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Federal
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June 2007
Treasury Agrees to Include Self-Insured Plans in New Public Safety Retiree Health Benefit Coverage The Treasury Department has advised the leaders of the House and Senate tax-writing committees that it is reversing itself and will now treat health insurance premiums paid to self-funded plans as eligible for the new limited exclusion from the gross income of eligible retired public safety officers, their spouses and dependents that was contained in last year’s Pension Protection Act (PPA). A formal announcement from Treasury is expected soon. Section 845 of the PPA provides public pension plans with the option of instituting an annual exclusion from taxable income of up to $3,000 for eligible retired public safety officers who have payments deducted from their retirement plan distributions to pay for qualified health insurance premiums. In January, the Internal Revenue Service (IRS) issued guidance on a number of provisions in the PPA, including this one, which concluded that premiums paid to self-insured accident or health plans were not covered by the new benefit. (See January 2007 NCTR Federal E-news) In late April, the Chairmen and Ranking GOP Members of both the House Ways and Means Committee and the Senate Finance Committee wrote Treasury Secretary Paulson to tell him that this interpretation was “more restrictive” than was intended. They advised him of their intention to include a clarifying technical amendment in the technical corrections bill currently being developed, and asked that the Secretary therefore “revisit the interpretation” contained in the IRS notice and “modify it to reflect the intended scope of the provision” – which was to include such self-insured plans. According to NCPERS, which worked to obtain the letter to Treasury, other plan implementation problems associated with the new benefit were not addressed because it was decided that the self-insured exclusion was “the most important issue to fix” and that other “secondary issues” had been clarified in speeches by Treasury and IRS staff. Neither NCTR nor NASRA were consulted on this strategy. Treasury responded in a letter dated May 15, 2007, from its Assistant Secretary for Legislative Affairs, which said that “in anticipation of the technical correction, ‘qualified health insurance’ will include employer-provided coverage under both insurance or an employer’s self-funded plan.” Treasury said that they intended to issue “a formal announcement” of this new administrative position “in the near future.” As of this writing, such an announcement has yet to appear. Treasury
Letter on Self-Insured Plans As public plan officials continue to pour over the recently-released final Section 415 regulations, a number of interesting issues have been identified with regard to the way in which the new regulations respond to concerns raised by governmental plans with the original proposal. On April 4, 2007, the Internal Revenue Service (IRS) issued its long-awaited final regulations for Internal Revenue Code (IRC) Section 415, which places limits on the benefits provided by defined benefit (DB) plans and the amounts contributed to defined contribution (DC) plans. As previously reported, public plan concerns with the proposed regulations’ requirement that plans actuarially convert a fixed percentage COLA into a straight life annuity, which would then be subsequently added to the annuity benefit tested under the applicable dollar limit in effect at the time of commencement of the benefit, were generally addressed in a favorable manner. In addition, concerns with the proposed treatment of multiple annuity starting dates were also generally acknowledged, and final regulations in this area have been postponed. (See April 2007 NCTR federal E-news) However, as the new final regulations have been subjected to closer scrutiny, a number of concerns have been identified that warrant closer examination, particularly as they relate to the definition of “an automatic benefit increase feature,” and to the multiple annuity starting date regulations’ possible application in a number of specific situations, such as changes in the form of retirement, for example. Wayne Schneider, General Counsel of the New York State Teachers' Retirement System, has prepared a summary of the manner in which the final IRC Section 415 regulations respond to the concerns of public plans in a number of areas. He has graciously consented to share it with NCTR E-news. If you have identified additional issues, or have a different take on any of those previously noted, please forward your comments to Leigh Snell (Leigh Snell) so that an assessment can be made as to the need for any remedial efforts on the part of NCTR.
Administration Once Again Opposes FTC Efforts to Stop “Pay to Not Play” Settlements Between Major Drug Companies and Generic Competitors The U.S. Solicitor General has once again urged the United States Supreme Court to refuse to hear an appeal of a case involving the making of so-called “reverse payments” as part of the settlement of a patent lawsuit between a brand-name drug manufacturer and a manufacturer of generics. The Federal Trade Commission (FTC) and many third party payor organizations and consumer advocacy groups believe that such payments can be anticompetitive and should be strictly policed. Congress has also entered the debate, and legislation that would prohibit such payments when they are intended to prevent or delay the entry of competition from generic drugs may soon be acted upon as part of major health legislation currently under consideration. The issue here involves situations in which generic companies, suing to invalidate drug patents held by brand-name manufacturers before they expire, reach settlements that involve payments by the brand-name manufacturers to the generic companies in exchange for an agreement by the latter not to enter the market with a generic - and less expensive - alternative to the brand drug in question. The FTC, which had been successfully policing such settlement agreements to prevent collusion, had its efforts effectively shut down in 2005 by court decisions that reversed the FTC’s actions and upheld such settlements. When the FTC sought to have these decisions overturned, the U.S. Supreme Court, at the urging of the Administration in the person of the U.S. Solicitor General, refused to hear an appeal of these rulings requested by the FTC last summer. Now, in the case of Joblove v. Barr Labs, the Solicitor General is pressing the High Court yet again to refuse to entertain an appeal of a similar lower court ruling. The case involves Zeneca, Inc. and AstraZeneca Pharmaceuticals LP, which own the patent for the drug tamoxifen citrate (sold under the brand name Nolvadex), and their settlement with generic manufacturer Barr Laboratories. While the Solicitor General’s amicus brief, requested by the Supreme Court and filed in May, concedes that “the petition presents an important and difficult question, and the court of appeals adopted an incorrect standard,” it nonetheless concludes that “this case does not appear to be a good vehicle for resolving the question presented.” “If not now, when?” That may be the question with which the FTC and its supporters find themselves struggling in light of the Solicitor General’s latest filing. However, Congress may decide not to wait for an answer. Legislation to restore the FTC’s authority (S. 316), introduced by Senators Kohl (D-WI), Grassley (R-IA), Schumer (D-NY), Feingold (D-WI), Kennedy (D-MA), Durbin (D-IL) and Judiciary Committee Chairman Leahy (D-VT), was approved by the Judiciary Committee and reported to the full Senate in February (see March 2007 NCTR Federal E-news). Some believe that it may yet be added to the Prescription Drug User Fee Act, (S. 1082, commonly referred to as the FDA Reauthorization bill), which was approved by the Senate on a vote of 93-1 on May 9, 2007 – either by the House of Representatives, where a companion bill, H.R. 1432, has been introduced by Congressman Henry Waxman (D-CA), or in conference once the House passes the FDA measure.
SEC, PCAOB Move to Ease Impact of SOX 404 Rules on Smaller Companies
On May 23, 2007, by a vote of 5 to 0, the SEC approved new interpretive guidance for management on the evaluation and assessment of its internal controls over financial reporting pursuant to Section 404 of SOX. According to SEC Chairman Chris Cox, “companies of all sizes will be able to scale and tailor their evaluation procedures according to the facts and circumstances” thanks to these changes. Virtually since its enactment, Section 404 has been the focus of intense criticism. Its requirements that companies conduct an evaluation of their internal controls over financial reporting, and that this assessment, as well as the controls themselves, be subject to external audits, have resulted in significant costs that even the strongest supporters of SOX concede have been higher than anticipated – particularly for smaller companies. The new SEC rules, representing the first real substantive modifications to the internal control standards, focus on risk and materiality. They are intended to empower management to focus its compliance efforts on those issues that pose the greatest risk to reliable financial reporting. According to Chairman Cox, “This focus will improve not only the efficiency of 404 compliance efforts, but also the effectiveness of the 404 process, by ensuring the direction of resources toward likely problem areas.” The SEC’s new approach should also benefit smaller companies because it will permit companies of different sizes and complexities to tailor their compliance efforts to their own individual facts and circumstances. “Small companies will be able to apply the guidance to their unique control systems — rather than create costly or complex control systems for the sole purpose of complying with the guidance,” according to Mr. Cox. “By tailoring the documentation and evaluation approaches to their particular business, we can avoid the one-size-fits-all, check list approach that many companies have bristled under as they've tried to comply with 404,” the SEC Chairman explained in a June 1st speech to the annual meeting of the Association of Audit Committee Members. The day after the SEC’s actions, the PCAOB approved its new Auditing Standard No. 5, or AS5, as it is often referred to. AS5 replaces Auditing Standard No. 2, and is a more principles-based standard that focuses on the procedures most necessary for effective internal control “tailored to the company’s facts and circumstances.” This mirroring of Chairman Cox’s language in the PCAOB’s press release was intentional, as staff had worked very hard to ensure that both agencies’ actions were closely aligned. The SEC must still sign off on the PCAOB’s action before it takes effect, but such approval appears almost certain, and the new standard is expected to be effective no later than for calendar year 2007 audits. PCAOB Chairman Mark Olson also stressed that AS5 is “scalable,” which means that it can be adjusted to fit better with smaller companies’ needs. Also, since the new standard should make the overall audit process more efficient, it should translate into lower audit costs. These costs, interestingly enough, appear to be coming down. According to a recent survey by Financial Executives International (FEI), a membership group of 15,000 corporate financial officers, compliance costs appear to have dropped about 23% in 2006, based on a survey of 200 of their members’ companies with at least $75 million in annual revenue. Nevertheless, 78 percent of survey respondents said that costs still outweighed benefits of the law – which law, 60 percent also conceded, had boosted investor confidence in their financial results. The U.S. Chamber of Commerce praised the SEC and PCAOB for making what it called “major revisions” to Section 404, characterizing them as a “major re-write” and a “clear step forward” – but also urged the SEC to further delay compliance for smaller businesses until the new guidance has been adopted and tested for a full-year by larger companies. Currently, small public companies have until 2008 to begin submitting management reports, and are not required to have auditor reports until 2009. However, in order to have the 2008 reports ready, smaller companies will have to begin their own internal assessments of their controls this year. No further compliance extensions were made for smaller public companies in the new SEC regulations. Making for strange bedfellows, the Chamber was joined in their request by none other than Senator John Kerry (D-MA). Kerry, the Chairman of the Senate Small Business Committee, complains that small public companies still face higher costs than large firms and therefore also believes that smaller companies “deserve more time” to comply with the recent changes. In a June 6th letter to SEC Chairman Cox, Kerry and Senator Olympia Snowe (R-ME), the Ranking Republican on the Small Business Committee, said that they “remain convinced” that such time is warranted, and asked for a “workable extension.” House Small Business Committee leaders Nydia Velázquez (D-NY) and Steve Chabot (R-OH) have made a similar request. Chairman Cox has consistently opposed legislative efforts to rework
Section 404, and as recently as June 7th, told the House Small Business
Committee that further extensions for small public companies remain
unwarranted “at this time.” However, some concerns have
been expressed that Section 404 can be whittled away by regulation and
extensions just as surely as it can by legislation. SOX supporters will
continue to closely monitor SEC actions to ensure that this sometimes
“fine line” is not crossed. Cox
Speech Outlining New 404 Rules New Court Ruling Ends “Erie County” Confusion on Medicare Bridge Plans – For Now
So-called “bridge plans” provide healthcare benefits to retirees who are not yet eligible for Medicare; generally, the benefit is reduced or eliminated when the former employee can apply for Medicare. But some saw this as amounting to unfair treatment for older retirees, and in 2000, the United States Court of Appeals for the Third Circuit ruled that such plans violated the Age Discrimination in Employment Act (ADEA) in the case of Erie County Retiree Association v. County of Erie. However, when employers responded by reducing or eliminating healthcare for younger retirees instead of enhancing older, Medicare-eligible retirees’ benefits to match those of the pre-Medicare group, the EEOC decided that perhaps the ruling was not exactly working as intended. It responded by issuing a proposed rule to allow employers to consider Medicare eligibility in benefits, noting that effectively promoting the elimination of health benefits to avoid discrimination did not further the public interest. But the AARP disagreed, and successfully enjoined the new rules from taking effect. This was appealed and the injunction was lifted, sparking yet another appeal from the AARP. (See April 2006 NCTR Federal E-news) It is this appeal that has now been decided against the AARP, allowing the EEOC to proceed with its rule exempting from the prohibitions of ADEA “the practice of altering, reducing or eliminating employer-sponsored retiree health benefits when retirees become eligible for Medicare or a State-sponsored retiree health benefits program.” In its decision, the Court recognized “with some dismay” that the EEOC’s rule may permit employers to reduce health benefits to retirees over the age of sixty-five while maintaining greater benefits for younger retirees. “Under the circumstances, however,” the opinion found that “the EEOC has shown that this narrow exemption from the ADEA is a reasonable, necessary and proper exercise of its...authority, as over time it will likely benefit all retirees.” If only the EEOC would recognize that such an exemption from ADEA would help benefit all retirees and avoid similar unintended consequences that will likely result if it is ultimately successful in its efforts against the Kentucky Retirement Systems’ disability plan. (See November 2006 NCTR Federal E-news) The AARP could request that the Third Circuit Court of Appeals hold an en banc rehearing of the case (in which all members of the Court, and not just a panel of three judges, would re-hear the appeal), or it could appeal directly to the Supreme Court. At the time of this writing, no such action had been taken. SEC Adopts Rules on Credit Agency Regulation
Adding to the alphabet soup already in its portfolio, on May 23rd the SEC approved new rules defining a “nationally recognized statistical rating organization" (NRSRO) and providing for the registration, reporting, record keeping, and oversight of new entrants into a field that Congress believed could benefit from increased competition. (See October 2006 NCTR Federal E-news) As SEC Chairman Chris Cox explained: "The goal of this new law is to improve credit ratings quality by fostering competition, accountability, and transparency in the credit rating industry.” The new program is intended to remove barriers to entry that had previously existed. “The replacement,” Mr. Cox said, “is a transparent and voluntary Commission registration system that favors no particular business model." The NRSROs must register with the Commission and include their lines of business and qualifications to be in the credit rating business, and will have to provide certifications from qualified institutional buyers. The new registrants will have mandatory financial record keeping requirements and must make confidential reports to the SEC on a regular basis. NRSROs must also detail their procedures against leaks and fraud to prevent misuse of insider information as well as their policies toward conflicts of interest, such as “being paid by issuers or underwriters to determine credit ratings with respect to securities or money market instruments they issue or underwrite,” or engaging in other coercive or inappropriate or anti-competitive behavior. While registration requirements were triggered immediately, the other rules take effect on June 26, 2007.
Health IT Rides Again, But to Where? Health information technology (HIT) may be reappearing on the Congressional agenda as major legislation begins to resurface on both sides of Capitol Hill. Most of the major action appears to be on the Senate side, where a redraft of the “Wired for Health Care Quality Act” (S. 1418 in the last Congress) has been circulated for discussion by the staff of the Senate Health, Education, Labor and Pensions (HELP) Committee. Several revisions to last year’s bill have been suggested, including the addition of a demonstration project to develop performance measures based on patient outcomes and a new Partnership for Health and Care Improvement, intended to make recommendations for achieving a nationwide, interoperable health information technology infrastructure. Finally, there are also new provisions providing stronger privacy and confidentiality measures for health information databases. The revised bill, expected to be introduced shortly, would be sponsored by the Chair and Ranking GOP member of the HELP Committee, Senators Edward Kennedy (D-MA) and Mike Enzi (R-WY), respectively, along with Hillary Rodham Clinton (D-NY), and Orrin Hatch (R-UT). Senators Debbie Stabenow (D-MI) and Olympia Snowe (R-ME) have also re-introduced legislation similar to that proposed by them in the last Congress. Their new bill, S. 1408, retains the basic outlines of their earlier legislation, providing a grant program to aid physicians, hospitals, skilled nursing facilities, community health and community mental health centers in implementing HIT systems. The bill would favor those in under-served areas, allocating one fifth of the money for rural areas, and would make changes in depreciation rules to speed investment in HIT. The bill also keeps an authorization of $4 billion in funding over five years -- a noteworthy down-payment on the estimated $98 billion needed to achieve 90% HIT use by hospitals or the $17 billion needed to get 90% of doctors using electronic health records (EHR’s), based on research by the RAND Corporation. Finally, freshman Senator Sheldon Whitehouse (D-RI) has also decided to make HIT a major focus, introducing the “National HIT and Privacy Advancement Act" (S. 1455) as one of his first pieces of legislation. The bill would create a private, not-for-profit corporation focused on establishing a nationwide system electronically connecting physicians, hospitals and pharmacies. The new corporation would be funded through user fees from providers and insurers and would not only design but also own and manage health information exchange networks. It would also be tasked with making sure that EHRs are confidential, secure and interoperable. Senator Whitehouse, along with Senator Stabenow, was influential in getting the Senate Budget Committee, during its consideration of the FY 2008 budget, to include a “deficit-neutral” reserve fund to provide incentives for the adoption of HIT. This special fund is designed to recognize the savings that will accrue from health IT adoption in later years, thereby permitting Senate committees to include funding in health IT legislation without having to come up with new sources of revenue under the new Congressional pay-as-you-go (PAYGO) rules. On the House side, Congressman Patrick Kennedy (D-RI) has reintroduced a new version of his 2006 personal health record bill, the “Personalized Health Information Act.” The new bill, H.R. 1368, would establish a program to provide financial incentives for the use of interactive qualifying personal health records by Medicare and other patients and their health care providers, requiring that each qualified physician receive an incentive payment for each qualifying patient of at least $3. he health records would be web-based, controlled solely by the patient, and must meet minimum security standards. Funding for the incentives would come from public or private payers, drug manufacturers, device manufacturers, or other public or private entities. In the last Congress, Congressman Kennedy also joined with Congressman Tim Murphy (R-PA) to introduce the “21st Century Health Information Act.” This legislation would have authorized up to 20 three-year grants to regional health information organizations for the development and implementation of regional HIT plans providing networks for a specific geographic area. According to reports, the two Congressmen, who co-chair the House 21st Century Health Care Caucus, will reintroduce an amended version of this legislation later in the session. Finally, Congressman Bart Gordon (D-TN), Chairman of the House Committee on Science and Technology, has also introduced legislation (H.R. 2406) to authorize the National Institute of Standards and Technology (NIST) to establish standards and guidelines for interoperability of EHRs, providing the Institute with greater authority to work with patients, physicians and vendors of HIT in the development of standards, including privacy and confidentiality. NIST would also be required to work with Federal agencies and the private sector to develop an interoperable system between the two. In addition to all of this Congressional activity, HIT has also recently received renewed support off the Hill. For example, AARP, the Business Roundtable (BRT) and the Service Employees International Union (SEIU) have now urged Congress to address health IT “immediately” in order to increase safety and efficiency in the country's health care system, saying that HIT will also be a critical building block for broader health reform. The jointly endorsed principles for implementing the use of HIT, created in conjunction with the three organizations’ healthcare-improvement campaign, “Divided We Fail,” include recommendations that Congress pass legislation requiring payers and healthcare providers to use secure, uniform and interoperable technology; create grants, loans or tax credits that would assist providers in purchasing such technology; and set a timetable for a uniform healthcare IT system to be universally used. Another new coalition called “Health IT Now!” has also been formed with the goal of seeing HIT legislation adopted this year. The coalition, co-chaired by former Senator John Breaux (D-LA) and former Congresswoman Nancy Johnson (R-CT), consists of 22 healthcare and business organizations representing employers, patients and providers. The new group supports codifying the Office of the National Coordinator for HIT, encouraging consumers to use personal health records, strong privacy measures in electronic health data, and Federal financial incentives for practitioners to facilitate the adoption of HIT, and for communities, states, and other entities to plan health IT components and to develop Health Information Exchanges. Senator Kennedy said that "I commend the coalition for forming Health IT Now! to ensure that patients and health care providers have a strong voice in the development of health IT.” So, does this mean that HIT is a slam-dunk for 2007? Don’t forget, despite the flurry of activity in the last month over HIT, it wasn’t that long ago that Hill staff were pronouncing the issue virtually “DOA” for this Congress. (See April 2007 NCTR Federal E-news) Skeptics continue to question how this year will be different than 2006. As they point out, although the Democrats now have control, the HIT bills of the last Congress were widely supported; for example, the Senate version passed 97-0. Yet, despite passage of HIT bills in both chambers, a final deal fizzled as both bodies opted not to hold a conference in the last days of he 109th Congress. Some, such as Congressman Patrick Kennedy, think that attaching parts of various HIT bills to other legislation may be the only way to accomplish the overall goal, since the urge to move a coherent free-standing HIT bill appears lacking. Possible vehicles would include the FDA reauthorization bill that has already passed the Senate but currently appears stalled in the House. Other possibilities include the reauthorization of the State Child Health Insurance Program (SCHIP) or legislation addressing cuts in Medicare reimbursements to physicians, currently scheduled to take effect January 1, 2008, unless Congress once again adopts an extension. The forces of inertia -- already strong this year -- will intensify with the coming of the 2008 elections. Indeed, some observers believe that in six months or less, political concerns will take over completely and legislative output will shrink to a trickle. The good news for HIT supporters is that pockets of strong support for HIT remain active both on and off Capitol Hill, as recent studies continue to document how far behind the United States remains in its use of IT. Furthermore, the Presidential race will bring additional attention to HIT’s promise as both a means to improve healthcare quality as well as a source of substantial savings – as much as $162 billion annually according to another Rand study -- that can be used to pay for other healthcare initiatives.
GASB Clarifies Disclosure Requirements on Pensions; Changes to Existing Accounting Standards Could be Next The Governmental Accounting Standards Board (GASB) has moved to make pension disclosures more closely align with those required for retiree health insurance and other non-pension retirement benefits. GASB also provided a reminder that it continues to research whether existing accounting standards for government pensions have been effective, or if they need to be changed. On May 31, GASB released Statement 50, which is intended to more closely align current pension disclosure requirements for governments found in GASB Statements No. 25 and No. 27 with those now required for other post-employment benefits (OPEB). Clearly pleased with its work in connection with Statements No. 45 and 47, GASB believes that the new Statement 50 “extends those advancements to the reporting of pension benefits," as Robert Attmore, GASB’s chairman, put it. The new Statement 50 requires disclosure in the notes to the financial statements of the current funded status of the plan as of the most recent actuarial valuation date. In addition, governments that use the aggregate actuarial cost method will be required to disclose he funded status and present a multi-year schedule of funding progress using the entry age actuarial cost method as a surrogate. The new changes generally apply for periods after June 15th of this year, but plans are advised to implement the changes as early as possible. GASB continues to be the focus of controversy. Last month, the Texas legislature thumbed its nose at the Board’s OPEB efforts, with the Texas State House of Representatives voting unanimously to reject GASB 45. Texas believes that the GASB rule would massively inflate the perception of a funding gap that does not exist in reality in that state. The Connecticut House also recently approved legislation to supplant GASB’s role by giving the state’s comptroller the legal authority to establish accounting rules for Connecticut’s financial reports. Elsewhere, GFOA’s dispute with GASB continues to fester. GFOA outgoing President Thomas J. Glaser told the recent GFOA annual conference that GASB’s “time has come and gone.” GFOA has called for the shutting down of GASB, with its functions moved to the Financial Accounting Standards Board (FASB). (See April 2007 NCTR Federal E-news) NASRA expressed its view on this idea in a recent letter to the Chairman of the Governmental Accounting Standards Advisory Council (GASAC), in which it said that “Members of NASRA believe the government financial reporting model should reflect [the] differences [between public and private sectors] and that the organization(s) responsible for setting public sector accounting standards should be independent; representative of state and local governments, and focused on the accounting needs of the public sector and its stakeholders.” NCTR is currently in the process of advising the Financial Accounting Foundation (FAF) of NCTR’s view that moving governmental accounting responsibility from GASB to FASB would not appear to be warranted at this time. This controversy surrounding GASB comes at a potentially critical juncture. At the end of its notice announcing Statement 50, GASB also offered a reminder that it continues to study whether existing accounting standards for government pensions have been effective. “Based upon constituent feedback received during that research, the Board will determine at a future date whether further changes to the current pension standards are necessary,” the notice stated. GASB originally announced its intentions to re-examine the question of accounting standards as applied to governmental plans in August of 2006, close on the heels of a series of stories in The New York Times and elsewhere criticizing the differences between public and private sector accounting rules. These reports suggested that governmental accounting standards were too flexible, providing an extraordinary number of options, and noted that they had been “denounced” by James F. Antonio, GASB chairman at the time, as failing to meet the “test of fiscal responsibility.” Is this pending GASB research a ticking time bomb? What will be the consequences if GASB determines that the current standards are indeed too flexible and decides to apply private sector rules? Yes, it is true that in 2006, GASB issued a white paper entitled “Why Governmental Accounting and Financial Reporting Is—And Should Be—Different.” But if that white paper represented GASB’s final word on the subject, why then the need for their on-going research project? Is this reminder at the end of the notice on Statement 50 intended as a subtle warning that changes could indeed be in the works? Remember that old saying: even paranoid people have enemies….
House Committee Clears New Iran Divestment Bill; Sudan Measure Expected to Follow The House Financial Services Committee has approved legislation that would authorize state and local government divestment efforts targeting Iran. A list of certain entities that support Iran's oil and gas industry would be required to be developed and published by the Federal government, but public sector investors would be given a Constitutional green light to target any corporations with an Iranian connection if they so choose, whether on the Federal list or not. Sudan divestment legislation, originally planned to be packaged together with the Iran bill, should be cleared by the Committee before the July 4th Congressional recess, according to staff. On May 23rd, the House Financial Services Committee finished work on (“marked up”) H.R. 2347, the “Iran Sanctions Enabling Act of 2007,” thus clearing the measure for consideration by the full House of Representatives. The bill is intended to protect investors, both public and private, from legal challenges should they choose not to invest in certain companies that invest in Iran’s energy sector. Under the bill, the President of the United States is required to “ensure publication” of a list of every person, whether within or outside of the United States, that has an investment of more than $20 million in the energy sector in Iran. The list, which is to be published in the Federal Register and maintained on an appropriate government website, is to include a description of the investment, its dollar value, intended purpose, and the status of the investment, as of the date of publication. The purpose of the list is to provide all investors with the ability to make “informed” investment decisions. According to Congressman Tom Lantos (D-CA), a primary sponsor of the legislation and the Chairman of the House Foreign Affairs Committee, “This new legislation puts the power of the purse to use so that Tehran might be deterred from its headlong pursuit of nuclear weapons." Barney Frank (D-MA), Chairman of the House Financial Services Committee, said, “It gives Americans the ability to speak out about their understandable revulsion to the actions of the Iranian government." The legislation would provide a safe harbor to registered investment companies, investment advisers, managers of mutual funds and corporate pension funds that divest from companies on the Federal list. Amendments to both the Investment Company Act and the Employee Retirement Income Security Act (ERISA) would protect them from actions by shareholders and others based on such decisions. Thanks to an amendment offered by Congressman Brad Sherman (D-CA), state and local governments would be given broader authority. As he explained, “My amendment will make it clear that state and local divestment efforts targeting Iran are fully authorized, whether they focus on corporations investing in Iran's oil sector or target Iran more broadly.” According to Mr. Sherman, “This will insulate Missouri and others from possible law suits, and encourage California, Ohio and many other states to move forward." Measures adopted by a State or local government before, on, or after the date of the enactment of this Federal law would be covered. As for preemption, the bill provides that a State or local government action that is authorized by the legislation is not preempted by any Federal law or regulation “except to the extent that a person is unable to comply with both the measure and the Federal law or regulation.” Similar legislation (S. 1430) was introduced in the Senate on May 17th by Presidential hopeful Barack Obama (D-IL). The bill is cosponsored by Senators Boxer (D-CA), Brownback (R-KS), Lieberman (I-CT), Mikulski (D-MD), Nelson (D-FL), and Wyden (D-OR). No hearings have yet to be held on the measure. Turning to the tragedy in Darfur, it appears that coming up with an acceptable form of legislation dealing with Sudan investments is proving to be somewhat more difficult, according to Financial Services Committee staff working on a final draft. Based on recent discussions with them, they are contemplating an approach similar to the Iran divestment legislation, with a Sudan “bad actors” company list required to be developed by the Federal government, and divestment authorized, but not mandated. However, affected Federal agencies are strongly resisting the idea that such list development be imposed on them. This should come as no surprise, given their past ignoring of requests to assist with the development of such a list by more than 40 public pension plans. This refusal is producing some interesting ideas. For example, in a recent meeting, Congressman Brad Sherman suggested that if lists currently available on the market are inadequate, then “trade associations” representing public pension plans should take charge of the development of tools for evaluating and identifying companies deserving to be on such a list. While this approach is unlikely to be adopted, don’t feel too smug. Mr. Sherman, who is a member of both the Foreign Affairs and Financial Services Committees, has been playing a very important role in the development of both the Iran and Sudan legislation. He appears to agree with Treasury and other agency officials that the development of such a list should not be the responsibility of the Federal government. However, without such Federal guidance, a Sudan divestment bill could prove to be very problematic for public plans.
Fall Hearings on Repeal of GPO/WEP Reported in the Works, but no Real Sign Yet of Actual Movement on Legislation Based on recent meetings with House leaders and staff on both sides of the aisle, it appears that a hearing on the problems associated with the government pension offset (GPO) and windfall elimination provision (WEP) could take place this fall. However, the likelihood of real action on legislation to repeal the two provisions is less clear, particularly given the new Congressional PAYGO rules. Despite the cosponsorship of 318 Members of the House of Representatives (as of 6/15/07), legislation to repeal GPO and WEP (H.R. 82) does not appear to be going anyplace soon, according to recent conversations with House leaders and staff. In a mid-May meeting, Congressman Charles Rangel (D-NY), chairman of the House Ways and Means Committee, continued to defer a decision to cosponsor the legislation, even though in the past he had signed onto previous repeal efforts. Mr. Rangel explained that, as Chairman, he doesn't like to formally cosponsor legislation before his Committee, but he said he would reconsider doing so in this case; he is still not on the bill as of this writing. While he indicated that he would like to figure out a way to get the bill passed, Rangel stressed that supporters will have to come up with a plan to pay for it, particularly given the new pay-as-you-go (PAYGO) House rules. The Chairman did, however, suggest that a hearing on H.R. 82 before the Subcommittee on Social Security in the fall was a possibility. Why is such a seemingly popular measure so difficult to pass? There are some members, according to staff, who continue to raise questions about concerns with “double-dipping” that repeal might be viewed as condoning. Then there are those who believe that something short of outright repeal would be more appropriate (and affordable). Finally, others stress that GPO/WEP relief should only be considered in the context of overall Social Security reform. However, this always raises the possibility of mandatory Social Security coverage for all employees. While staff reports that the topic has not surfaced, it easily could if members get serious about Social Security reform and try to identify sources of funds to cover the $60 billion cost of GPO/WEP repeal, or to help fill the much larger hole of Social Security insolvency. Republican staff indicated that Rep. Kevin Brady (R-TX) is also expected to reintroduce a version of the WEP replacement bill that he proposed in the last session of Congress (H.R. 1714). His bill would have repealed the current WEP for individuals first performing non-covered service beginning one year after enactment, and established a new WEP formula for individuals subject to the current WEP if the benefit under the new formula would be higher. However, action on such legislation is problematic because, if it reached the House floor, it would be very difficult to keep the broader repeal provisions of H.R. 82 from being offered as an amendment to it. The GPO cuts Social Security spousal or survivor benefits by two-thirds of the amount of an individual's public pension. According to the NEA, nationwide, more than one-third of teachers and education employees, and more than one-fifth of other public employees, are subject to the Government Pension Offset. The WEP reduces the earned Social Security benefits of an individual who also receives a public pension from a job not covered by Social Security. As the National Education Association (NEA) explained in testimony before the Senate Finance Committee in March of this year, GPO and WEP can have serious impacts on the recruitment of quality teachers. For example, individuals who have worked in other careers are less likely to want to become teachers if doing so will mean a loss of Social Security benefits they have earned. Another problem is that some states “seeking to entice retired teachers to return to the classroom have found them reluctant to return to teaching because of the impact of the GPO and WEP,” according to the NEA.
IRS Finalizes Regulations on Normal Retirement Age, While New Survey Suggests Decreased Interest in Phased Retirement in Private Sector The Internal Revenue Service (IRS) has issued final regulations making it clear that that a pension plan is allowed to begin paying retirement benefits after a participant has reached the plan's normal retirement age even if such payments constitute in-service distributions (i.e. they are made prior to the participant’s severance from employment with the employer maintaining the plan). In addition, the regulations deal with just how low a normal retirement age is permitted to be before it runs into trouble. Surprisingly, while the new regulations should make it easier for employers to retain older workers, a new survey suggests that many businesses may not be all that excited about keeping older employees on the job. On May 22nd, the IRS provided final regulations dealing with portions of its 2004 proposed regulations on the subject of in-service distributions after normal retirement age; that portion of the proposed regulations that would have created “bona fide phased retirement programs” was not addressed at this time. Generally speaking, prior to these new rules, the Internal Revenue Code (IRC) prohibited a pension plan from paying benefits prior to retirement if the plan wanted to retain its qualified (tax exempt) status. This prohibition on so-called “in-service” distributions meant that benefits could only be paid to an employee who had reached normal retirement age (or eligibility for an unreduced benefit under the terms of the plan). The new regulations (which, for a governmental plan, will apply for plan years beginning on or after January 1, 2009) will now permit a pension plan (a defined benefit plan or money purchase pension plan) to pay benefits upon an employee’s attainment of normal retirement age, even if the employee has not yet had a severance from employment with the employer maintaining the plan. With regard to what qualifies as “normal retirement age,” the new regulations are somewhat different from the proposed regulations in that they replace the so-called “subterfuge standard” with a requirement that the normal retirement age under a plan 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.” (The original proposal would have required that a plan’s normal retirement age could not be set so low as to be a subterfuge for some purpose other than the payment of retirement benefits.) So what does this mean? First, there is a safe harbor providing that a normal retirement age of at least age 62 is deemed to meet this new “typical retirement age” standard. This would also include a normal retirement age defined as the later of age 62 or another specified date, such as the later of age 62 or the fifth anniversary of plan participation. If a plan’s normal retirement age is between ages 55 and 62, then the new regulations provide that “it is generally expected that a good faith determination of the typical retirement age for the industry in which the covered workforce is employed that is made by the employer (or, in the case of a multiemployer plan, made by the trustees) will be given deference, assuming that the determination is reasonable under the facts and circumstances.” For a normal retirement age that is lower than age 55, there is a presumption that it does not meet the new standard (i.e., it is earlier than the earliest age that is reasonably representative of the typical retirement age for the industry of the relevant covered workforce) “absent facts and circumstances that demonstrate otherwise to the Commissioner” of the IRS. There is a safe harbor, however, for plans where substantially all of the participants in the plan are qualified public safety employees: in such instances, a normal retirement age of age 50 or later is deemed to meet the new standard. Finally, keep in mind that the new regulations state that, “For the purposes of paragraph (b)(1)(i) of this section, retirement does not include a mere reduction in the number of hours that an employee works. Accordingly, benefits may not be distributed prior to normal retirement age solely due to a reduction in the number of hours that an employee works.” Overall, the new regulations appear to be fairly straightforward. Of course, the devil is always in the details. For example, what are the "relevant facts and circumstances" that can be used for determining what is the “typical retirement age” for the industry in which the covered workforce is employed? And how will this "industry" be determined? By the type of job involved? By the employer? If you have other questions regarding these new regulations, please forward them and NCTR, working together with NASRA, will see if further guidance in this area is possible. While a major impetus for the IRS in proposing the new regulations in 2004 was the perceived need for business to find ways to cope with a shrinking workforce thanks to the Baby Boomers’ impending retirement, a new study suggests that the times, they may be a-changing. The Center for Retirement Research at Boston College, reporting in May on a survey of 400 nationally representative employers concerning whether employers will create opportunities for employees to work longer, found some surprising results. Despite a sense that the loss of “institutional intelligence” when the Boomers retiree will push employers to seek out older workers, the survey results, in the authors’ words, “raise a cautionary flag.” The survey found that, when asked whether they would create opportunities for a “significant number” of workers to remain on the job two to four years longer than workers have in the past (with a “significant number” defined as at least half who want to stay) employers provided a median response of 6 on a scale from 1 to 10, with 1 being “highly unlikely” and 10 “highly likely.” As the survey report concludes, “Employers, in other words, are only slightly more likely than not to accommodate even half their employees who will want to stay on.” Whatever these results may suggest about the need for phased retirement plans, they certainly provide a strong signal that older employees who are concerned they will not have adequate resources to retire at normal retirement age, and who will therefore want to work longer, may not find it as easy to do so as they had anticipated. It is therefore all the more important that the nation’s retirement policies, at all levels, focus on encouraging systems that can assure meaningful retirement security for the life of the retiree. Did somebody say DB?!!
DOE Once Again Backs Down on Anti-DB Contractor Policy –This Time, Apparently for Good
As it did in June of 2006, the DOE has once more determined that it will stop pursuing efforts to deny reimbursement of contractor costs associated with DB pension plans for new employees. According to several press reports, Megan Barnett, a DOE spokeswoman, made the announcement on June 15th that the Energy agency has decided not to re-issue the suspended proposal and “will continue to operate under the previously established contractor benefits policy.” On June 19th of last year, in the face of mounting Congressional opposition, Energy Secretary Samuel Bodman wrote to then-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." And when the DOE formally sought that input earlier this year, it received an earful – almost all of it in opposition to its efforts. (See May 2007 NCTR Federal E-news) However, the final straw may have been the recent decision by the House Appropriations Committee to add language in its bill making funds available to the DOE for FY 2008 that would deny the spending of any such funds to implement the proposal. The same Committee had taken a similar step in 2006, but the DOE’s decision to delay the proposal for a year made such a rider unnecessary. While the proposal may be dead as an overall policy, there are still some concerns that the DOE may attempt to continue to impose benefit changes on a case-by-case basis when new contracts are awarded. Hedge Fund Registration, Regulation Appear Increasingly Likely; Pension Funds Continue to be Focus of Concern Private equity funds in general and hedge funds in particular find themselves under the microscope and under the gun on Capitol Hill, as legislation to require hedge fund registration with the SEC is introduced, and two major Senate leaders propose a bill that would close what they see as a loophole that gives a tax advantage over corporations to private-equity firms and other partnerships that go public. As pension funds, particularly public funds, continue to be used by both sides to bolster their views, legislation to limit pension investments in hedge funds appears increasingly likely. It has not been a good few weeks in Washington for private equity, including hedge funds. Hearings in the House have offered opportunities for unions to bemoan the impact of private equity leveraged buy-outs -- which they say profit buyers while harming employees through wage cuts, job losses and reduced pensions. In response, Congressional allies threaten new legislation to regulate private-equity funds. For example, in a recent television interview, Congressman Barney Frank (D-MA), Chairman of the House Financial Services Committee, is reported as saying that he may consider legislation requiring companies to add financing for pension funds deemed compromised by a private-equity buy-out, similar to provisions in the British pension law that authorize claims against third parties (in addition to the employer) for any funding shortfall in a defined benefit pension plan (the so-called “moral hazard” provisions). In the Senate, the tax treatment of private equity firms that go public and the “integrity of the tax code and the corporate tax base over the long term” is the focus. It has resulted in major bipartisan legislation (S.1624) being introduced by Senate Finance Committee Chairman Max Baucus (D-MT), along with his GOP counterpart, Senator Charles Grassley (R-IA), that would tax as corporations all publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services. “The tax law,” Baucus maintains, “ought to treat as corporations entities that function as corporations.” Earlier, it looked like Baucus and Grassley were going after other tax code changes, such as the tax treatment of carried interest (See May 2007 NCTR Federal E-news). Therefore, the so-called “Blackstone Bill” came as something of a surprise. (The Blackstone Group, a huge private equity firm, is about to go public, and the billions of dollars worth of stock and hundreds of millions in cash that this is expected to make for its top executives has received increasing media and Congressional attention.) In a related matter, the AFL-CIO recently demanded that the Securities and Exchange Commission (SEC) require Blackstone to register as a mutual fund since it would be offering its shares as a publicly traded limited partnership. The Baucus-Grassley legislation, if adopted, would have major financial consequences -- and not, coincidentally, produce major increases in Federal revenue – by increasing the effective tax rate by 35 percent for publicly traded private equity firms and hedge funds from the current lower 15 percent capital gains rate they enjoy as partnerships. In an indication that the legislation may have real “legs,” House Ways and Means Committee Chairman Charles Rangel (D-NY) issued a statement saying: “We should not permit one segment of the financial services industry to enjoy a competitive advantage over others.” Rangel said that his Committee “intends to follow the legislation in the Senate with its own thorough examination of these issues. Together, our actions should put everyone on notice that Congress may act to address these outstanding issues.” Legislation has also finally been introduced by Senator Grassley (R-IA) to restore the SEC’s authority to require hedge fund registration. His bill, "The Hedge Fund Registration Act" (S. 1402), would narrow the current exemption from registration for certain investment advisers, including hedge funds. According to Grassley, it “closes a loophole in the securities laws these hedge funds use to avoid registering with the SEC and operate in secret.” As he has in the past, the Senator points to the failure of Amaranth and “the increasing interest in hedge funds as investment vehicles for public pension money” as justification. While Congressman Barney Frank (D-MA) has not yet endorsed the Grassley approach, he continues to talk about his concern with the “pressure to show a quick increase in the return'' that is being exerted on public pension funds, and says that he wants to limit the extent of their investments in hedge funds, while “not keeping them out altogether.'' According to Financial Services Committee staff, no specifics have been developed for possible legislation, but requiring increased disclosure for investors is one possibility that is often mentioned. After months of saber rattling, it looks like the long-anticipated hedge fund wars are finally underway. Public pension plans -- cast by some as victims of a greedy private equity market, and by others as victims of collateral damage from a greedy Congress -- may find themselves smack in the middle of the conflict. And the only thing that both points of view on the subject appear to have in common is the word “victim.”
SEC Oversight Hearing Scheduled in House; Proxy Access a Likely Subject Despite “talking the talk,” there is growing concern in some quarters that Securities and Exchange Commission (SEC) Chairman Chris Cox is not “walking the walk” when it comes to supporting investors, as evidenced by a number of recent SEC actions. Consequently, the House Financial Services Committee is holding an oversight hearing at which Cox, along with his four fellow SEC Commissioners, will appear. Among the likely topics for discussion will be the status of the Commission’s proxy access proposal, which has been pending since the AFSCME v. AIG decision last September. The hearing, expected to be held on June 26th, will be the first in many years at which all five Commissioners (three Republicans and two Democrats) will appear together. Financial Services Committee Chairman Barney Frank (D-MA) says that he has not prejudged the situation, but “there are enough questions in the air that we are holding a hearing." Examples of such questions were noted in a letter to Mr. Frank from the attorneys general of Ohio and Utah. In their letter thanking the Massachusetts Democrat for calling the hearing – and urging the Senate to do likewise -- the two AG’s (one a Democrat, the other a Republican) argue that “the SEC’s actions—and inactions—regarding the way [the Sarbanes-Oxley Act (SOX)] and other securities laws are implemented is a cause for alarm.” Among the items noted in their letter is the filing by the SEC of a friend-of-the-court (amicus) brief in the investor lawsuit against Tellabs, the fiber optic network equipment maker, before the U.S. Supreme Court. Tellabs is accused of overstating its business prospects, and the case hinges on the question of whether or not management knew (or had reason to know) that it was making false or misleading statements. The lower court (the Seventh Circuit Court of Appeals) ruled against a pre-trial motion and allowed investors to proceed with their claim, finding that the Private Securities Litigation Reform Act (PSLRA) provision requiring plaintiffs to plead a “strong inference” of intent to defraud meant plaintiffs’ allegations need only be sufficient to permit “a reasonable person” to infer that defendants “acted with the required intent.” But the SEC, siding with Tellabs and not the investors, argues that this standard is too lax. According to investor advocates, should the SEC position prevail, it would strike a serious blow against institutional investors’ ability to bring suits to recover losses suffered as a result of securities fraud. Other issues of concern involve the SEC’s move to require that Enforcement Division lawyers must now seek pre-approval from the Commissioners themselves to negotiate a settlement in corporate cases involving financial penalties – as well as for the amount of the fines. Previously, Commission approval was sought only after staff had worked out the settlement. Some, including former SEC Chairman Arthur Levitt, believe that this could undermine enforcement efforts by increasing the influence of extraneous issues such as Commissioner politics/ideology. Then there was the “trial balloon” floated in April that the SEC was considering permitting corporations to amend their bylaws to force shareholders to settle disputes through arbitration. The idea was raised last year by the Committee on Capital Markets Regulation, a new organization, composed of 22 corporate and financial leaders from the investor community, business, finance, law, accounting, and academia, that has received support from the Bush Administration. (See December 2006 NCTR Federal E-news) Chairman Frank was quick to warn the SEC about moving ahead with such a proposal without Congressional input, and Chairman Cox has subsequently said that the idea is not being actively pursued – for now, at least. Cox, a former Congressman, has generally been warmly received on the Hill in the past, and has taken a number of steps that have received strong investor support, including new rules governing disclosure of executive compensation. (See August 2006 NCTR Federal E-news) The SEC Chairman has also resisted legislative changes to SOX strongly pushed by the business community. Most recently, he surprised some by siding with the two Democratic members of the SEC to request that the U.S. Solicitor General file an amicus brief supporting shareholders in the case of Stoneridge Investment v. Scientific-Atlanta. At issue in this Supreme Court case is whether shareholders can sue bankers, lawyers, accountants and others who assist corporate clients in committing financial fraud, but do not themselves mislead the public in the process. The ruling in the case will likely serve to determine whether a separate lawsuit filed by Enron shareholders can proceed against major investment banks, including Merrill Lynch & Co., Barclays PLC and Credit Suisse Group, for their alleged roles in accounting fraud. Unfortunately, despite the SEC’s urgings, the Solicitor General declined to file in support of investors, reportedly in light of the personal intervention of President Bush in the discussions surrounding the issue. According to Al Hubbard, the director of the National Economic Council and the chief economics adviser to the President, Mr. Bush generally is opposed to “unnecessary lawsuits” and believes Federal securities regulators are in the best position to bring suit in these cases. The White House Counsels’ office reportedly conveyed these views to the Solicitor General. Finally, and of special significance to institutional investors, is Mr. Cox’s decision to date not to interfere with the results of the September 5, 2006, ruling by the U.S. Court of Appeals for the Second Circuit in American Federation of State, County and Municipal Employees Pension Fund v. American International Group. The Court found that AIG did not have the right to exclude AFSCME's shareholder proposal seeking proxy access in order to nominate directors. (See October 2006 NCTR Federal E-news) Although it appeared at first that the SEC would move quickly to effectively overturn the results of the court’s actions through regulatory changes, Chairman Cox has repeatedly delayed such action. This in turn has effectively resulted in the 2006/2007 proxy season being permitted to operate under the terms of the AFSCME ruling. Now, according to the latest reports, Chairman Cox may be poised to once again side with the two Democrats on the Commission and allow a regulatory proposal to advance that formally approves this result. Earlier reports had suggested that, following a series of SEC Roundtables in May that focused on the value of binding and non-binding (or "precatory") resolutions, and the role of Federal regulation vis-à-vis state law, the SEC was considering a different response. This other approach was described as permitting the AFSCME decision to stand, but requiring that only binding resolutions proposing bylaw changes would be allowed on proxies as part of a proposed “big picture” solution to proxy access. Issues currently dealt with in precatory resolutions could be handled instead online via such options as electronic discussion boards between shareowners and companies. But this approach regarding the use of websites and blogs to handle precatory resolutions was roundly criticized by both business and investors at the Roundtables, and is apparently dead in the water. Now, although Chairman Cox had hoped to avoid a split vote on the issue, he is reportedly resigned to supporting an approach whereby shareowners would not be precluded from introducing proposals to amend corporate bylaws (subject only to a “screen” to ensure that they are consistent with state law) to require corporations to publish the names of shareowner-nominated candidates for director positions, with no changes made to the filing of precatory resolutions. Needless-to-say, this can be expected to be opposed by his fellow Republican Commissioners, and strongly objected to by the business community. The June 26th hearings may therefore provide an important opportunity for Chairman Cox to hear from institutional investors and their Congressional supporters that such an approach is indeed desirable, and that that the SEC should not adopt any amendments to the SEC rule in question (Rule 14a-8) that would inhibit the open and frank communication the proxy rules were intended to facilitate. Therefore, if you have a Member (or Members) of your Congressional Delegation on the House Financial Services Committee, and would like to help provide support for SEC approval of such an approach, now is the time to weigh in with them. This would also be the time to seek support on other issues involving the SEC, such as the PSLRA, with which you are concerned. A listing of Committee Members can be found here. New Studies on Teacher Plans Now Available The National Education Association (NEA) 2006 survey, “Characteristics of Large Public Education Pension Plans,” is now available. Another report, this one a working paper by the National Center for the Analysis of Longitudinal Data in Education Research (CALDER), examines how teacher pension rules affect behavior, mobility, and retirement. The NEA survey provides an overview of plans, including the type of plan, its administration, the investment of assets, types of employees covered, the entity administering the plan, and the entity investing plan assets. Normal retirement age and service, as well as early retirement age and service, early retirement annual discount, vesting period, and the purchase of service credits are covered. The survey also looks at employee and employer contribution rates, as well as benefit formulas and limitations, including final average salary definitions and periods. The second report, a CALDER April 2007 working paper prepared for the Teacher Supply and Demand Symposium for the National Center for Education Statistics, examines late career mobility and retirement decisions for a cohort of mid-career Missouri public school teachers. As its authors note, while policy discussions about teacher recruitment, retention, and quality often focus on young teachers, the timing of retirements and workforce retention policies need attention as well, particularly given increasing budgetary demands related to pension benefits. There have been many studies of the effect of current compensation on teacher turnover, but the authors note the dearth of econometric literature on teacher pensions. The working paper finds that teachers are retiring at ages well below those in the private sector or in the Social Security system. Furthermore, according to the paper, teachers who retire in their mid-fifties not only create vacancies that must be filled, but they also draw pension benefits for spells that are likely to exceed their years of service employment. Finally, the study documents that “retirement” and workforce withdrawal are not necessarily the same thing, and that many educators continue to teach in public schools even after formally retiring. CALDER working papers have not gone through final formal review, and are intended to encourage discussion and suggestions for revision before final publication.
Studies Examine Income Levels and Needs in Retirement Two new studies, one by the National Academy of Social Insurance (NASI), and the other by the Employee Benefit Research Institute (EBRI) examine the role of Social Security in meeting the retirement income needs of the nation’s elderly. Not surprisingly, both continue to document that Social Security provides the largest source of that income, and that it is increasingly inadequate for retirement security. The NASI report shows how Social Security will replace a smaller share of pre-retirement earnings for boomers than it has for retirees over the last two or three decades under current law changes that are beginning to phase in. The EBRI report documents that, in fact, the median income level of the elderly population has been declining, and that earnings from working after retirement have increased significantly as a result. The NASI report, entitled “Social Security and Retirement Income Adequacy,” discusses how achieving an adequate retirement income will be a growing challenge for future retirees, as changes in the Social Security laws now beginning to be felt will mean that Social Security will start to replace a smaller share of earnings. As their study points out, in the next two decades net replacement rates under current law, already dropping, will decline even further for three reasons: 1983 legislation that increased the so-called normal retirement age (NRA) from 65 to 67 is being phased in, producing an across-the-board benefit cut at every retirement age; Medicare Part B premiums will in all likelihood continue to rise faster than Social Security benefits; and the 1983 law that made part of Social Security benefits taxable under the personal income tax will affect more people in the future because the exempt amounts are not indexed to keep pace with inflation. “For all these reasons,” NASI concludes, “an illustrative average earner retiring at 65 in 2030 will have net Social Security income that replaces about 29 percent of prior earnings, down from 39 percent in 2005, and 41 percent in 1986.” The EBRI examination, “Income of the Elderly Population Age 65 and Over,” confirms these trends. It also documents how the elderly are working more post-retirement. For example, it finds that for two age groups (65–69 and 70–74), earnings from work increased significantly as a source of income from 1985 to 2005. “For the youngest group (65–69 year olds) the increase was most significant, increasing 17.8 percentage points from 1985 to 2005,” according to EBRI. NASI notes that Social Security’s declining replacement rates come at the same time that employers are shifting away from traditional pensions to 401(k) plans “that expose workers and retirees to more risks.” Furthermore, according to NASI, “Most experts agree that an ideal pension system would have broad coverage, be fully portable, avoid "leakage" from early withdrawals, provide inflation-indexed benefits that last for life, continue benefits for widowed spouses, and have low administrative costs.” Social Security has all these features, and NASI therefore argues that “Policymakers concerned about retirement income” will need to consider how much to build on Social Security’s strengths and how much to focus on other parts of the retirement system. Of course, except for the portability issue, public defined benefit (DB) pension systems also meet this definition of an “ideal pension system.” And yet many policymakers continue to want to dump DB plans and turn to defined contribution plans for public employees. As the new NCTR/NASRA joint campaign stresses, public DB plans are “getting it right.” Isn’t it time that politicians at all levels start to do the same thing?
Prescription Drug Reimportation: How it Would Work The Congressional Research Service (CRS) has released an explanation of the issues involved with prescription drug reimportation. Despite action by the Senate to approve the concept, but then make it impossible to have implemented, the issues is still alive and could be taken up by the House shortly as part of legislation to reauthorize Food and Drug Administration (FDA) user fees. During Senate consideration of S. 1082, the Prescription Drug User Fee Act, (commonly referred to as the FDA Reauthorization bill), drug reimportation was the subject of heated debate and a veto of this “must-do” legislation was threatened by President Bush should it contain such a provision. In a compromise reminiscent of the infamous “I voted for it before I voted against it” argument that proved to be such an embarrassment for Senator John Kerry (D-MA) during his 2004 Presidential campaign, the Senate solved the problem by passing two reimportation amendments. The first, offered by Senators Byron Dorgan (D-ND) and Olympia Snowe (R-ME), would permit consumers, pharmacies and wholesalers to purchase FDA-approved prescription drugs that are manufactured at FDA-inspected facilities in 19 industrialized nations, and establishes a regulatory framework for reimportation. The second, offered by Senator Thad Cochran (R-MS), would prohibit any reimportation until the Department of Health and Human Services (HHS) certified that reimportation presented no additional risk to the public and would save the public money. Given that HHS has consistently refused to guarantee that it could certify the safety of drugs imported from other countries, the Cochran amendment effectively negates the Dorgan-Snowe amendment. (See May 2007 NCTR Federal E-news) The Prescription Drug User Fee Act subsequently passed the Senate and is now awaiting action in the House, where the reimportation issue is likely to resurface. The CRS, the nonpartisan public policy research arm of the Congress, has therefore produced a new report that provides a brief look at the issues surrounding the debate over reimportation and compares the Senate legislation to current law. All you health policy wonks, have at it!
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