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Federal
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December 2007
New Sudan Divestment Law Signed by President Bush Despite serious concerns with its constitutionality, President Bush
signed into law legislation that would authorize – but not mandate
– state and local government divestiture from targeted companies
in Sudan. The new law, which would impose new Federal reporting requirements
in connection with future divestiture measures, does not require the
development of lists of such companies by any Federal agency or department.
The Bush Administration believes that the new law could interfere with
the implementation of national foreign policy, and the President says
that it will be implemented in a manner that preserves the exclusive
authority of the Federal government to conduct foreign relations. Looking
ahead, perhaps, to other similar battles to come, the new law also expresses
the sense of Congress that divestment is appropriate in any situation
in which a State or local government has determined that an investment
poses a “financial or reputational risk.” Therefore, it came as no surprise that, in signing the bill, President
Bush expressly reserved the authority to implement it consistent with
what he called the Federal government’s “exclusive authority
to conduct foreign relations.” What this will mean in practice
remains to be seen. A recent report on defined contribution (DC) plans from the Government
Accountability Office (GAO) finds that a large proportion of workers
will likely not save enough in DC plans for a secure retirement. Congressional
leaders expressed strong concern with this latest indictment of the
effectiveness of DC plans in providing for adequate retirement security,
noting that the lack of savings in 401(k)-style retirement plans is
especially troubling in light of the fact that such plans are fast replacing
traditional pension plans. The GAO found that only 36 percent of workers participated in a current DC plan, and determined that for all workers with a current or former DC plan, including rolled-over retirement funds, the total median account balance was $22,800. Among workers nearing retirement – those aged 55 to 64 – with a current or former 401(k)-style plan, the median account balance in 2004 ($50,000) was significantly higher, but GAO reported that this would provide an income of about $4,400 per year, replacing just 9 percent of income, on average, for workers in this group. Looking ahead, based on their projections of DC plan savings over a career for workers born in 1990, DC plans could on average replace about 22 percent of annualized career earnings at retirement for all workers. However, projected “replacement rates” varied widely across income groups. For example, workers in the lowest income quartile have projected replacement rates of 10.3 percent on average, with 63 percent of these workers having no plan savings at retirement, while highest-income workers have average replacement rates of 34 percent. The GAO notes that there is little consensus about how much constitutes “enough” savings to have going into retirement, noting that some economists and financial advisors “consider retirement income adequate if the ratio of retirement income to pre-retirement income—or replacement rate—is between 65 and 85 percent.” However, the report also points out that others believe that, due to the uncertainties about future health care costs and future Social Security benefit levels, a much higher replacement rate may be needed. For example, in 2006, the Employee Benefit Research Institute (EBRI)
released an issue brief on calculating realistic income replacement
rates. According to its analysis, low-income workers will require significantly
larger replacement rates, “since non-health care retirement expenditures
are not reduced proportionally with retirement income nor is the health
care expense typically a function of income.” For example, the
EBRI paper estimates that a low-income The GAO report concludes that while their results on both current and projected plan balances “suggest that while some workers save significant amounts toward their retirement in DC plans, a large proportion of workers will likely not save enough in DC plans for a secure retirement.” Congressman Miller and others have introduced legislation addressing 401(k) fees and other DC plan issues in 2007 (see October 2007 NCTR Federal e-News). According to press reports, Congressman Miller would like to move his legislation to the House floor “in the first couple of months” of 2008. · GAO
Report on DC Plans NCTR, NASRA File Comments on Normal Retirement Age Regulations NCTR and NASRA have filed joint comments with the Internal Revenue
Service (IRS) in response to their question whether normal retirement
ages based on years of service should be permitted under governmental
plans. The comment letter reiterates earlier requests from the two associations
that the Federal government should not attempt to create standardized
definitions for normal retirement age, but instead should defer to the
applicable state or local laws, regulations and policies governing a
particular plan. Of course, the new regulations raise the question of the definition
of “normal retirement age.” For the purposes of in-service
distributions, the new regulations provide that normal retirement age
under a plan must be an age that is “not earlier than the earliest
age that is reasonably representative of the typical retirement age
for the industry in which the covered workforce is employed.”
2. Since governmental pension plans typically have normal retirement ages that include a service component or are exclusively service-based, the final regulations should make clear that a governmental pension plan may permit in-service distributions at a time that is no earlier than the earliest time that is reasonably representative of the typical retirement date for the employee group. If employees typically retire after completing 20, 25 or 30 years of service, in-service distributions should be permitted at that point, regardless of the employee’s age. 3. Governmental pension plans often provide multiple benefit structures and cover multiple employee groups. Accordingly, the term “plan” under the final regulations should be interpreted to permit treatment as a separate “plan” (a) each benefit structure under a governmental pension plan that results from differences in the formula for determining the amount of retirement benefits, the time at which retirement benefits may commence, or reductions imposed for early retirement and (b) each classification of employees identified under the terms of a governmental pension plan as having rights or benefits that differ from other employees covered under the governmental pension plan. 4. The final regulation should be revised to include additional presumptions
and safe harbors for governmental pension plans, including: (a) the
time at which an employee is qualified for an unreduced retirement benefit
under a governmental pension plan should be presumed to satisfy the
requirement that in-service distributions be no earlier than the earliest
age that is reasonably representative of the typical retirement age
in the industry in which the covered workforce is employed; (b) for
non-public safety employees, a normal retirement age that is no earlier
than age 55 or the date the participant has earned a minimum of 25 years
of service (regardless of age) should be deemed to satisfy this requirement;
(c) for public safety employees, a normal retirement age that is no
earlier than age 50 or the date the participant has earned a minimum
of 20 years of service (regardless of age) should be deemed to satisfy
this requirement; and (d) governmental pension plans that currently
define normal retirement age or normal retirement date, whether expressed
in terms of age alone, service alone, a combination of age and service,
or a series of alternate age and service combinations, may allow in-service
distributions at their earliest current normal retirement age or date. SEC to Give Small Businesses New One-Year Delay for SOX 404 Compliance
Currently, there are about 5,000 smaller public companies that still are not required to provide an auditor's report on their internal controls, as required by section 404(b) of SOX. Generally, this is every public company with securities registered with the SEC if it has less than $75 million in public equity. There have been repeated delays over years since SOX was adopted, but now, unless the SEC adopts the Chairman’s proposal, these smaller public companies will be required to begin complying with the section 404(b) requirements for fiscal years ending after December 15, 2008. Cox now believes that this implementation should be delayed yet again until the Commission completes its new study and has had time to analyze its results. The study, which will identify trends and provide a comparison to costs under the old auditing standard, is not expected to be completed before June 2008. The Council of institutional Investors (CII) promptly blasted the SEC Chairman’s announcement. Calling it “unwarranted, unwise and unacceptable to investors,” Ann Yerger, CII’s executive director, said that there is no compelling evidence that small companies need more time to adjust to the internal control rules. “These annual reprieves are starting to look like a de facto derailing of a critical investor protection,” Yerger warned. · Cox
Testimony before House Small Business Committee Hedge Fund/Alternative Investments Survey of NCTR, NASRA Members Provides Important Data
In March of 2007, Senator Grassley was joined by the new Democratic Chairman of the Committee, Max Baucus (D-MT), in asking the Government Accountability Office (GAO) to investigate the scope of public and private pension plan investments in hedge funds, and what returns and risks are likely for workers’ retirement funds. As Senator Baucus put it at the time, “We need to know whether hedge funds are real asset builders or just risky business for retirement.” This GAO report has subsequently been expanded to include all alternative investments. More recently, the level of governmental plan investments in hedge funds has become a major focal point in the so-called “carried interest” debate dealing with the manner in which private equity/hedge fund managers’ income is taxed. Opponents of any change in this area have argued that, due to the level of involvement in private equity and hedge funds by governmental plans in particular, raising taxes on these funds would have a significant impact on these plans, with the result that plan sponsors will be forced to make up the difference by increasing pension contributions or allowing the unfunded liabilities of public pension plans to increase. (See September 2007 NCTR Federal e-News.) Therefore, the NCTR Research and Development Committee recommended that a survey would be very helpful in providing accurate information about actual governmental plan involvement in hedge funds and other alternative investments. Working together with Keith Brainard, NASRA’s Director of Research, an asset allocation study was conducted, the results of which have been shared with the GAO and are now available on-line. Fifty-two funds responded to the survey, ranging in size from $1.8 billion to $254.6 billion, and representing $1.96 trillion, or approximately 60 percent of all public pension assets. The survey found that 16 respondents (31 percent) have an allocation to hedge funds totaling approximately $21.7 billion, with the average allocation being 1.1 percent of total assets. As for private equity, the responses showed the average allocation was 5.7 percent. The survey found no apparent correlation between fund size and the likelihood of investing in hedge funds. However, the results did suggest that the larger the fund, the more likely it is to be invested in private equity. With regard to the future, 53 percent of respondents indicated that they expect to make changes to their target or actual asset allocation over the next 3-5 years, increasing diversification primarily through alternative investments. Not a surprising response, given the recent performance of various markets, and hardly the “mad dash” to risky investments in a blind pursuit of needed returns that is all too often the popular media viewpoint. · NCTR/NASRA Asset Allocation Survey Executive Summary Pension Technical Amendments Package Fails to Clear Congress before Christmas Break
NCTR, NASRA and other organizations representing public employers and employees thought they had reached agreement with Congressional staff on a technical amendment that would fix this problem by providing that rates of interest used by State or local governmental plans in accordance with a statute, ordinance, administrative procedure, or other public process, would be treated as permissible methods of crediting interest under the PPA provision. However, in the waning days of the first session of the current Congress, non-specific objections were raised with this proposed amendment. (See November 2007 NCTR Federal e-News.) Some “tweaking” was consequently proposed at the 11th hour that would appear to be aimed at creating a “grandfather” approach, limiting relief only to existing plan provisions and making plan amendments subject to the interest rate cap. Such an approach would clearly be problematic, and efforts were made to sit down with Congressional staff to see if whatever problems that had been identified could be resolved. However, maneuvering in connection with the larger issue of the rules for private sector DB plans delayed such a meeting, and it eventually was postponed when it became clear that the PPA technicals package was not going to advance in the House. The House decision not to move on the package before the end of the year leaves many in what Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, and his GOP counterpart, Senator Charles Grassley (R-IA) referred to as a “tough spot.” In a joint statement issued on December 19th when the Senate passed its version of the PPA technicals (S. 1974), the two leaders pointed out that in the absence of action on the legislation, “the Department of Treasury will not have the necessary corrections and clarifications of the original intent of the Act to sufficiently issue the details necessary to allow the pension community to achieve proper compliance.” They called the failure of the House to pass a pension technical corrections bill by December 31, 2007 “irresponsible.” Furthermore, the Finance Committee leaders warned their House counterparts that they were not in the mood to make dramatic changes to the 2006 reforms. “Perhaps,” the two Senators suggested, “the House majority wants to re-negotiate the Pension Act, which could be accomplished by delaying the effective date of the statute for 1 year.” If so, they reminded everyone that the Senate passed the PPA by a 93 to 5 vote. “It is clear,” Baucus and Grassley said, “that a bipartisan majority of the Senate thinks the Pension Act is good pension policy.” Therefore, in their view, the Senate does not and would not support delaying the effective date of the PPA. “That is a non-starter,” they concluded. Another nominal victim of the failure to adopt the PPA technicals is the legislative fix to the so-called “HELPS I” public safety retiree $3,000 health benefit exclusion. The amendment would provide that self-insured plans are covered under the new law, and was included in the Senate-passed technicals package and has also been included in the version introduced in the House. However, in December, the Internal Revenue Service (IRS) issued Notice 2007-99, making it clear that the exclusion also applies to self-insured accident and health insurance. Therefore, the failure to have the amendment adopted in time for 2007 tax returns should not present a problem for eligible retirees. · Description
of PPA Technicals as Passed by the Senate EEOC Finalizes Rule Permitting Medicare
“Bridge Plans” In the Erie County case, the court held that if an employer provides retiree health benefits, ADEA required that the health insurance benefits received by Medicare-eligible retirees be the same, or cost the same, as the health insurance benefits received by younger retirees. Thus, for example, employers who provided retirees under age 65 with health insurance to “bridge” the gap between the time they retired and the time they became eligible for Medicare, found that they were in violation of ADEA if they tried to terminate these benefits when retirees became Medicare-eligible. Not surprisingly, when the EEOC moved to enforce this ruling, they found that employers, forced to ensure that Medicare-eligible retirees received benefits identical to those of younger retirees, intended to simply reduce or eliminate retiree health benefits that they currently provided, rather than incur additional healthcare costs by providing new benefits to Medicare-eligible retirees. However, when the EEOC therefore moved to make an exception to ADEA to avoid this result, they were blocked in court by the AARP. Last June, this injunction was finally lifted, and the EEOC was permitted to proceed with its original proposal. (See June 2007 NCTR Federal e-News.) The EEOC’s rule, which took effect December 26, 2007, is intended to permit employers to create, adopt, and maintain a wide range of retiree health plan designs, such as Medicare bridge plans and Medicare wrap-around plans, without fear of violating ADEA. It does not require that retiree health benefits be cut, and it does not require any changes to contractual agreements, including union-negotiated collective bargaining agreements, to provide retiree health benefits. · New
EEOC Retiree Health Rule Despite Some Negative Spin, New Pew
Report Echoes Recent GAO Findings on Shape of Public Plans A new report from the Pew Charitable Trusts finds that governmental pensions plans are “in reasonably good shape,” having set aside 85 percent of the needed funding for pension benefits. However, the report is ominously entitled “Promises with a Price,” and the Pew press release lumps together the pension obligations with those attributable to retiree health care and other non-pension benefits, and leads with the charge that “States Face $2.73 Trillion Bill for Retiree Benefits.” The Pew study reports that at the end of fiscal year (FY) 2006, states had set aside over $1.99 trillion, or about 85 percent, of the $2.35 trillion they had made in pension promises – leaving about $361 billion unfunded. As with the GAO report, which found that, in general, State and local governments have set aside funds to meet most of their future pension costs, the PEW report also concludes that “Nationally, state pension plans are in reasonably good shape.” However, their press release also underscores that the Pew numbers are “conservative” and do not include all costs for teachers and local government employees. The Pew report also tracks the GAO conclusion that when it comes to other post-employment benefits such as retiree health care, the situation is dramatically different. However, unlike the GAO, which was careful to maintain the distinction between the two, the PEW report lumps OPEB promises together with pension obligations to come up with a $2.73 trillion price tag – a number guaranteed to get the attention of the media and the general public. Furthermore, the PEW press release chooses to take the “glass-half-empty” viewpoint and focuses on the $731 billion that is unfunded instead of the $2 trillion the States already have set aside to meet their overall long-term retiree obligations. For example, the first quote in their release, attributed to Susan Urahn, managing director of the Pew Center on the States, stresses “the magnitude of this bill,” the fact that “paying it will require an enormous investment of taxpayer dollars,” and the observation that “For states that have dug themselves into a deep hole, there are no quick and easy solutions.” The report also provides “fact sheets” for each state, which lay out specific numbers for both pensions and OPEB liabilities. The fact sheets also rate how each state is doing in paying its annual pension bill and in managing its bill for other non-pension obligations – from “Top Performer” to “Needs Improvement” to “Below Par.” As expected, early media reports zeroed in on the negatives, but on balance, the basic findings are positive. When combined with the GAO report’s conclusion that, in general, public pensions are well-funded and well managed, and that state and local governments are likely to need to raise their contribution rates only slightly to meet future pension costs, the overall news is good. But then again, that doesn’t sell papers…. The Pew Charitable Trusts, an independent nonprofit, is the sole beneficiary of seven individual charitable funds established between 1948 and 1979 by two sons and two daughters of Sun Oil Company founder Joseph N. Pew and his wife, Mary Anderson Pew. Historically a conservative organization, the Trusts has become more liberal in recent years. The Pew Research Center, funded by the trusts, is one of the largest think-tanks in Washington. · Pew
Press Release on “Promises with a Price” (with links to
the full report and State fact sheets) Congress Opts to Postpone Efforts on Healthcare Reform Legislation Faced with a January 1, 2008 effective date for several controversial
changes in Federally-governed healthcare, and strong opposition from
the Bush Administration to proposed reforms, Congress chose to delay
its efforts and instead passed a temporary patch to buy time until later
in 2008 on Medicare reimbursement rates and several other health reform
issues, including SCHIP. However, all of the contentious disputes that
prevented a decision on these reform initiatives have not been resolved,
only postponed. Many of the underlying causes of deadlock – a
slim Senate majority, warring factions among Republicans, and an unyielding
Administration, to name a few – remain in place. Now faced with
further election-year foot-dragging by Congress, long-term changes in
Federal healthcare will probably have to wait until after the November
elections. The legislation contains a host of smaller healthcare provisions to help offset the legislation’s $5.3 billion cost. For example, it restricts Medicare Advantage special needs plans (SNPs) from expanding and blocks new SNPs from entering Medicare. It also continues a controversial provider quality reporting initiative; extends abstinence-only education programs; halts entry of new long-term acute care hospitals pending quality assurance standards; and re-ups a program helping poor Americans pay their Medicare premiums. The provider community had been extremely vocal in opposing the planned Medicare reimbursement cuts. Doctors threatened that they would be forced to refuse to see new Medicare patients or withdraw completely from the program, in addition to making cut-backs in staff and equipment modernization. And the President was adamant when it came to SCHIP expansion, carrying through on his promise to veto the “new-and-improved” SCHIP reform package sent to him by Congressional Democrats after their effort to override his first SCHIP veto failed. The new law therefore simply extends the SCHIP program for one year with enough funding for States to maintain their current enrollment levels. It leaves unclear the effect of the policy directive announced last August by the Administration that would not allow states to expand SCHIP eligibility unless they had enrolled 95% of children in families with incomes up to 250% of the federal poverty level. While the acting Administrator of the Centers for Medicare & Medicaid Services (CMS) is reported as having said that this would not require states to disenroll children from the program, Democrats claim that in the 14 states that provide SCHIP coverage to children in families with incomes greater than 250% of the poverty level, they will have to roll back their eligibility levels at some point before August 2008 or else pay for such coverage with state funds. But the failure to advance any significant healthcare reforms was not all based on partisanship. Senator Chuck Grassley (R-IA), the Ranking Member of the Senate Finance Committee, said of the legislation, “We were unable to reach consensus even on the Republican side either and, therefore, the Finance Committee was unable to move ahead with the legislation that Senator Baucus and I had been developing.” According to Finance Committee Chairman Max Baucus (D-MT), the Finance
Committee will move aggressively on broader Medicare reform in the next
session of Congress, and he promised that “Work on comprehensive
Medicare · Press Release and Summary of New Medicare, Medicaid and SCHIP
Extension Act of 2007
SEC Makes Executive Compensation Data Available On-Line In December, the Securities and Exchange Commission (SEC) announced the creation of a new online tool designed to help investors more efficiently view Summary Compensation Tables and certain other data in the proxy statements of 500 of the largest American companies. Total annual pay as well as dollar amounts for salary, bonus, stock, options and company perks is available, and can be compared with those of other companies by sorting according to industry or size. The SEC’s new tool, the “Executive Compensation Reader,” is based on the Commission's executive compensation disclosure rules, adopted in 2006 (see August 2006 NCTR Federal e-News), that took effect in 2007. According to SEC Chairman Chris Cox, the new tool eliminates the need to “hunt through financial statements, footnotes, proxy statements, and other disclosure documents to figure out how much a company pays its top executives." The SEC's new Web tool provides information tagged in XBRL, which stands for “eXtensible Business Reporting Language.” It is being developed by an international non-profit consortium of approximately 450 major companies, organizations and government agencies, and provides an open standard, free of license fees. The SEC tool includes direct links to companies' proxy statements, including footnotes and the companies' explanation of their compensation decisions. Comparisons can be shown in both table and graph form, allowing shareholders to compare how executives are paid at companies according to industry, public market cap, or revenue. According to the SEC, the data also can be downloaded into Microsoft Excel “so that users can further devise their own programs and tables.” · Link
to new SEC “Executive Compensation Reader” FAF Responds to Push for International Accounting Standards; Proposes Changes to Oversight, Structure, and Operations of GASB The Financial Accounting Foundation (FAF) Board of Trustees believes that changes need to be made in the funding and operations of the Governmental Accounting Standards Board (GASB). It has also made recommendations concerning its own oversight role, operations and governance, as well as the structure and operations of the Financial Accounting Standards Board (FASB). The FAF says that its proposals are designed to “better position” the FAF, FASB and GASB to “become even more effective and efficient in a changing environment,” and that its recommendations “are of such significance to the capital markets that they should be exposed for public comment.” The FAF recommendations come at a time when the SEC is moving aggressively to replace the existing U.S. Generally Accepted Accounting Principles (GAAP) with the International Financial Reporting System (IFRS) – a system that is moving in sync with the views of proponents of “financial economics.” The FAF is responsible for the oversight, funding, and appointment of members of FASB and GASB. While its Board of Trustees does not direct the standard-setting activities of either, the FAF trustees have the responsibility to periodically review the structure and governance of the organization to assess its effectiveness and efficiency. Their new recommendations come as a result of an evaluation of the future role of the FAF and FASB in what they refer to as “a capital market environment moving toward a single set of global financial reporting standards.” They are also concerned with the future funding and continuing role of GASB, as well as FAF’s future role in preserving the independence and promoting the effectiveness of private sector and governmental accounting standard setting. This accounting standards convergence and globalization is picking up steam. For example, in November of 2007, the Securities and Exchange Commission (SEC) ruled that financial statements from foreign private issuers in the U.S. would be accepted without a required reconciliation to GAAP as long as they are prepared using IFRS. According to the SEC, the purpose of the requirement to use the IASB-approved version is “to encourage the development of IFRS as a uniform global standard.” Subsequently, the Commission heard from the public on December 13 and
17 about moving U.S. companies to the IFRS standard. Witnesses from
the accounting and financial fields said that companies should have
the option of using whatever accounting system they wish. James Schnurr
of Deloitte & Touche cautioned, however, that the SEC would need
to provide guidance to prevent a “free-for-all.” He said,
“I think it would be very confusing to the marketplace”
for a given company to keep switching its accounting system from year
to year. The Council of Institutional Investors (CII) agreed that there
could be problems with unrestricted freedom to move from system to system. Apart from the impact of this convergence movement on investors, the International Accounting Standards Board (IASB), which oversees the IFRS process, is currently working on a fundamental review of all aspects of post-employment benefit accounting, including pensions, with the aim of issuing an interim standard by 2011. Furthermore, the International Public Sector Accounting Standards Board (IPSASB), which has a long-term objective of convergence of its standards with those issued by the IASB where the latter’s requirements are relevant for the public sector, also issued an exposure draft in 2006 proposing requirements for accounting for employee benefits, including short-term benefits, post-retirement benefits, other long-term benefits and termination benefits. The IPSASB standards, although not currently applicable to American state and local governments, provide a clear view of the direction in which the international community is moving in this area, and it is definitely in the direction with which proponents of financial economics agree. For example, the IPSASB’s draft would require a governmental entity to determine the valuation discount rate as the risk-free rate based on market yields of government bonds in a currency consistent with the benefit obligations (or high quality corporate bonds where there is no deep market for the government bonds). In short, if the U.S. moves to IFRS, how long would it take before GASB followed the IPSASB’s lead? Don’t forget, GASB is currently reviewing the effectiveness of Statements No. 25, “Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans,” and No. 27, “Accounting for Pensions by State and Local Governmental Employers.” The GASB staff has substantially completed their planned research efforts, with discussion and a decision expected by the Board at their April 2008 meeting in regard to whether to add a project to the GASB’s current agenda “to address issues related to pension accounting and financial reporting standards and to consider whether standards should be amended in order to improve their effectiveness.” With regard to GASB, the new FAF proposals are to secure a stable mandatory funding source; retain the current size, term length, and composition of GASB; and provide the GASB Chair with decision-making authority to set GASB’s technical agenda. Responses from interested parties wishing to comment on the proposed changes must be received in writing by February 10, 2008. Comments should be submitted by email to tspolley@f-a-f.org. · FAF
Proposed Changes to Oversight, Structure, and Operations of the FAF,
FASB, and GASB
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