new Ranking Member is Jim McCrery (R-LA). While Subcommittee assignments have not been finalized, Pete Stark (D-CA) is expected to chair the Health Subcommittee, and Sander Levin (D-MI) the Social Security Subcommittee. GOP Committee assignments have yet to be finalized, but new Democratic members of Ways and Means are:
Education and the Workforce – George Miller (D-CA) replaces fellow Californian Buck McKeon (R-CA) as Chairman; McKeon now becomes the top committee Republican. New Democratic members of Education and the Workforce are:
Financial Services – Barney Frank (D-MA) assumes the new Chairmanship, replacing Mike Oxley (R-OH), who has retired. The new ranking Republican Member will be Spencer Bachus (R-AL), who defeated Richard Baker (R-LA) for the post. New Democratic members of Financial Services are:
Senate The new Majority Leader is Senator Harry Reid (D-NV), replacing Senator Bill Frist (R-TN), who has retired. The new Majority Whip is Senator Dick Durbin (D-IL). Other Democratic leadership positions include Charles Schumer (D-NY) as Chairman of the Democratic Senatorial Campaign Committee and Vice-chair of the Democratic Caucus, Patty Murray (D-WA) as Conference secretary, and Debbie Stabenow (D-MI) as Chair of the steering committee. Top Senate Republicans are Senator Mitch McConnell (R-KY), formerly the Majority Whip and now the new Minority Leader, and Senator Trent Lott (R-MS), the new Minority Whip. Other GOP leadership positions include Conference Chair Jon Kyl (R-AZ), Conference Vice-Chair John Cornyn (R-TX), Policy Committee Chairman Kay Bailey Hutchison (R-TX), and Chairman of the National Republican Senatorial Committee John Ensign (R-NV). The composition of key Senate Committees, including their new Chairmen, and new members, where known, is as follows (GOP posts have not been finalized, but are expected to be as shown): Finance – Senator Max Baucus (D-MT) will take over the reins of the Finance Committee from Senator Chuck Grassley (R-IA), who will now become the Committee’s Ranking Member. New Democrats on Finance are:
Health, Education, Labor and Pensions – Senator Edward Kennedy (D-MA) assumes the Chairman’s seat on the HELP Committee, replacing Senator Mike Enzi (R-WY), who is expected to become the new top Republican on the Committee. New Democrats/Independents on the HELP Committee are:
Banking, Housing and Urban Affairs – Senator Christopher Dodd (D-CT) will be the new Chairman, replacing Senator Richard Shelby (R-AL), who should become the Ranking Member. New Democrats on the Banking Committee are:
CRS
Study on PAYGO Rules President Bush has recently directed Treasury Secretary Henry Paulson to meet with Congressional leaders in an attempt to find bipartisan agreement on reform of the Social Security program. Paulson has said there will be no “preconditions” to the discussions, signaling that the White House no longer insists on private accounts within Social Security as a mandatory part of the equation. With these off the table, some Washington observers believe that a solution may be possible that involves progressive indexing of the benefit, an increase in the cap on payroll taxes, and new personal accounts that are in addition to -- not a carve-out from -- Social Security. However, finding additional funds to pay for this grand compromise raises the possibility of major changes to the tax code’s current subsidization of retirement security, and could even mean that mandatory Social Security coverage for all public employees would be on the table. In a news conference on November 8th, President Bush said that he had "instructed" Secretary Paulson to "reach out to folks" on the Hill to see if "we can't at least get a dialogue started" about Social Security. Although the White House continues to insist that it has not backed off its support for private accounts, Secretary Paulson was quoted as saying just before Thanksgiving that he is "going to make a huge effort to persuade people to engage in a bipartisan discussion where we don't precondition our discussion." It has also been reported that White House Chief of Staff Josh Bolten recently suggested that private accounts could perhaps be dropped if that were the price of obtaining consensus. With such strong indications of a willingness to deal on what was previously a sacrosanct component of Mr. Bush’s agenda for Social Security, will the new Democratic Congress be inclined to finally discuss reform? Spanning the political spectrum from an editorial board member of The Washington Post to a commentary in The Wall Street Journal, there are those who think such an outcome is definitely possible. How would it work? Both newspapers suggest that "progressive indexing," an idea advanced by Robert C. Pozen, could form the centerpiece. Mr. Pozen, a former vice chairman of Fidelity Investments and president of Fidelity Management & Research Company, a member of President Bush’s Commission to Strengthen Social Security in 2001-2002, and a Democrat, currently teaches graduate courses in law and business at Harvard University. In 2005, he gained quite a bit of attention with his proposal, which would work as follows. Beginning in 2012, Social Security benefits for those with average annual career earnings of $113,000 and above would be indexed to the rate of price inflation. (At the present, all benefits increase annually based on the increase in average wages, which historically has risen about 1% a year faster than general price inflation.) Middle-wage earners – those with average career earnings between $25,000 and $113,000 a year -- would have their initial benefits indexed to a combination of inflation rates for wages and prices. Finally, those with average annual career earnings of $25,000 and below would continue to have their initial benefits indexed to wage growth, as is now the case. Thus, for all current retirees and those retiring before 2012, as well as for all low wage earners in the future, the current schedules for Social Security benefits would be maintained. As proposed, it is estimated that progressive indexing could save enough money to do away with approximately 70% of Social Security's current unfunded future liabilities, and the concept was actually endorsed by Mr. Bush as well as The Wall Street Journal last year. The thinking is that while Democrats may be initially reluctant to support such benefit "cuts," it is an approach that can nevertheless be sold -- particularly if privatization is off the table. For example, most low-wage workers do not participate in IRAs and have limited access to 401(k)s or other employer-provided pensions, depending instead almost entirely on Social Security for their retirement income. In contrast, most middle- and high-income wage earners participate in these and other private retirement programs which are heavily subsidized under the Federal tax code. As the Congressional Research Service (CRS) has recently documented, the net exclusion of pension contributions and earnings from current taxation is estimated to amount to $124.7 billion in FY 2006. (See October Federal E-News) In testimony before Congress, Mr. Pozen has pointed out that, "from the perspective of overall government support of retirement income, progressive indexing of Social Security benefits is needed to bring about even-handed treatment of all wage groups." The monies needed to plug the remaining solvency hole could be obtained from a number of places. One way to do so that President Bush has indicated some willingness to entertain is by lifting the cap on the payroll tax, which is currently set at $90,000 – another approach whose progressivity should appeal to Democrats as it would only affect the wealthiest taxpayers (top 6%). So what does President Bush get in return? In addition to enhancing his legacy with a Social Security "fix," rumors are that personal accounts could be made a part of the deal as well. However, they would have to be Social Security add-ons, not carve-outs, in order to obtain Democrats’ approval. Mr. Pozen has suggested enhancing the existing structure of IRAs by changing the low-income tax credit for IRA contributions into a partially refundable tax credit as one approach. Another possibility is something called a “Universal 401(k)” that is being advanced by Gene Sperling, a national economic adviser to former President Bill Clinton. Under Sperling’s plan, middle-income and working poor families would be eligible for up to $1,000 in matching funds from Uncle Sam for savings they contributed to new tax-deferred retirement savings accounts. For low-income families, the government could provide a 2-1 match. According to Mr. Sperling, “a family eligible for a 2-1 match could accumulate a nest egg of $190,000 simply by contributing $500 a year for 40 years, assuming a 5 percent rate of return.” However, add-on accounts would increase the budget deficit and, under the new rules that Democrats intend to enforce, they would have to be paid for by offsetting revenue increases or cuts in other programs. One source for such funding, suggested by Sebastian Mallaby, a member of The Washington Post’s editorial board, is to “prune” current tax breaks for saving. According to Mr. Mallaby, this patchwork is “extraordinarily, scandalously regressive,” with 90 percent of the tax breaks going to the richest 40 percent of taxpayers. And how could this “pruning” be accomplished? One approach that has been suggested in the past by the Congressional Budget Office (CBO) is for a flat 5% tax on pension investment earnings! Other potential revenue sources more directly addressing Social Security solvency could include mandatory Social Security coverage for all public pension plans – a suggestion that could raise an estimated $44 billion over the first 5 years. While this is not currently being advanced in the discussions centering on the use of progressive indexing and carve-out accounts, any overall reform of Social Security will inevitably raise the issue. Of course, this will also in all likelihood force a discussion of the repeal or reform of the government pension offset (GPO) and the windfall elimination provision (WEP). Oh well, they do say that every dark cloud has its silver lining….
Pozen
Progressive Indexing Proposal Medicare Part D: Will Democrats Really Be Able to "Fix" it? Democrats made campaign promises to do it. A new poll by the Kaiser Family Foundation says that an overwhelming majority of Americans favor it. But will the new 110th Congress be able to fashion an acceptable way for the Federal government to negotiate prescription drug prices? The lack of any agreement among Democrats on a specific approach may make it more difficult for them than it sounds. Furthermore, with the new Medicare Part D program costs proving to be lower than expected, most beneficiaries reportedly satisfied with their new drug plans, and Republicans charging that permitting price negotiations would be the equivalent of imposing price controls, the politics of Part D reform may also be more complicated than anticipated. Despite the fact that Medicare sets rates for doctors and hospitals, Congress explicitly prohibited Medicare from negotiating drug prices when the new Medicare Part D prescription drug benefit was created in 2003. The theory was that better discounts would result if private insurance plans were allowed to do the bargaining. However, many Democrats and other critics immediately hailed the ban as a massive giveaway to the pharmaceutical companies. They point out that the Department of Veterans Affairs (VA) is permitted to negotiate, and effectively uses the buying power of its 5 million patients as leverage to obtain better prices. For example, according to a recent survey by Consumers Union of “donut hole” or “full-cost” prices for six top drugs in all 44 Medicare Part D plans operating in Broward County, Florida, the monthly cost to the VA for the six drugs was 54 percent lower than Medicare Part D plans. Surely Medicare, with its 43 million beneficiaries, could do as well, supporters of negotiated prices argue. Nevertheless, GOP opponents of lifting the ban and their allies stress that there are differences between the VA and Medicare programs that may not make the analogy a fair one. For example, they note that the VA restricts the number of drugs that they will cover to about 1,300. By comparison, the most popular Medicare drug plan includes approximately 3,000 more options. The VA’s approach can result in lower drug prices, but it also means fewer choices for its beneficiaries, they warn. However, with Medicare being so much larger than the VA, it may not have to use a preferred drug list in order to get better deals, Democrats counter. Medicare’s purchasing power is so great, they contend, that virtually every manufacturer would have to accept its prices. But the drug industry and its supporters argue that this is nothing more than an acknowledgment that Medicare would be setting prices, not negotiating them. The results, they warn, would be either reduced drug-company profits -- thereby curtailing the development of needed medical innovations -- or effective cost-shifting to non-Medicare purchasers. But would simply repealing the ban on bargaining, as some Democrats propose, be enough? After all, the Bush Administration could refuse to implement negotiations. Therefore, some House Democrats, including the new Chairman of the Ways and Means Health Subcommittee, Pete Stark (D-CA), think that in addition to allowing negotiations, Medicare should be ordered to set limits on the price they would pay for each drug, with private insurers permitted to negotiate lower – an approach similar to that used in Canada. Another approach, supported by both incoming Speaker of the House Nancy Pelosi (D-CA) and Senate Majority Whip Richard Durbin (D-IL), would be to create a government program as an alternative to the private drug plans. Medicare would run the new plan using prices that it negotiated with drug manufacturers, and private plans would therefore have to do a better job themselves in negotiating prices in order to remain competitive. Mr. Stark has also indicated he could support such an approach. Finally, some have suggested that drug companies should be forced to give Medicare beneficiaries their best price for a drug, as they are required to do for Medicaid program participants. But even assuming that some consensus could be developed on an approach in the House in their first 100 hours, there may still be rough going once the bill arrives in the Senate – even though all 8 new Democratic Senators have said they would support negotiated prices. The new Chairman of the Senate Finance Committee, which has jurisdiction over Medicare, will be Max Baucus (D-MT), and he has not indicated a great desire to move forward on lifting the ban. In fact, Senator Baucus, who helped shepherd the original Medicare Part D plan through Congress, has voted in the past against permitting drug price negotiations. His staff has recently indicated that Baucus wants to allow more time for the benefit to work as designed before changes are considered, but that “[h]e will continue to look at all negotiation proposals as they are made." Therefore, for the time being, the Senate may simply hold hearings on the issue. Finally, Secretary of Health and Human Services Michael Leavitt signaled that there is little chance for compromise on the issue with the Administration. "In politics," Mr. Leavitt said, "most specific issues like this are a disguise for a larger difference. Government negotiation of drug prices does not work unless you have a program completely run by the government. Democrats say they want the government to negotiate prices. What they really want is government-run health care." So, even with the Democratic takeover of the Congress, don’t look for major reform of the Medicare Part D program any time soon.
401(k) Fees Become Focus of Increased Congressional Interest; What About 457 and 403(b) Plans?
According to the November GAO report, fewer than 20% of workers with 401(k) plans knew how much they were paying in fees. In fact, GAO found that participants can be unaware that they pay any fees at all for their 401(k) investments and are particularly unaware of investment fees that are typically not quantified on account statements. However, fees can significantly decrease retirement savings over the course of a career. As the GAO points out, “Even a small fee deducted from a worker’s assets today could represent a large amount of money years later had it remained in the account to be reinvested.” Congressman Miller had written to the GAO in November of 2005, raising concerns that employers sponsoring 401(k) plans and plan participants may not be aware of all of the fees being charged to them. In addition, the letter raised the issue of whether companies providing services to the plan have undisclosed business arrangements with other service providers that could negatively affect participants. For example, when pension consultants recommend investment options – like mutual funds – to employers that sponsor 401(k) plans, do they disclose that they also receive compensation from the mutual fund companies involved in such referrals? The GAO said that the fee information that 401(k) plan sponsors are currently required by law to disclose is indeed limited and does not provide participants with an easy comparison of investment options. For example, ERISA requires that plan sponsors provide all participants with a summary plan description, account statements, and the summary annual report, but these documents are not required to disclose information on fees borne by individual participants. Furthermore, the GAO found that where additional fee disclosures are required for certain -- but not all -- plans in which participants direct their investments, these disclosures are provided in a piecemeal fashion and do not provide a simple way to compare plan investment options and their fees. In addition to recommending enhanced disclosure, the GAO also suggests that Congress consider amending ERISA and updating regulations to better reflect the impact of undisclosed business arrangements among service providers. Without such changes, the GAO says that some conflicts of interest that affect the fees that participants pay may continue to go unnoticed because service providers are not required to inform plan sponsors of the compensation they receive from other service providers. Consequently, it may not be possible for regulators to identify instances in which service providers might be steering plan sponsors to overpriced investment options or services that are not in the best interest of plan participants and may cause them to pay higher fees. Congressman Miller said in a press release “it’s critical that workers’ hard-earned savings not be wasted on excessive fees. Workers need complete, accurate, and clear information about the total cost of different investment options so they can choose the ones that are best for them. They need to know exactly what fees they are paying so they can get the best deal.” He also announced his intent to hold hearings on the report next year. While not covered in the GAO study, it is very possible that such hearings
could also touch on 403(b) and 457 plans – particularly given
the Committee’s recent interest in public sector pensions. In
this regard, it is well to note Congressman Miller’s interest
in the possibility of improprieties that reach beyond pension consultants’
potential conflicts of interest. Specifically, in his letter to the
GAO requesting this study, he asked if “employers, plan trustees,
or plan administrators receive any compensation or anything of value
that could influence their 401(k) financial management decisions”.
New GASB Implementation Guide Available
The Comprehensive Implementation Guide consolidates and updates previously issued guides to individual standards and provides current guidance on standards for which no stand-alone guides have been published. According to GASB, the 2006–2007 guide also provides the answers to new questions about OPEB and a variety of other topics, including: compensated absences; the modified approach for reporting infrastructure assets; asset impairment; reporting net assets; and termination benefits. The Comprehensive Implementation Guide (product code GSIG07) can be
ordered through GASB’s order department at 800-748-0659 or via
its website at www.gasb.org. HHS Secretary Asks for Public Health Care Purchaser Support
According to Secretary Leavitt, the nation’s network of insurers and providers is so disparate that it cannot accurately be called a health care system. "What we have is a large, robust, rapidly growing health care sector. This disconnected sector needs to be molded into a connected system," he told the coalition of public purchasers of health care. Leavitt drew an analogy to cell phones, banks and airlines, industries in which different companies compete for customers, but use the same systems. If this is to happen with health care -- and it must, he said, if quality is to be improved and costs reined in – then national consistency must be established in four areas: 1) electronic records; 2) standards of quality; 3) pricing information; and 4) incentives that reward good performance. Earlier this year, President Bush issued an Executive Order that directed Federal agencies to make progress in these areas. Specifically, the Order directed major Federal agencies that administer or support health insurance programs to take certain steps that should result in more complete and open information for consumers, including the use of interoperable health IT products, so that data can be easily shared. These Federal departments are also to promote the same kind of gradual improvements in capability outside of the government through their contracts with providers, plans, or issuers. The Administration is encouraging other employers, including private industry as well as state and local governments, to band together and sway their healthcare providers to do the same thing. (See September NCTR Federal E-News) "There is no national health care market," Leavitt said. "There is a network of local markets. This has to happen one market at a time. ... I believe we'll soon see more than 60 percent of the marketplace saying to potential vendors, suppliers and service providers, 'These four big things are important to us.'" The conference, held in Alexandria, Virginia, also featured presentations by Federal Trade Commissioner Jon Leibowitz, Senator Debbie Stabenow (D-MI), Congressional staffers, business representatives, public sector purchasers of health care and others.
New Reform Recommendations; New PCAOB Rules; New Congress: What Does it all Mean for the Future of Sarbanes-Oxley?
Committee on Capital Markets Regulation Report: The Committee, whose report was issued November 30th, is a new organization, composed of 22 corporate and financial leaders from the investor community, business, finance, law, accounting, and academia, that has received the blessing of Treasury Secretary Henry Paulson. Its creation was announced on September 12, 2006, and its stated purpose is to explore a range of issues related to maintaining and improving the competitiveness of the U.S. capital markets. The report begins by noting that, when compared to stock markets and financial centers abroad, the United States is losing its leading competitive position. It points to the trend in IPOs done outside the U.S. as evidence of a decline in competitive position, noting that, as measured by value of IPOs, the U.S. share declined from 50 percent in 2000 to 5 percent in 2005. (Measured by number of IPOs, the decline is from 37 percent in 2000 to 10 percent in 2005.) While the U.S. continues to provide an important source of capital for new equity offerings, foreign companies are increasingly using the private rather than the public markets; for example, in 2005, foreign companies raised 10 times as much equity in the private U.S. markets as in the public markets. The new Committee suggests that one reason for this “going private” is that foreign companies can avoid all the mandated disclosure requirements, SOX Section 404 requirements, and the strict liability provisions of the U.S Securities laws by doing so. The growth of U.S. regulatory compliance costs and liability risks compared to other market centers is a growing competitive problem of U.S. capital markets, the report concludes. The solution, the report suggests, is to reduce the burden of litigation and regulation while increasing shareholder rights. Its key recommendations are broken into four areas:
Investor reaction to the Capital Markets report has been cool. The Council of Institutional Investors (CII), while commending the Committee for acknowledging the importance of shareowner rights, said it “disagrees strongly” with the Committee’s assertion that overzealous regulation is stifling U.S. competitiveness. “We also believe that many of the panel’s recommendations, if adopted, would undermine the effectiveness of market watchdogs and weaken critical investor protections,” CII warned. SEC Commissioner Roel Campos also questioned the report’s conclusion that the U.S. has been losing IPO market share due to SOX. Foreign markets began taking IPO business away as long ago as 1996, a good 6 years prior to the enactment of SOX. "You can't blame Sarbanes-Oxley for that," Mr. Campos is reported as having said. However, he did agree that securities litigation is a problem, and recommended litigation reform be tied to expanding shareholder rights. As for shareholder access to the proxy, Commissioner Campos has suggested that the SEC should consider a system under which shareholders with at least 5% of a company's shares would have the right to include their own director nominations on company ballots. The SEC, which has been struggling to respond to the Second Circuit’s recent decision in AFSCME v. AIG, confirming that shareholders had a right to introduce proposals to adopt proxy access schemes, has once again postponed action on possible changes to SEC Rule 14a-8. The Commission had originally planned to address such changes at a meeting in mid-October, but tabled consideration until December. However, the agenda for the December 13th meeting does not contain a notice of any such consideration.
PCAOB Chairman Mark Olson has said that while the SOX requirements provide great benefits to companies and their investors, “we are concerned that the costs are not adequately aligned with the benefits.” He proposes the PCAOB consider changes at its December 19th meeting that provide for a much more efficient, risk-based, scalable implementation of Section 404’s requirements. In other words, make the audits fit the size and complexity of the company. Currently, large, established companies have been required to comply with the SEC rule since fiscal years ending after November 14, 2004. However, the SEC’s rule has not yet become effective for smaller companies, and the Commission is set to act at its December 13th meeting on providing more time for compliance for these companies, requiring them to first obtain an internal control audit for the company’s fiscal year ending on or after December 15, 2008. (See September NCTR Federal E-news) According to earlier reports, SEC Chairman Chris Cox had proposed to PCAOB Chairman Olson that for the smallest companies, the PCAOB simply require a check of the design of a company's controls, with no mandatory external audit every year. However, that approach does not appear to have been adopted. PCAOB Release on Revised Auditing Standards Congressional Changes: Despite the failure of the Committee on Capital Markets Regulation to recommend legislative exemption of small public companies from Section 404’s mandatory audits, and the PCAOB’s anticipated move to ease existing rules on conducting such tests, with further delays in implementation provided by the SEC, there is still strong sentiment within the business community in favor of major legislative reform of SOX. The Bush Administration also has been signaling that it would consider major reforms, with Vice President Cheney telling CNBC in late October that “I think you can make a case that Sarbanes-Oxley went too far.” Even the much-revered Alan Greenspan, former head of the Federal Reserve, is reported as having said that most of SOX had become a "nightmare" and should be scrapped as soon as possible. How will this be received by the new Democratically-controlled 110th Congress when it convenes in January? Although many consider the Democrats less friendly toward business than their GOP counterparts -- suggesting that reform will face an uphill battle -- many of the new Congressional leaders are no strangers to advancing business interests. For example, incoming House Speaker Nancy Pelosi (D-CA) represents a district rich both in high tech companies and venture capital firms, two groups particularly interested in market regulation and the effects of SOX 404 on small companies. She has commented on the law’s "unintended consequences" and has indicated that she would support revisiting it. Furthermore, according to the National Venture Capital Association, they believe that she has made it clear that there need to be changes to Sarbanes- Oxley, particularly for smaller, emerging growth companies. Congressman Barney Frank (D-MA), set to chair the House Financial Services Committee, has also said he would look for ways to ease the costs of the SOX law on smaller companies. “I think Sarbanes-Oxley, as administered, has become too burdensome," Mr. Frank is reported to have said. However, he has also emphasized that he thinks it is possible to reduce the law’s burdens on smaller companies without undercutting its principles. It is expected that Congressman Frank’s early priorities as Chairman of the Financial Services Committee will focus on housing issues. But even here, he has indicated that if business groups support his efforts to expand affordable housing programs, then perhaps he and his fellow Democrats would support efforts to control burdensome regulation. In the Senate, the new chairman of the Banking Committee, Chris Dodd (D-CT), is, in his own words, not “allergic to business.” Dodd represents a state in which many of the nation’s most powerful businesses, including insurance companies, accounting firms, and hedge funds, are located. As a “bedroom community” for New York City, Connecticut, with the highest per capita income in the nation, is also home to many of the nation’s top corporate leaders. However, Senator Dodd has indicated that when it comes to Sarbanes-Oxley, he is satisfied with the law as it stands. He has said that he is open to listening to reform proposals, but has also warned that “if I get a sense that these new proposals are going to weaken transparency and stability and the competence in the system, then I'm going to be resistant." Therefore, while reform of Sarbanes-Oxley is clearly not as likely as it perhaps would have been if Republicans had maintained control of the Congress, neither is it off the table now that the Democrats will be calling the shots. Anticipated actions by the SEC and the PCAOB may also help to satisfy some critics. But other reforms of the securities industry are likely to be advanced by the business community, including a number suggested in the new Capital Markets Regulation committee’s report directed at securities litigation in particular. The players may have changed, but the play will go on.
NCPERS Promotes Expanded Retiree Health Benefit; Provides Guidance on New Public Safety Officers Provision of PPA
The new Pension Protection Act contains a modified version of H.R. 2177, the Healthcare Enhancement for Local Public Safety (HELPS) Retirees Act, introduced by Congress Chris Chocola (R-IN) in 2005. As introduced, the bill would have provided up to $5,000 annually in tax-free disbursements from pension plans for public safety retiree medical premiums, and would have cost the Federal government almost $5 billion in lost revenues over its first 10 years of implementation. However, the final version included in the new law reduced this annual limit to $3,000 in order to lower overall costs of the provision. The concept first surfaced legislatively in 2003 as a section of H.R. 1776, the Portman-Cardin bill as introduced in the 108th Congress. As originally proposed, all retirees-both public and private – would have been able to elect to use retirement plan distributions on a pre-tax basis to pay for their share of the cost of retiree health plan coverage (including coverage under a qualified long-term care insurance contract). In addition, in order to qualify for pre-tax treatment, the distribution would have to be used to pay part or all of the premium (or imputed premium in the case of a self-insured plan) of only retiree health plans maintained by the retiree’s former employer. Finally, there would have been a cap on the amount of pre-tax retirement plan distributions that could be used for retiree health purposes, phased in over time, beginning at $500 and increasing to $2,000. However, the retiree health benefit was ultimately dropped from the legislation due to its cost. In the 109th Congress, NCPERS modified the legislation to apply to only public safety officers and made it their self-proclaimed “number one legislative priority.” Changes included making the payments excludable from retiree gross income, but only if payment of the premiums is made directly to the provider of health plan by deduction from a distribution from the retirement plan. Nor does the new legislation limit the payments to the employer’s retiree health plans only. Cost will continue to be a problem for any new “HELPS II” legislative proposal, particularly in an environment where legislation that creates lost revenues must be paid for by either cuts elsewhere or new, offsetting revenues. Furthermore, some early staff reaction suggests that Democrats will be more interested in spending monies on expanding the number of individuals covered by health insurance rather than enhancing coverage for those already fortunate enough to have access to it. Explaining why public sector retirees, but not their private sector counterparts, should receive the benefit will also be a challenge. It is hoped that any new legislation will address some of the administrative
challenges that plans and retirees are encountering with the new benefit.
In an effort to provide assistance in this regard, NCPERS has offered
a number of aids, including frequently-asked questions, a model enrollment
from, and a checklist, as follows: HELPS
Retirees FAQs for Governmental pension Funds |
| 7600
Greenhaven Drive, Suite 302 Sacramento, CA 95831 • 916-394-2075
•
916-392-0295 (Fax) |
| Last Update: December 19, 2006 |
