|
|
Federal
E-News  |
July 2006
Some Smoke, But Still No Fire: Pension Reform Fireworks Fizzle Despite an appeal for action from the White House, Congress once more failed to meet a self-imposed deadline for a pension deal -- this time the July 4th recess -- and left town June 30th without reaching a final compromise on long-stalled reform legislation. For a change, however, there were some promising signs that an agreement might still possibly be in the works. On June 14th, at a bill-signing ceremony at the White House dealing with new TV and radio indecency fines, President Bush himself reportedly pushed for completion of the pension conference. According to House Majority Leader John Boehner (R-OH), the President told him "he wants us to finish." The day before, the GOP Congressional leadership also began a concerted effort to break the conference deadlock, with Boehner and Senate Majority Leader Bill Frist (R-TN) sitting down with House Speaker Dennis Hastert (R-IL), House Ways and Means Chair Bill Thomas (R-CA), House Education and the Workforce Chair Buck McKeon (R-CA), Senate Finance Committee Chair Chuck Grassley (R-IA) and Health, Education, Labor and Pensions (HELP) Committee Chair Mike Enzi (R-WY) to try to force a deal. Frist said that House and Senate GOP leadership and conferees were going to hold daily meetings until a conference agreement was reached. Whether or not these meetings continued daily until the recess, they did not achieve their stated goal. Nevertheless, there were reports that some slight progress had been made in some of the key problem areas, including reforms in the treatment of credit balances and higher contribution rates for companies with poor credit ratings. In a clear sign that at least some initial agreements might have been reached among Republicans, the following week Senator Enzi met with Senators Ted Kennedy (D-MA), ranking Democrat on the HELP Committee, and Max Baucus (D-MT), the top Democrat on Senate Finance, and subsequently told reporters that significant progress had been made on the pension package in that meeting. (Democrats had been excluded from meetings of GOP conferees.) In another indication that some common ground might have been found, Congressman Boehner told reporters as Congress prepared to leave town for the Independence Day break that the focus of negotiations had moved to the issue of airline relief and hybrid pensions ("cash balance" plans). Furthermore, there are reports that the White House -- which had adamantly opposed allowing air carriers to amortize their pension underfunding over 20 years instead of seven -- has now decided that it will accept this provision. But the Administration is still said to be resisting another provision that would permit the airlines to use higher interest rates to project the current value of their pension liabilities. According to researchers, the airlines' interest-rate provision would let them avoid any further contributions to their pension funds for years into the future. In the meantime, conference items of great importance to the public
sector, such as making the pension provisions of the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent, continue
to receive little attention. Stressing the need to ensure that these
provisions not be allowed to expire in 2010, the national coalition
supporting EGTRRA permanency, of which NCTR is a member, recently ran
an open letter to the Congress in Roll Call, a widely-read publication
on Capitol Hill, urging that any final legislation must include this
vital element.
An amendment dealing with cash balance plans -- which have been effectively dead in the water following the 2003 court ruling in Cooper v. IBM -- is one area of the pending pension reform conference that is of interest and concern to public plans. Currently, only the Senate bill provides for a comprehensive "fix" to the problems for cash balance plans created by the Cooper case (should it be upheld on appeal). The Senate does so by dealing with the Age Discrimination in Employment Act (ADEA) -- a federal law that applies to public as well as private pension plans -- and not just federal tax code and ERISA provisions applicable only to private plans, as does the House bill. However, the manner in which the Senate bill amends ADEA could raise serious problems for public plans by including cross-references to provisions of ERISA (dealing with 3-year vesting and interest-rate corridors) that do not currently apply to governmental pension plans. Despite ongoing meetings about this potential problem between NCTR and other public sector interest groups and key Congressional staff throughout the spring and into the summer, the ADEA language has been one of the areas of the conference that has received little attention by conferees. Now, however, this appears to be changing. Although the problems that the cash balance amendment is intended to address involve private sector conversions, attempts to acknowledge this in the amendment's language have yet to be resolved. The danger for public sector plans is that existing public sector cash balance features as well as potential future hybrid arrangements could continue to be subject to potential challenges under ADEA, should the Cooper case become the law of the land, unless they complied with currently inapplicable ERISA requirements such as 3-year vesting. For example, in a recent letter from AARP to House and Senate pension
conferees, anything other than ERISA vesting rules would appear to be
viewed as "inadequate" in protecting accrued benefits for
older workers in a cash balance plan context. Furthermore, the letter
seems to suggest that in order to avoid "eviscerating the ADEA
protections prohibiting age discrimination in defined benefit plans"
in general, such ERISA-based vesting rules are necessary in order to
protect plan participants' benefits and rights. If this view were to
prevail in the pension reform conference compromise, it could be seen
as opening a back door, through ADEA, for the application of ERISA to
public plans. New FASB Proposal Another Nail in Pension Reform
Coffin? The new pension accounting project of the Financial Accounting Standards Board (FASB) is generating increased attention – and concern -- on Capitol Hill as well as in corporate executive suites. It is now even being blamed in part for the delay in reaching an agreement on pension reform legislation. FASB wants employers to recognize on their balance sheets, and not just in footnotes, the over-funded or under-funded status of their pension plans and other post-retirement benefits (OPEBs), and to do so using the projected-benefit obligation measure and not the earned-benefits measure. At a June 14th hearing before the Senate Banking, Housing and Urban Affairs Committee on phase one of this new FASB project, Senator Mike Enzi (R-WY) is reported to have pointed out that the FASB proposal was complicating efforts to reach agreement on pension reform compromise legislation. Senator Enzi, chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, is one of the lead negotiators on the pension conference. He said that reconciling what FASB is proposing and what Congress is trying to do in conference is very complicated due to the differences between the funding rules of ERISA and the federal tax code that are at the heart of the pension conference, on the one hand, and the generally accepted accounting principles of which FASB is in charge. The challenge, he said, is to be careful that "one is not undoing the process of strengthening what the other is doing." Furthermore, Senator Enzi also expressed concern that the combination of new pension rules (assuming a conference deal can ever be reached) and new FASB accounting rules could produce a "double-whammy" for companies trying to make the transition that would end up causing them to abandon their pension plans. His concern was echoed by Senator Paul Sarbanes (D-MD), the Banking Committee's ranking Democrat, who asked if FASB's new rule wouldn’t cause some companies to be "catapulted into the red." This same concern with the FASB rule has been expressed by many corporate employers with defined benefit pension plans. They concede that the FASB proposal won't affect what companies pay for their pensions, but it could substantially affect their net worth, particularly if any pension deficit must be based on the difference between the projected-benefit obligation and the value of the plan's assets. And if it net worth decreases as a result, more companies may be forced to freeze their current pension plans. (Does this debate over which pension obligation measure to use really matter? According to the Wall Street Journal, at Hewlett-Packard, the projected-obligation measure produced a $935 million pension deficit, while the earned-benefit measure resulted in a $700 million surplus.) The first phase of the FASB proposal is expected to be completed by the end of September, but phase two, which involves even more controversial proposals such as the elimination of the "smoothing" of pension investments, might take up to three years, according to the testimony of FASB Chairman Robert Herz. While FASB's rules only apply to the private sector, their counterpart,
the Government Accounting Standards Board (GASB) often follows FASB’s
lead. Furthermore, with the prospect of even more private sector companies
abandoning their defined benefit plans in response to changes in pension
rules such as this, the public sector commitment to DB plans is placed
under increasing pressure from DC plan proponents. The FASB proposal
therefore merits watching. DOE Delays New Anti-DB Policy; NCTR Prez Urges
its Repeal The Department of Energy (DOE) has announced that it intends to suspend for one year its recently announced policy that would have denied reimbursements to DOE contractors for the costs of their new employees' defined benefit pension plans. However, that is not enough for NCTR's president, Clare Barnett, who, in a letter to Vice President Richard Cheney, urges that the policy be totally repudiated. On April 27th, the DOE issued a new policy that would limit its reimbursements to defined contribution plan benefits for its contractors' new hires, and would impose new, restrictive limits on reimbursements for DB pensions provided to existing employees. The policy immediately came under fire from Congressional Democrats, who sent letters demanding its rescission. Some Republicans also criticized the proposal, and one month later the House of Representatives approved a rider on the DOE's FY2007 Appropriations bill that would prohibit the use of any funds to pursue the new policy. The full Senate has yet to act on its version of the legislation. In response to growing concerns that the proposal could also serve to further delay the already-mired pension conference, on June 19th, Energy Secretary Samuel Bodman wrote to Senate Energy and Natural Resources Committee Chairman Pete V. Domenici (R-NM), telling him that the new policy would be suspended for one year while DOE sought input from "stakeholders," including the Congress. However, this does not mean that the policy has been abandoned, or that further efforts to prepare for its implementation have been frozen in place. Furthermore, as long as it is pending as a DOE policy (and possibly one that could be copied by other Federal contracting agencies), it will continue to have a chilling effect on federal contractors' continued use of DB plans. Accordingly, Clare Barnett has sent a letter to Vice President Richard Cheney, urging him to use his influence with the President to have the policy rescinded, not simply delayed. Mrs. Barnett wrote to the Vice President in her capacity as a former delegate to this year's National Summit on Retirement Savings, which the Vice President addressed. She expressed "in the strongest terms" her objections to the policy, and warned that "by financially coercing their contractors into 'freezing' their DB plans, the DOE's actions threaten the future financial security of these existing DB plans, present the possibility of greater contractor costs, and could even increase the potential liability of taxpayers." The NCTR President's letter also asked Mr. Cheney to remind the President of his Administration's announced support for the defined benefit pension system and their belief that the promises made to the workers enrolled in these plans must be kept. "The DOE proposal does not help ensure the continued viability of the DB system," she cautioned. "It contradicts the President's stated objectives in the critically important area of retirement security," she concluded, and it "should be withdrawn." (The full text of the Barnett letter to Mr. Cheney will be available at the link noted below once it has been delivered to the Vice President.) NCTR continues to work with other interested organizations to ensure
that the Appropriations rider in the House bill is retained and that
the DOE policy is stopped dead in its tracks and not simply suspended
for one year. IRS Shut down: Every Cloud Has Its Silver Lining? Torrential rains along the East Coast during the last week of June brought terrible devastation and tragic loss of life, and resulted in extensive flooding in the nation's capital. For example, the Internal Revenue Service (IRS) headquarters building in downtown Washington found its subbasement submerged in at least 20 feet of water, while its basement filled to a level of five feet. Consequently, the IRS announced June 29th that it is very likely that its headquarters will be closed for the next 30 days, at a minimum. However, potential celebrants should note that repairs to its headquarters
won't affect service or enforcement operations, according to the IRS.
Many of its 2,400 employees who work downtown have been relocated to
other buildings in the DC metropolitan area, and others will telecommute.
GASB Ignores Public Sector Concerns in Issuing
Final Medicare Part D Technical Bulletin On June 30th the Government Accounting Standards Board (GASB) issued a Technical Bulletin clarifying how state and local governmental entities should report payments received from the federal government under the retiree drug subsidy provisions of Medicare Part D. The final version was essentially unchanged from the staff proposal published in early March of this year. The action was taken despite serious concerns expressed by NCTR, NASRA and other representatives of governmental employers and employees. In an April comment letter to GASB, the public sector representatives strongly encouraged approval of the use of the Part D subsidy to offset OPEB liabilities. "To require a calculation without a reduction for Medicare D reimbursements, as the proposed recommendations direct, would actually be counterproductive and would likely produce the unintended consequence of accelerating the elimination of retiree healthcare coverage," NCTR and the other organizations warned. However, the GASB bulletin, which took effect immediately, requires
that Medicare Part D payments should be reported as revenue, and that
the costs a government reports in its financial statements should not
be reduced or "netted" by the amount of the payment. GASB
Announces Adoption of Final Medicare Part D Guidance IRS Section 415, Section 403(b) Regulations Behind Schedule Despite earlier expectations that final regulations under Sections 403(b) and 415 of the Internal Revenue Code would be released by the end of the second quarter of 2006, the timetables appear to have slipped somewhat. The far-reaching 403(b) regulations are reportedly in their very final stages, delayed now by interdepartmental coordination and clearance procedures involving the Department of Labor. They are nonetheless expected very shortly. The 415 regulations are not as far along. They reportedly left the IRS in June and have just begun the final clearance process within Treasury, which could take up to an additional two months. However, the recent flooding in Washington, which has shut down IRS headquarters, could complicate this process. Furthermore, the pension conference is serving as somewhat of a distraction for senior policymakers in Treasury, and should the conference logjam be broken, work on implementation of its provisions would further diminish the ability of key personnel to finish their sign-offs on the 415 regulations. On the other hand, in anticipation of just such circumstances, others think that an impending deal on pensions could actually serve to expedite the approval process as affected staff scramble to "clear the decks" for the upcoming work. Nevertheless, as Washington approaches an election-year August, things
always tend to slow down even under the best of circumstances. On a
more positive note, it does appear that the comments of NCTR and other
public pension interests regarding the testing of COLAs has been heard,
and that the 415 regulations will permit such testing in the year the
COLA is received, based on the 415 limit in effect for that year. As
for the proposals dealing with multiple annuity starting dates, it appears
that, based on the volume of comments on the original proposal, this
section of the regulations may be reserved and modified regulations
could be submitted for additional comment. New Revenue Ruling on Employer "Pick-up"
in the Works The recent use by Congressional conferees of a proposed revenue raiser drafted by the Joint Committee on Taxation (JCT) – the 3% withholding requirement on governmental payments for purchases of goods and services that was included in the recently-enacted capital gains tax bill – has raised concerns about another JCT proposal to raise revenues. Specifically, NCTR and other public pension organizations have been worried that the JCT’s proposal to repeal the use of the so-called "employer pick-up" pursuant to section 414(h) of the Internal Revenue Code could also be gaining some traction. While the good news is that, so far, there are no signs that this is the case, the bad news is that, in the course of checking, it has been discovered that a Revenue Ruling is apparently being developed dealing with governmental pick-up’s. No formal discussions have been held between Treasury and the public sector on this issue, so it is difficult to determine the exact nature of the ruling. However, it appears that Treasury is concerned with previous private letter rulings on the use of the pick-up, particularly in connection with the purchase of service credits, and it is feared that the new ruling could impose new restrictions in this regard. NCTR, NASRA and NAGDCA have contacted the Internal Revenue Service (IRS) in an effort to arrange a meeting with policy-makers to discuss the current usage of the pick-up and the potential for serious disruptions depending upon the nature of the impending ruling. The recent shut-down of IRS headquarters is creating difficulties in
arranging for such a meeting. On the bright side, this disruption could
also be causing delays in the development of the ruling. Another potential
silver lining to those rain clouds? Social Security Reform: It’s B-a-a-a-a-ck…..? Just when you thought it was safe to go back in the water….the great white shark of President Bush's version of Social Security reform has once again raised its ugly head – or should we say "fin" in order to stick with the metaphor? (For all you film fanatics out there, I know that I'm already mixing up "Poltergeist II" with "Jaws II," OK?) One of the GOP's top Social Security experts, as well as the President's new chief of staff, have both recently given the likelihood of reviving Social Security reform in 2007 a "two thumbs up" review. First Congressman Jim McCrery (R-LA) was reported to have said that 2007 would hopefully offer a good opportunity to find consensus on Social Security reform. Mr. McCrery is the likely next Chairman of the powerful House Ways and Means Committee should the GOP retain control of the House of Representatives in November. Following a speech to the U.S. Chamber of Commerce in early June, McCrery, the current Chairman of the Ways and Means Subcommittee on Social Security, told reporters that "I think the president wants to do tax reform, and I'm certainly ready to help him do tax reform in '07 and '08. ... Looking at the lay of the land politically and substantively, it seems to me the more logical order would be Social Security, then tax reform, then healthcare reform." Democrats immediately characterized his comments as promising another attempt at Social Security privatization. "When the House Republican point man on Social Security says that privatizing Social Security will be a top priority next year, it is clear the Republicans once again are not listening to the American people, who resoundingly rejected this risky scheme last year," House Democratic Leader Nancy Pelosi (D-CA) charged. Mr. McCrery supports individual accounts. Then, less than two weeks later, Josh Bolten, President Bush's new
chief of staff, was reported to have said that, looking ahead to next
year, the groundwork is being laid for a renewed effort to reform Social
Security. Taken together, it is clear that Social Security reform in
general, and privatization in particular, may not be as dead an issue
for President Bush’s second term as some had previously thought.
Health IT Runs into Snag in House Health information technology (Health IT) legislation (H.R. 4157) has run into a snag that kept it from being voted on by the full House of Representatives during that chamber's version of "health week" in mid-June, as had been previously anticipated. This comes even though both the House Ways and Means Committee and the House Energy and Commerce Committee had earlier cleared their versions of the bill for consideration. However, there is still some hope that a bill can be sent to the President for his signature before year’s end. The problem came in the form of a June 15, 2006 letter from the Congressional Budget Office (CBO) to Congressman Charles Rangel (D-NY), the ranking Democrat on the Ways and Means Committee. According to CBO, the IT legislation could produce increases in Federal spending because it provides exemptions for donations of health information technology that might otherwise be subject to civil monetary penalties, criminal penalties or sanctions for violating the prohibitions on certain physician referrals. CBO believes that these broad exemptions would serve to implicitly encourage referrals by recipients of health IT to the donors of such. CBO estimates that, in the aggregate, such donations -- which would be permitted by the legislation to come from any entities and not just hospitals, group practices, Medicare Advantage plans, and prescription drug plans -- "would lead to an increase in the volume of services that Medicare and state Medicaid programs pay for, thus increasing costs." Democrats had argued during mark-up on the Health IT bills that these broad exemptions would also increase Medicare fraud and abuse. Instead of creating exemptions in the anti-kickback laws, they offered amendments to provide grants to providers, similar to those contained in the Senate-passed HIT bill, as well as creating a Medicare add-on payment to fund IT adoption. But Republicans believe that the exemptions will permit reasonable steps to be taken to better coordinate care between hospitals and providers, and defeated the Democrats’ efforts. In addition to the CBO letter, jurisdictional differences of opinion
– such as modifications to the Health Insurance Portability and
Accountability Act to preempt state privacy laws within three years,
contained in the Ways and Means bill but dropped by Energy and Commerce
– are also creating continued problems for the legislation. These
are proving more difficult to resolve that had been anticipated. There
is still hope, however, that election year politics will argue for the
passage of some healthcare reform measure before November. The Senate's
version of Health IT, S. 1418, passed that chamber unanimously in November
of 2005, so the chances are good that if a bill can reach conference,
then such arguments will prevail. FTC Fails to Win Hearing Before Supreme Court
on Generics Pay-offs; Legislation in the Works Ignoring warnings by the Federal Trade Commission (FTC) that the economic impact of lower court rulings permitting the settlement of patent litigation between brand name drug manufacturers and their generic competitors is "staggering" on consumers of prescription drugs – including the States – the Supreme Court has decided not to hear the Commission's appeal of the Eleventh Circuit's decision in Federal Trade Commission v. Schering-Plough Corporation, et al. Despite the FTC's insistence that "billions of dollars in added prescription drug costs annually are at stake," the Justices decided to follow the advice of the U.S. Solicitor General and denied the FTC's request for a writ of certiorari, or "cert," at the high court's last regular conference before its summer recess on June 23rd. However, if a bipartisan group of Senators has its way, the Supreme Court's decision will be legislatively overturned. At issue are settlements of patent litigation between brand-name drug manufacturers and generic companies in which the branded company gets to maintain patent exclusivity for longer periods in return for payments made to generic competitors to effectively drop their legal challenges. As part of the deal, the generic company also often gets an agreement from the brand-name company not to oppose the generic's market entry at some predetermined date far closer to the expiration of the brand’s patent -- often far in the future. Until recent court rulings such as the Schering decision in the 11th Circuit, the FTC had been blocking such actions. But since the ruling, an FTC analysis has found at least seven such agreements so far in fiscal 2006, with three in 2005. The Congressional response was immediate. Just hours after the decision was announced on June 26th, four senior Senators from the Judiciary Committee announced the introduction of S.3582, the "Preserve Access to Affordable Generics Act," to stop the practice. The bipartisan group consists of Senators Herb Kohl (D-WI), Patrick Leahy (D-VT), Chuck Grassley (R-IA) and Charles Schumer (D-NY). "This may be the first time in history that the U.S. Solicitor
General under any administration has opposed a request by the FTC for
the Supreme Court to hear a case of this nature," said Leahy, the
Ranking Democrat on the Judiciary Committee. "It is stunning,"
he continued, "that the U.S. Supreme Court would refuse a request
by the Federal Trade Commission to hear a case so important to senior
citizens and others needing lower-cost generic medicines. It is also
regrettable that the Administration has sided with big drug companies
over seniors and the FTC in pushing for this outcome." Senator
Grassley, who also chairs the tax-writing Senate Finance Committee,
focused on the costs of such deals, not just on consumers but also on
Federal programs like Medicare and Medicaid. "Our bill will ensure
that the FTC has the ability to look out for the American public, not
the profits of drug companies," Grassley said. Citizen's Healthcare Group Calls for Universal Coverage
The group, which consists of the Secretary of Health and Human Services (HHS) and 14 members selected by the Comptroller General of the United States, is different from many other such working groups, which often include lobbyists and other “inside the beltway” experts funded by entrenched interest groups of all political persuasions. Instead, the panel, chaired by Randall L. Johnson of Naperville, Illinois (who has more than 30 years of experience in corporate benefits and for the last 22 years worked at Motorola, where he led the design of health care benefits for Motorola employees, retirees, and their families), includes a physician specializing in gastroenterology and in private practice since 1970, a registered nurse who works as a health policy consultant and an adjunct professor at Dartmouth College, an advocate for the disabled who runs a support group for persons with multiple sclerosis, and others with not only a theoretical knowledge of healthcare but practical experience with its problems as well. The group held 6 hearings with experts, stakeholders, scholars, public officials and advocates, and conducted 31 community meetings, as well as special topic meetings and sponsored events, in more than 50 communities across the country. Based on these, as well as reviews of all the major public opinion polls focused on health care conducted between 2002 and 2006 and close to 5,000 individuals’ commentaries on health care matters, the CHCWG prepared its interim set of recommendations. Although universal coverage is one such recommendation, the CHCWG does
not state whether this should be accomplished by the private sector
or the government. This and the report's other recommendations are now
subject to a 90-day public comment period, after which the Working Group
will submit to Congress and the President a final set of recommendations.
The President is then required by the same law that established the
CHCWG to submit a report to Congress on the recommendations within 45
days of receiving them. Following this, the law requires that Congressional
hearings be held on the report and its recommendations, but there is
no subsequent requirement that actual legislation be developed based
on these activities. Anti-DB Proponent Linked to Federal Lobbying
Scandal According to a recent report by the Washington Post, powerful conservative activist Grover Norquist’s tax-exempt organization, Americans for Tax Reform (ATR), was used as a "conduit" for monies given by former federal lobbyist Jack Abramoff's clients to secretly finance grass-roots lobbying campaigns. The Post cited an investigative report on Abramoff's lobbying released by the Senate Indian Affairs Committee in June as the source for this claim. The possible misuse of tax-exempt groups is at issue. Abramoff pled guilty on January 3, 2006, to three criminal felony counts in federal court related to the defrauding of American Indian tribes and corruption of public officials. Norquist, who has known Abramoff since their college days together, is a noted conservative activist who has been called one of the most influential men in Washington. He is perhaps best-known in the public pension community for his efforts supporting conversion of DB plans to DC models. According to a 2001 article in The Nation, "State by state, he's planning to launch a campaign to dismantle and privatize state pension plans and their trillions of dollars of public funds held as investments for retirees. 'Just 115 people control $1 trillion in these funds,' he says. 'We want to take that power and destroy it.'" For example, in recalling his first meeting with George W. Bush 10 days after the 1998 Texas gubernatorial election, Norquist said in a 2004 PBS "Frontline" interview that "I had five major issues that I wanted to talk to him about. I felt that a governor who acted on these five would be demonstrating to the conservative movement and the Republican base that he got it. One was moving from defined benefit to defined contribution pensions for the state pension system, which foreshadows Social Security reform. Bush immediately understood it, and got it passed through one half of his legislature. The other half was run by Democrats." Norquist has proved true to his word. For example, he actively supported the efforts of California Governor Arnold Schwarzenegger to convert his state's public employee DB retiremment system to a DC system. "Make no mistake," Norquist has said, "the current unfunded liabilities that exist under California's defined benefit system are unsustainable. Gov. Schwarzenegger knows that unless the switch is made to a defined contribution, 401-k style system, the State retirement system risks collapse." Norquist is reported as saying that ATR and Abramoff's gambling clients
worked together because they shared anti-tax, anti-regulatory views,
and he denied that ATR was used to conceal the source of funds sent
to others for use in lobbying efforts. New CRS Study of Saving Incentives Faults 401(k) Plans, New Bush Proposals A new study of savings incentives, released June 20th by the Congressional Research Service (CRS,) concludes that the results of government-provided tax incentives for individuals and families to save, in the form of IRAs and 401(k) plans, are "mixed, but generally indicate small effects." The study also criticizes the Bush Administration's tax-free savings proposals as threatening economic growth. The new CRS study also finds that these tax incentives tend to benefit higher-income individuals and families to a much greater extent than their lower-income counterparts because (1) higher-income individuals are much more likely to save, and (2) higher-income individuals face higher marginal tax rates and benefit more from sheltering income from taxation. Furthermore, the study questions the efficacy of tax incentives in light of the tax revenue loss they produce, lowering public saving by reducing the budget surplus or increasing the budget deficit. For example, in FY2006, CRS notes that these tax incentives are estimated to cost the U.S. Treasury $125.6 billion in forgone tax revenues -- almost 40% of the estimated FY2006 budget deficit. (These figures cover both DB as well as DC plans’ "cost" in terms of lost revenues.) Finally, the CRS report examines President Bush's FY 2007 budget proposals to expand tax-free saving opportunities, specifically lifetime savings accounts (LSAs) and Retirement Savings Accounts (RSAs). Both would have an annual contribution limit of $5,000, regardless of age or income, and would be similar to Roth IRAs in that investment earnings would accumulate tax-free. Funds from the LSA could be withdrawn penalty-free at any time for any purpose, while RSA distributions would not be taxed or penalized if made after age 58, death, or disability. The annual contribution limit would be indexed to inflation. The CRS finds that these proposals may actually reduce personal savings. "In addition," the report warns, "the long-term revenue loss from these proposals could be substantial thus leading to a large reduction in public saving. The result of these savings proposals could be a large reduction in national saving and a reduction in economic growth." The CRS is the public policy research arm of the Congress, housed within
the Library of Congress. Created in order for Congress to have its own
source of nonpartisan, objective analysis and research on all legislative
issues, CRS works exclusively and directly for Members of Congress,
their Committees and staff on a confidential, nonpartisan basis. Legislation Responding to Milberg Weiss Indictment Gets Hearing
The Baker measure (1) contains a so-called "loser pays" provision for a plaintiff's attorney should plaintiff’s position be found by the court to be "not substantially justified" and fees and expenses incurred by the defendant "substantially burdensome or unjust;" (2) would require each plaintiff and plaintiff's attorney to disclose any conflicts of interest, including any direct or indirect payment between the two; and (3) would provide courts the explicit authority to use alternative means in the selection and retention of class counsel, including a competitive bidding process. Witnesses included Bill Galvin, Massachusetts Secretary of the Commonwealth; Vaughn Walker, chief judge of the U.S. District Court for the Northern District of California; James Cox, Brainerd Currie Professor of Law at Duke University; and Theodore Frank, resident fellow with the American Enterprise Institute. Mr. Galvin clearly thinks the bill would be a mistake, while Professor Cox notes his "less than wholehearted embrace" of the proposal. However, Judge Walker says that Congress needs to review the operation of securities class actions, and specifically links pension funds (generically) to the issue by mentioning the recent story in the Chicago Tribune (6/22/2006) that raised serious questions about financial relationships between William Cavanaugh, the general counsel of several large pension funds that had served as lead plaintiffs in four class actions and the law firms, including Milberg Weiss, that had served as lead counsel. Judge Walker praised the legislation as plainly seeking to promote transparency and accountability in securities class actions and protect the investing public. Finally, the AEI calls the bill only a "small step" in the right direction, with provisions that are "uncontroversial" and should not be "divisive." Although it does not appear that the legislation will receive any final disposition in the current Congress, Mr. Baker is potentially the next Chairman of the House Financial Services Committee, upon the retirement of Congressman Mike Oxley (R-OH), assuming the GOP retains control of the House of Representatives in November. In any case, he can be expected to pursue the legislation vigorously. On the other hand, Congressman Barney Frank (D-MA), who was able to get Mr. Galvin a seat at the witness table, clearly has concerns with the bill. Mr. Frank will likely be the next Chairman of Financial Services should the Democrats win back the House this fall. Views differ as to the overall effectiveness of the Private Securities Litigation Reform Act of 1995. Does it need amending, particularly in light of the current indictments? Or, as Professor Cox notes, particularly given that there has already been a very significant decline in the number of securities class action filings since the adoption of the 1995 statute, would it be better if Congress were to "pause in considering additional reforms at this time"? What do you think? VA Data Theft Prompts New Bills, Including
Ban on State, Local Use of SS Numbers In the wake of the much-publicized May 28th theft of a laptop computer from the home of a Veterans Administration employee with data on over 28 million veterans, several bills have been introduced in the Congress responding to data security concerns, including one specifically targeting the use of Social Security numbers by state and local governments. Other recent data security breaches, including the June 17th theft of a laptop stolen from an ING employee's home that contained retirement plan information including Social Security numbers of D.C. city employees, is attracting increased media attention to the problem. Georgia Teachers' Jeff Ezell has some suggestions for keeping you and your system out of the spotlight. While most of the bills that were recently introduced are targeted at the federal government’s data security problems, S. 3514, introduced by Congressman Chuck Schumer (D-NY), is aimed squarely at state and local governments, and does not provide any exceptions, such as for the use of data in connection with retirement programs. His proposal, the "Social Security Number Online Protection Act of 2006," would amend the federal criminal code to prohibit a state or local government from displaying to the general public on the Internet the last four digits of any social security number. Violations would trigger a fine of up to $5,000 a day on any state or local government that has a policy or practice of substantial noncompliance with the requirements of this Act, and the Attorney General would be authorized to bring a civil action against a state, local government, or officer, employee, or contractor of such state or local government to enforce compliance with this Act. Finally, the bill would also provide for grants to states and local governments for removing or redacting the last four digits of social security numbers from forms and records of their executive, legislative, and judicial agencies which are currently displayed on the Internet. Data security is a hot topic these days, and getting it under control can be a real challenge. According to the Privacy Rights Clearinghouse (www.privacyrights.org), 88,794,619 records containing sensitive personal information have been involved in security violations since the February 15, 2005 announcement by ChoicePoint of its data breaches after a group of criminals obtained personal information on almost 140,000 consumers through the company. As examples involving state and local governments are disclosed, there could be increased attention from the media as to your system’s data security. Jeff Ezell, Executive Director of the Teachers' Retirement System of
Georgia and a member of the NCTR Executive Committee, provided an excellent
presentation on the subject in general and what they are doing to combat
data theft at Georgia Teachers’ in particular at the Annual Directors
Meeting in Ashville, North Carolina, in June. His presentation provides
some excellent ideas for you to consider, and is well worth your while
to consider using as a stepping-off point for discussions with your
own staff about this very important subject. Congress Reacts to Court Decision on SEC’s Regulatory Authority Over Hedge Funds
Hedge funds are essentially private investment partnerships, limited to institutional investors and wealthy individuals. These funds manage, collectively, anywhere from $1.2 to $2.4 trillion in assets, depending upon whom you ask, and are found to be increasingly attractive investment opportunities for some pension funds, both private as well as public. For example, according to a Bank of New York study, it is estimated that pension plans and other large institutional investors will invest up to $300 billion in hedge funds by 2008, which is up from just $5 billion 10 years ago. However, there is also growing concern that hedge funds, referred to by Senator Orrin Hatch (R-UT) as "the Wild West of our financial markets," are rife with opportunities for manipulation and present risks to investors that are very difficult to adequately assess. (Indeed, some question whether hedge funds are appropriate investments for pension funds at all.) Furthermore, the SEC has found "a substantial and troubling growth" in the number of hedge fund fraud enforcement cases, and, in the last five years, has brought 51 cases alleging that hedge fund advisers have defrauded hedge fund investors or used the fund to defraud others in amounts estimated to exceed $1.1 billion. Calls for greater oversight of what has historically been an unregulated market have been increasing, culminating in the SEC's new rule, which took effect February 1, 2006. It required that managers of hedge funds with more than $30 million in assets and 15 or more clients register with the SEC as investment advisers. Such registration would also entail periodic audits of the funds by SEC examiners. It is this registration requirement that has been voided and sent back to the SEC; hedge funds still remain subject to the SEC's anti-fraud authority. While the SEC, according to a statement by its Chairman, Chris Cox, is currently re-evaluating whether to re-write the rule or to challenge the court's ruling, the Congress is moving ahead. House Democrats on the Financial Services Committee have called on the Government Accountability Office (GAO) to produce a report that provides a comprehensive review of the risks and regulatory framework of hedge funds, including an assessment of the percentage of pension funds that are currently investing in hedge funds, at what level, and with what characteristics. Meanwhile, in the Senate, Banking Committee member Chuck Hagel (R-NE), Chairman of its Securities and Investment Subcommittee, called for additional hearings on hedge funds; his Subcommittee has already held a general hearing on the subject in May. However, before such a hearting could be scheduled, the members of the Senate Judiciary Committee took the opportunity at a hearing on June 28th on hedge funds and independent analysts, scheduled before the DC Court’s ruling, to explore the issue. At this hearing, Connecticut Attorney General Richard Blumenthal (D) said that if Federal law remained silent on hedge fund regulation, the States would step into that void. "Hedge funds are a regulatory black hole - lacking even minimal disclosure and accountability," he said. Former SEC lawyer Gary Aguirre, who alleges that he was fired for his efforts to have Morgan Stanley’s Chairman, John Mack, questioned in connection with alleged insider trading by Pequot Capital Management, a $7 billion hedge fund, also testified. He alleged insider trading on a massive, pervasive scale within the hedge fund industry. Finally, on the House side, Congressman Barney Frank (D-MA), the top
Democrat on the Financial Services Committee (and its potential Chairman
if Democrats gain control of the House in November) along with fellow
Committee Democrats Paul Kanjorski (D-PA) and Mike Capuano (D-MA), have
introduced legislation (H.R. 5712), to amend the Investment Advisers
Act of 1940 to authorize the SEC to require the registration of hedge
fund advisers. The absence of GOP cosponsors does not bode well for
the bill’s current chances for action. In addition, Senator Charles
Schumer (D-NY) reportedly dropped by the Judiciary Committee’s
hearing, discussed above, long enough to assert that the Senate Banking
Committee had "exclusive" jurisdiction over hedge funds. Such
inter-committee squabbles may signal a difficult time ahead for any
legislation to address hedge fund regulation. SEC Filing Info Now at Your Fingertips The SEC announced on June 12th that, for the first time, the information it collects about companies and mutual funds is now fully searchable online. The company filing search engine will now permit real-time, full-text searches of filings on the SEC's EDGAR (Electronic Document, Gathering, Analysis and Retrieval) database of company filings for the last two years. According to the SEC’s press release, you will be able to quickly
and easily identify and retrieve mutual fund filings by fund or share
class. The Commission concedes that, previously, searching for information
on particular funds and particular share classes within funds was "very
difficult." |
| 7600
Greenhaven Drive, Suite 302 Sacramento, CA 95831 • 916-394-2075
•
916-392-0295 (Fax) |
| Last Update: November 16, 2006 |
