Federal Update

Federal Update

2000 Here We Come! …..and a review of NCTR’s legislative activity in 1999.

National Council on Teacher Retirement

Prepared by Cynthia L. Moore, Washington Counsel
5537 Lee Highway
Arlington, VA 22207
Tel: 703/534-9770 Fax: 703/534-9754
E-mail: cmoore@nctr.org

Section I

NCTR’s Legislative Goals for Year 2000

Work for enactment of expanded pension portability for public employees ("Portman-Cardin" provisions)
Support the continuation of defined benefit plans Advocate increased retirement savings through higher pension limits and "catch up" provisions
Support strengthening the Social Security System, including advocating the voluntary, though not mandatory, affiliation of public employees not currently in the System
Continue to work with individual NCTR members to identify legislative issues of concern

Section II

Year End Wrap Up

By Cindie Moore, Washington Counsel
National Council on Teacher Retirement

December 7, 1999

End of Congressional Session

The first session of the 106th Congress, which ended on November 19, was somewhat disappointing for NCTR members. Although the pension package (the text of H.R. 1102, the Portman-Cardin bill) was included in H.R. 2488, the tax cut bill, it was vetoed by the President in September. As explained below, however, the package is contained in pending legislation in each House of Congress, which puts it in a good position for enactment in the year 2000.

Senate Action on Pension Package. During consideration of the Bankruptcy Reform Act, S. 625, the Senate approved a multi-purpose amendment that not only increased the minimum wage, but included the pension package. As a related matter, S. 625 also contains a provision that extends the current protection for pension assets against the creditors of a bankrupt plan participant to all types of retirement arrangements. Assets in governmental plans are already covered; the new protection would extend to such retirement programs as IRAs. The threatened amendment by Senator Grassley (R-IA) to limit this protection to some dollar amount ($500,000 was discussed) never materialized. The bill, along with the amendments added to it, was pending on the floor when the Senate adjourned. The leadership will likely bring it up early in year 2000. The House passed its version of the bill, H.R. 833, earlier this year.

House Action on Pension Package. In the House, the Ways and Means Committee approved H.R. 3081 a few weeks before adjournment, the minimum wage increase that also included the pension package. The full House did not act on it before adjournment. Either H.R. 3081 or a re-vamped tax cut with the pension package will likely come before the House at some point next year.

Efforts to Correct Misperception of Pension Package to be Made. During the recess, we will be working to correct a misperception that the pension package is targeted to high paid workers. We will point out that the package contains provisions that help improve pension portability for state and local government workers and allow them to save more money for retirement. State and local workers are middle-income wage earners. Therefore, the package helps middle income wage earners. In addition, the American Council of Life Insurance has done research to show that most people receiving pensions (both public and private sector) are middle income wage earners.

NCTR Commended

Of particular note is the attached page of the November 4th Congressional Record referencing NCTR. The statement made by Senator Orrin Hatch (R-UT) thanks the organization for its support of a provision in the Bankruptcy Reform Act of 1999 protecting all types of pension assets from the creditors of bankrupt plan participants (mentioned above). The Senator goes on the clarify that the provision does not disturb existing case law helpful to NCTR members, but rather expands protections to retirement arrangements (such as IRAs) that are not currently protected. Staff of several NCTR members worked with me on requesting the Senator to make the clarification. They are Kevin Howard, Utah Retirement System; Wayne Schneider, New York State Teachers’ Retirement System; and Bill Stephens, Retirement Systems of Alabama. The Senator made similar remarks in the September 21st Congressional Record.

Other Items

Clearing Up Misperception about Prohibited Transaction Rules Applicable to State and Local Plans. Rep. John Boehner who chairs the House Subcommittee with jurisdiction over ERISA raised a potential problem for state and local plans, which I believe has now been resolved. Specifically, he hypothesized that the prohibited transaction rules applicable to our plans are somehow less stringent than those for private plans. Prohibited transactions are those in which the retirement system enters into some kind of investment with the plan sponsor, e.g., makes a loan to the sponsor (in our case the state is the plan sponsor). The prohibited transaction rules for our plans are in IRC Section 503(b) and for private plans in ERISA. The rules are somewhat parallel, except that private plans must seek special permission from the U.S. Department of Labor (DOL) for some types of transactions while we are not subject to the requirement. When we heard that Rep. Boehner planned hearings on the subject, I met with his staff, along with Jim Miller from Ohio STRS and some others, to disabuse them of their hypothesis. We argued that even though we are not subject to the DOL authorization process, we are subject to an analogous, though less formal, process. For example, a proposed transaction with a plan sponsor would be discussed by the retirement board in question and most board meetings are open to the public. In addition, the proposed transaction might also require legislation which would mean that it would be discussed in the open forum of the legislative process. Our underlying concern (which we did not explicitly express) was that our plans would somehow be labeled as being less well-regulated than private plans if this hypothesis were promoted. His staff seemed to be impressed with the argument. I followed up after the meeting by sending the staff NCTR publications explaining the detailed regulation to which our plans are subject.

Social Security Activity Tapers Off. Although Congress and the President expressed great interest in reforming the Social Security System at the beginning of 1999, their concern never coalesced into a unified commitment for change. Instead, the 1999 activity will be remembered (if at all) as a series of unconnected efforts. Two such efforts occurred just before adjournment. First, Rep. Nick Smith re-introduced his bill to create private Social Security accounts for each American worker (H.R. 3206). Unlike most Social Security bills introduced this year, the bill includes mandatory coverage of newly hired state and local government employees. Rep. Smith is not on the Ways and Means Committee and therefore his proposal will not have the same amount of clout as proposals such as those made by Committee Chairman Bill Archer and Subcommittee Chairman Clay Shaw. Second, the Clinton Administration changed its view on how to finance reform. Specifically, it dropped its support of some federal entity investing part of the Social Security Trust Fund in the private markets (similar to the way that state and local plans currently invest). As an alternative, it proposes to extend the life of the System through channeling interest savings from debt reduction coming from Social Security surpluses into the Trust Fund. In essence, the Administration wants to use the savings earned from reducing one liability – the federal debt held by the public – to meeting another government liability, namely, promised Social Security benefits. Rep. Richard Gephardt (D-MO) and Sen. Daniel Patrick Moynihan (D-NY) introduced the proposal, numbered H.R. 3165 and S. 1828, respectively. The House Ways and Means Committee held hearings on November 9.

Change in Nonperiodic Distributions Proposed. Both Houses of Congress have approved increasing the elective withholding rate for certain nonperiodic distributions from 10% to 20%. The provision is part of H.R. 434 that authorizes a new trade and investment policy for Sub-Sahara Africa. It is a revenue raiser that offsets lower tariffs resulting from the new trade policy. If approved, the provision will apply to distributions made after 2000. Conference committee appointments will be finalized early next year. The bill is expected to be enacted.

Congressional Staff Hearing about Differences between Private and Public Plans. I recently explained to a group of congressional staff and others how the regulation of private and public plans varies. A copy of my handout showing the differences is attached for your information.

Atts: Senator Hatch’s Comments about NCTR

S13964 Congressional Record – Senate

November 4, 1999

Senator Orrin Hatch’s comments regarding NCTR: "…S. 625 also includes a provision to create new legal protections for a large class of retirement savings in bankruptcy. This measure has widespread support form a long list of groups, ranging from the American Association of Retired Persons, to the Small Business Council of America and the National Council on Teacher Retirement.

Let me take this opportunity also to point out that the assets of some pension plans already are protected from bankruptcy proceedings. The United States Supreme Court has ruled in Patterson v. Shumate, reported at 504 U.S. 753 (1992), that assets of pension plans which have, and are required by law to have, anti-alienation provisions, are excluded from bankruptcy estates. Let me be clear that my amendment is intended to expand the protection of retirement savings to protect assets that were not previously protected. My amendment is not intended in any way to diminish the protections offered under existing law and under the United States Supreme Court’s decision in Patterson v. Shumate, but, rather, is intended to provide protection to other retirement plans and accounts not currently protected.

I am proud to propose several enhancements to the bill that primarily are designed to protect consumers and further provide incentives for consumers to take personal responsibility in dealing with debt management…"

Section III

Comparison of Key Provisions of Law Applicable to Private Pension Plans and to State and Local Government Plans Comparison of Key Provisions of Law Applicable to Private Pension Plans and to State and Local Government Plans

by Cynthia L. Moore
Washington Counsel
National Council on Teacher Retirement
cmoore@nctr.org

October 1999

SUBJECT	PRIVATE PLANS	STATE AND LOCAL GOVERNMENT PLANS
Source of Law (Certain Federal laws apply to both types of plans, including the U.S. Constitution, Civil Rights Acts, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Uniformed Services Employment and Reemployment Rights Act, and the Veterans Reemployment Rights Act.)	Federal Law: Employee Retirement Income Security Act (ERISA); the Internal Revenue Code (IRC) [IRC pension provisions also known as Title II of ERISA]; and relevant case law. IRC Pension Qualification Rules: 3 key benefits -- 1) contributions that the employer makes to finance the pension plan are deductible as a business expense within certain limits; 2) the income on the assets in the pension trust fund is tax exempt until distributed to the employee; and 3) the contributions and income on the assets are not taxable to the employee or subject to income tax withholding or employment taxes until the employee retires and begins to draw a benefit. State and Local Law: ERISA generally supersedes state laws relating to employee benefit plans. ERISA Sec. 514.	Federal Law: IRC and relevant case law. IRC Pension Qualification Rules: State and local government plans are not taxable entities, so they do not benefit from the first 2 key tax benefits. The third benefit does apply because it allows the employee to defer tax on the employer contributions and income on the assets until the employee retires and begins to draw a benefit. Moreover if a plan is inadvertently disqualified without the knowledge of the employer, the employer can be held liable for the amount of tax withholding it should have done, even though the error may be discovered too late to allow for the money to be taken from the employee’s check. State and Local Law: State constitutions statutes and local ordinances relating to pensions; relevant case law; and common law of trusts, including Restatement of Trusts.
Participation and Coverage Requirements	ERISA Secs. 201 and 202; IRC Sec. 401(a)(3), (4), (5), (6), and (26) and Sec. 410 (coverage by and participation in pension plan must not discriminate in favor of highly compensated employees).	Federal Law. Generally inapplicable per Taxpayer Relief Act of 1997. State and Local Law. Participation and coverage laws are sometimes based on occupations as a consequence of particular occupations’ characteristics and requirements (e.g., physical demands of police and fire employees). Plans generally cover all full-time employees within an occupational classification.
Plan Administration	ERISA Sec. 3(16) (plan provisions designate plan administrator or, if plan administrator not so designated, plan administrator is deemed to be employer or plan sponsor).	Federal Law. Inapplicable. State and Local Law. Generally board of trustees made up of individuals with different backgrounds establish overall policy for administering plan. An executive director is responsible for daily administration of plan. Board members may include employee representatives, retiree representatives, employer representatives, governmental officials, representatives of members of public, and individuals with special skills, such as investment expertise. Among state plans that include teachers, 45 have retiree and/or active members who are elected or appointed to serve on boards of trustees. Moore & NCTR, Public Pension Plans: The State Regulatory Framework, (1998).
Funding	ERISA Secs. 301 - 308; IRC Sec. 401(a)(29), (32), (33) and Sec. 412 (minimum funding requirements); ERISA Title IV (plan termination insurance).	Federal Law. Funding requirements not applicable, except that state and local plans must comply with requirements of IRC Sec. 401(a)(7) in effect before ERISA. IRC Sec. 412(h) (under pre-ERISA IRC Sec. 401(a)(7), if a plan was terminated or contributions discontinued, the rights of all employees to benefits accrued to the date of termination or discontinuance are nonforfeitable). State and Local Law. Typically, funding is required to cover the normal cost and the amount necessary to amortize the unfunded liability of the plan. Employer Contributions. Average actual employer contribution varies by size of plan, ranging from 18.31% of payroll for plans with less than 1,000 members to 8.73% of payroll for plans with 100,000 members or more. Survey of State and Local Government Employee Retirement Systems, Public Pension Coordinating Council (1995) ("PPCC Survey"). Employee Contributions. Unlike most private plans, the majority of state and local plans require an employee contribution. Comparative Study of Major Public Employee Retirement Systems, Wisconsin Retirement Research Committee (1994) ("Wisc. Survey"). The average employee contribution is 5.41%. PPCC Survey.
Fiduciary Duties	ERISA Secs. 401 - 414 (fiduciary responsibilities); IRC Sec. 401(a)(2) (no part of plan assets may be used for purposes other than for exclusive benefit of employees and beneficiaries, known as "exclusive benefit rule") and IRC Sec. 4975 (prohibited transaction rules).	Federal Law. IRC Sec. 401(a)(2) ("exclusive benefit rule") and IRC Sec. 503 (special prohibited transaction rules for state and local plans). State and Local Law. As of 1995, 23 retirement systems that include teachers use a standard nearly identical to ERISA’s, 14 use the prudent person standard, and 13 use some variation. Twenty-six retirement systems that include teachers have legal lists, as of 1995. These lists set limits in the statute on the types of investments in which system fiduciaries may invest (e.g., no more than 50% of plan assets in stock). Moore & NCTR, Protecting Retirees’ Money, (1995).
Contractual Rights	RISA Sec. 204(g) (accrued benefit may not be decreased by amendment in plan; prospective changes allowed); IRC Sec. 411(b) (accrued benefit requirements).	Federal Law. Some state courts have held that the Contract Clause of the U.S. Constitution (Article I, Section 10) would grant contractual rights under state and local government law. (Bailey v. State, 500 S.E. 2d 54 (N.C. 1998)). State and Local Law. Pension benefits and other rights are fixed upon hiring (e.g., N.Y. Const. Art. V, Sec. 7); upon vesting (e.g., Alaska Const. Art. XII, Sec. 7); or upon retirement (e.g., Ohio Rev. Code Ann. Sec. 3307.711). Moore & NCTR, Public Pension Plans: The State Regulatory Framework (1998).
Vesting	ERISA Sec. 203; IRC Secs. 401(a)(7) and 411 (employee who completes at least 5 years of service has nonforfeitable right to 100% of employee’s accrued benefit derived from employer contributions).	Federal Law. Not applicable, except that state and local plans must comply with vesting requirements of IRC Sec. 401(a)(7) in effect before ERISA. IRC Sec. 411(e)(2). See section on funding. State and Local Law. 53% of plans surveyed require 5 or fewer years of service to vest. Nearly 40% require 10 or more years. A slow trend in vesting is toward 5 years or shorter. Wisc. Survey.
Qualified Domestic Relations Orders (QDROs)	ERISA Sec. 206(d)(3); IRC Secs. 401(a)(13), 401(n), and 414(p) ("QDRO" creates or recognizes right of alternate payee, e.g., former spouse, to receive all or part of a plan participant’s pension).	Federal Law. To the extent that a pension is divided under a Domestic Relations Order (DRO) (not a QDRO), the federal tax law treats the DRO as though it were a QDRO. State and Local Law. As of 1994, 39 states had laws requiring retirement systems to recognize QDROs. AARP’s survey of spousal rights under state pension plans (1994).
Joint and Survivor Benefits	ERISA Sec. 205; IRC Secs. 401(a)(11) and Sec. 417 (participant’s spouse must consent in writing if participant does not select annuity with survivor benefits).	Federal Law. Inapplicable. State and Local Law. As of 1994, 23 states had laws or rules requiring retirement systems to obtain spouse’s consent or acknowledgment for waiver of survivor benefits, 3 states provided for automatic survivor benefits for spouse, and 24 states did not have spousal consent or acknowledgment laws or rules. AARP’s survey of spousal rights under state pension plans (1994).
Portability	IRC Sec. 401(a)(31) rollover rules. Portability and reciprocity between plans (except as allowed by the rollover rules) are not typical outside of the rules applicable to multi-employer plans (i.e., plans negotiated through collective bargaining).	Federal Law. IRC Sec. 401(a)(31) rollover rules. State and Local Law. Extensive opportunities to purchase service credit as a means to increase pension benefits exist. Employee may purchase credit for years of work that would be otherwise lost because employee was ineligible to receive a benefit for the work (e.g., had not vested). As of 1998, 47 out of 50 statewide retirement systems that include teachers allow some or all participants to purchase out-of-state teaching service. Moore & NCTR, Portability of Teacher Retirement Benefits (1998). States also frequently allow "reciprocity," in which employee’s service credit is transferred from one retirement system in state to another in same state. National Conference of State Legislatures, Public Pensions: A Legislator’s Guide (1995). For example, employee worked 10 years in teachers’ plan and 10 years in general employees plan. He/she may be allowed to consolidate service in one plan. Reciprocity between plans within same state is fairly common, but rare on an interstate basis.

E:\Nctr\comparison of private plans to state & local govt plans 101399.doc

Section IV

NCTR Policy Resolutions for 1999-2000

Approved October 5, 1999

Opposition to Tax on the Assets and Income of Public Pension Plans and Opposition to Elimination of Tax-Exempt Status of Public Pension Plan Assets

WHEREAS, the administrators and trustees of a public pension plan invest the plan's assets to earn income as part of the overall funding process; and

WHEREAS, any tax on these assets and income whether in the form of a securities transfer excise tax or any other form, or the elimination of the tax-exempt status of these assets, will erode the financial integrity of the plans as well as raise the cost of these programs to the employees, employers, and taxpayers; and

WHEREAS, this result would be contrary to the retirement objectives embodied in the Internal Revenue Code; now therefore be it

RESOLVED, that the National Council on Teacher Retirement vigorously opposes any effort to enact any tax on the assets and income of public pension plans or any effort to eliminate the tax-exempt status of such plans. Submitted by the Legislative Committee.

Support for Social Security and the Need to Ensure its Solvency

WHEREAS, Social Security has successfully provided basic retirement and other benefits to Americans since the 1930's; and

WHEREAS, Social Security has raised many older Americans out of poverty and allowed them to spend their retirement years in dignity; and

WHEREAS, Social Security is the primary source of retirement income for many senior citizens in this country; and

WHEREAS, Social Security is not only a retirement program, but also a family protection plan that provides benefits for spouses and dependent children of wage earners who die during their working lives, adults and children with disabilities, and other Americans with special needs; and

WHEREAS, in the year 2011, the first of the 77 million Baby Boomers will retire and begin to draw Social Security benefits; and beginning in the year 2014, the annual amount of benefits paid from the Social Security Trust Fund is projected to exceed the collection of payroll taxes used to finance benefits; and by the year 2034, the Trust Fund is projected to be depleted and Social Security recipients will receive only 75% of their promised benefits; and

WHEREAS, the Social Security System can currently pay benefits, but action is needed in the future; and

WHEREAS, even though the Social Security System does not cover all participants in state and local government retirement systems, the System may touch their lives in other ways;

WHEREAS, state and local government retirement systems provide models for federal reform of Social Security; now therefore be it

RESOLVED, that the National Council on Teacher Retirement calls upon the President and the Congress to take action that will:

Guarantee at least the current level of Social Security benefits;

· Ensure the long-term solvency of the Social Security Trust Fund by maintaining the economic security of current and future Social Security beneficiaries; and

· Continue to guarantee inflation-adjusted retirement income as well as to continue to provide guaranteed inflation-adjusted survivor benefits for the families of deceased workers, as well as disabled workers and their families.

RESOLVED, that the National Council on Teacher Retirement encourages Congress to invest the social Security trust fund in a diversified portfolio of assets in the public and private markets, and such investment must: Be administered through an independent board that is well insulated from political interference and that includes Social security beneficiaries as board trustees; Be made for the exclusive benefits of Social Security beneficiaries as under state pension law; Be protected from excessive administrative costs; and Be used solely for retirement, survivor, and disability benefits. Submitted by the Legislative Committee

Support for Voluntary Participation in Social Security

WHEREAS, many states and localities, based upon provisions of the Social Security Act, have affiliated with the Social Security System and developed excellent retirement and related programs that include both Social Security benefits and benefits from the respective state or local government pension plan; and

WHEREAS, other states and localities, in reliance upon the voluntary affiliation provisions, have not elected to participate in Social Security and have developed independent and excellent programs of retirement and related benefits; and

WHEREAS, imposition of mandated Social Security coverage upon states, localities, and their employees would create substantial cost pressures, necessitating rapid and ill-considered changes in plan design, including the possible abandonment of existing programs; and

WHEREAS, the inclusion of states, localities, and their employees in the Social Security System would not solve the System’s long-range funding problems; and

WHEREAS, serious constitutional questions are raised by the imposition of mandatory Social Security coverage of states, localities, and their employees; now therefore be it

RESOLVED, that the National Council on Teacher Retirement records its strong opposition to mandatory Social Security coverage for public employees of state and local governments; and be it further

RESOLVED, that the National Council on Teacher Retirement supports the affiliation of states, localities, and their employees with Social Security and Medicare only by means of a voluntary referendum. Submitted by the Legislative Committee.

Prudent Investment of State and Local Government Pension Plan Assets

WHEREAS, the exclusive purpose of state and local government pension plans is to provide benefits to their participants; and

WHEREAS, state and local pension plan administrators and trustees must invest plan assets according to fiduciary standards which include the duty to invest the assets in a prudent manner; and

WHEREAS, in investing prudently, state and local pension plan administrators and trustees seek investments that provide an appropriate risk adjusted market rate of return; and

WHEREAS, if state and local pension plan administrators and trustees do not invest according to these standards, they violate their fiduciary duties and responsibilities to the plan participants and are subject to personal liability; and

WHEREAS, some policy makers are interested in using pension funds as a source of program funding in violation of these duties and responsibilities; and

WHEREAS, other policy makers would like plan administrators and trustees to make investments that advance certain social concerns, which are not directly related to investment returns; now therefore be it

RESOLVED, that the National Council on Teacher Retirement vigorously opposes any mandate that requires state and local pension plan administrators and trustees to make investment decisions that violate their fiduciary duties and responsibilities. Submitted by the Legislative Committee.

Support for Current Governance of State and Local Government Retirement Plans

WHEREAS, most state and local government retirement plans have been in operation for decades, some having been in existence since the beginning of the 20th century; and

WHEREAS, over 90% of full-time state and local government employees are covered by a defined benefit pension plan; and

WHEREAS, state and local government retirement plans are funded by revenues provided by the employees themselves, state and local taxpayers, and/or earnings from investments managed by the pension board of trustees; and

WHEREAS, state and local governments have a strong contractual, and in some cases, constitutional commitment to guarantee their pension liabilities; and

WHEREAS, the political process ensures that state and local government employees and retirees have meaningful input regarding legislative decisions affecting retirement plans; and

WHEREAS, state and local government retirement plans operate pursuant to an array of state laws, including statutory and common law trust principles, conflict of interest laws, codes of ethics, and sunshine laws; and

WHEREAS, the boards of trustees of state and local government retirement plans have diverse memberships that frequently are made up of representatives of employees, retirees, investment professionals, elected officials, and members of the public; and

WHEREAS, state and local government retirement plans have a long history of success in providing retirement security to their participants under the current regulatory structure; now therefore be it

RESOLVED, that the National Council on Teacher Retirement advocates the regulation and protection of state and local government retirement plans by the respective state or local government. Submitted by the Legislative Committee.

Support for Pension Simplification Proposals

WHEREAS, the federal government is involved to a degree in the regulation of state and local government plans through the pension qualification rules of the federal Internal Revenue Code; and

WHEREAS, the federal Internal Revenue Code grants state and local government retirement plans and their participants tax-deferred treatment; and

WHEREAS, in exchange for this tax-deferred treatment, state and local government retirement plans must comply with a series of complicated qualification rules; and

WHEREAS, many of these rules have little application to the operation of state and local retirement plans; and

WHEREAS, many of these rules interfere with an employee’s ability to save for retirement; and

WHEREAS, many of these rules impose great administrative cost with little or no corresponding benefit; now therefore be it

RESOLVED, that the National Council on Teacher Retirement supports proposals to simplify the Internal Revenue Code pension qualification rules that will improve the administration of state and local government retirement plans for the exclusive benefit of plan participants. Submitted by the Legislative Committee.

Support for Defined Benefit Plans

WHEREAS, efforts to convert state and local government retirement plans from defined benefit to defined contribution have taken place; and

WHEREAS, state and local government employees traditionally participate in defined benefit plans that provide a pension benefit based on the employee's length of service and salary at retirement; and

WHEREAS, some state and local government employees have in addition to defined benefit plan coverage a supplementary defined contribution plan, such as a Section 403(b) tax sheltered annuity, a Section 457 deferred compensation plan, or a Section 401(k) plan, in which they may voluntarily participate; and

WHEREAS, state and local government defined benefit plans help to attract and retain productive employees, which helps produce a high performance work force for taxpayers; and

WHEREAS, such plans provide employees with an effective means of building retirement income; and

WHEREAS, such plans offer a predictable lifetime retirement benefit that can never be reduced; and

WHEREAS, such plans are long-term investors and average the bad periods against the good, therefore, the amount of a retiree’s benefit is not reliant on the health of the stock market as could be the case with defined contribution plans; and

WHEREAS, such plans frequently offer plan participants the opportunity to purchase service credit which affords portability; and

WHEREAS, the funding policy of such plans is intended to produce relatively level rates of funding that will accumulate sufficient assets to meet the cost of promised benefits, and

WHEREAS, some changes have been made recently in state and local retirement plans to address the issue of short service employees and to enhance portability within the structure of the existing defined benefit plan and not by converting to a defined contribution plan; now therefore be it

RESOLVED that the National Council on Teacher Retirement supports the prevailing system of retirement benefits in the public sector, namely, a defined benefit plan and a supplementary defined contribution plan into which the employee voluntarily contributes. Submitted by the Legislative Committee.

Support for Pension Portability

WHEREAS, some state and local government employees will not spend their entire careers with one employer; and

WHEREAS, many states and localities provide their employees with the opportunity to purchase service credit for years of work for which they will not otherwise earn a pension (for example, they left employment before vesting in a benefit); and

WHEREAS, many state and local government employees participate in Section 403(b) tax-sheltered annuities for public education employees and Section 457 deferred compensation plans for other types of employees; and

WHEREAS, despite some improvements, federal pension law continues to hinder state and local government employees’ full access to pension portability; and

WHEREAS, federal law severely limits the right of state and local employees to rollover their money in Section 403(b) and Section 457 plans if they move to a private sector employer or, in some cases, move between public sector employers; and

WHEREAS, employees who participate in Section 401(k) plans (most of whom are in the private sector) have many more rollover options; and

WHEREAS, federal rules penalize employees who use money in their 403(b) and 457 plans to purchase service credit, with the same strict rules not applying to money in other types of plans used for such purchases; now therefore be it

RESOLVED that the National Council on Teacher Retirement calls on Congress to expand pension portability for state and local government employees by passing provisions including those in: the Retirement Account Portability Act, by Rep. Earl Pomeroy (D-ND) (H.R. 739) and Sen. Jim Jeffords (R-VT) (S. 1357); the Comprehensive Retirement Security and Pension Reform Act, by Rep. Rob Portman (R-OH) and Rep. Ben Cardin (D-MD) (H.R. 1102); the Pension Coverage and Portability Act by Sen. Bob Graham (D-FL) and Sen. Charles Grassley (R-IA) (S. 741); the Taxpayer Refund and Relief Act of 1999 by Rep. Bill Archer (R-TX) (H.R. 2488), and the Taxpayer Refund Act of 1999 by Sen. Bill Roth (R-DE) (S. 1429) or passing legislation with similar provisions. Submitted by the Legislative Committee.

Support for All Governmental Employers to Have Authority to Offer 401(k) Plans, in Addition to Defined Benefit Plans and Existing Supplementary Pension Plans, to Their Employees

WHEREAS, defined benefit plans provide the basic retirement income for state and local government employees; and

WHEREAS, some employees also contribute to a supplementary pension plan in which they voluntarily defer a portion of their income (subject to limits) on a tax-favored basis; and

WHEREAS, supplementary plans for education employees are known as 403(b) tax sheltered annuities and are called 457 deferred compensation plans for non-education employees; and

WHEREAS, private sector employees have 401(k) plans available to them, but only a few state and local employees have the same opportunity to participate because Congress, in the Tax Reform Act of 1986, terminated the right of states and localities to offer any new 401(k) plans after that time; and

WHEREAS, allowing states and localities to offer 401(k) plans to their employees in addition to other types of voluntary supplemental retirement savings vehicles would give the governmental employers desirable additional flexibility in assisting their employees in preparing for retirement; and

WHEREAS, granting such authority to the states and localities will restore the status quo that was in effect before the Tax Reform Act of 1986; and

WHEREAS, states and localities should be allowed to offer 401(k) plans if desirable for their employees; and

WHEREAS, the extension of 401(k) plans to the public sector should not be made on conditions that restrict or eliminate the use of other existing tax favored vehicles, such as 403(b) tax-deferred annuities and 457 deferred compensation plans; and

WHEREAS, 401(k) and other supplemental pension programs complement defined benefit plans, but are not a substitute for them; now therefore be it

RESOLVED, that the National Council on Teacher Retirement supports the enactment of legislation authorizing the use of 401(k) plans by public sector employers as a complement, not a substitute for defined benefit plans; and be it further

RESOLVED, that the extension of the availability of 401(k) plans to public sector employees pursuant to the foregoing should be in addition to existing tax favored arrangements, such as 403(b) tax-deferred annuities and 457 deferred compensation plans, and not conditioned on the restriction or closing of these savings vehicles. Submitted by the Legislative Committee

Support for Liberalizing the IRC §415(b) Defined Benefit "Dollar" Limitations

WHEREAS, state and local retirement systems are primarily defined benefit plans subject to the so-called "dollar" limitations of section 415(b) of the Internal Revenue Code; and

WHEREAS, the enforcement of the dollar limitations pose cumbersome administrative burdens for public sector pension plans because it is often difficult to predict in advance whether the 415(b) limitations will impact a given participant’s benefit and the overwhelming majority of public employees are ultimately not affected by the dollar limitations in any event; and

WHEREAS, the uncertainties created by the 415(b) dollar limitations can also present potential traps for plan participants who cannot be expected to be familiar with the complexities of the Federal tax laws as they make their retirement decisions, and because of their particular age and circumstances they might find their promised benefits capped by an unforeseen application of the IRC §415(b) dollar limitations; and

WHEREAS, any liberalization of the 415(b) dollar limitations would be greatly welcomed by public sector pension plans as a way of easing the administrative burdens of complying with the limitations and by participants as a means of assuring they will be able to predict with confidence what benefit they will ultimately be receiving when they choose to retire; and

WHEREAS, in addition to the foregoing problems, a key feature of the IRC §415(b) defined benefit limitations is the actuarial lowering of the limitation for employees who commence receiving benefits at an age younger than age 62 in the case of governmental plans subject to the so-called governmental plan limits or at an age younger than Social Security retirement age (age 65, 66, or 67 depending upon date of birth) in the case of governmental plans subject to the so-called private sector limitations; and

WHEREAS, Congress has already recognized that the actuarial lowering of the 415(b) limitation can unfairly penalize police and fire employees who typically retire at ages well short of age 62 and has accordingly exempted those employees from such lowering of the limitation through the enactment of section 1527 of the Tax Payer Relief Act of 1997; and

WHEREAS, the actuarial lowering of the IRC §415(b) limitations for non-police and fire employees has a similar potential for unfairly penalizing such employees who retire at ages younger than age 62, notwithstanding that such employees may have had an extended career in public service; and

WHEREAS, the actuarial lowering of the IRC §415(b) limitations may be particularly detrimental to public employees born after 1954 participating in retirement systems subject to the private sector limitations because the limitations are actuarially lowered from age 67; and

WHEREAS, the actuarial lowering of the IRC §415(b) limitation may also interfere with employer sponsored early retirement incentives and other strategies for encouraging the early retirement of public employees; now therefore be it

RESOLVED, that the National Council on Teacher Retirement supports the enactment of legislation liberalizing the IRC §415(b) dollar limitations; and be it further

RESOLVED, that the National Council on Teacher Retirement supports amendments to IRC §415(b) that either substantially ameliorate the actuarial lowering of the IRC §415(b) limitations for non-police and fire public employees or, preferably, eliminate the actuarial lowering of the limitations for such employees altogether as has already been done by Congress for police and fire employees. Submitted by the Legislative Committee

Support for Increased Retirement Savings and Enhanced Education on the Subject

WHEREAS, employees of state and local governments as well as large companies usually have pension coverage; and

WHEREAS, only 20% of small business workers have pension coverage; and

WHEREAS, women and minorities are less likely to have pension coverage than other groups; and

WHEREAS, Americans’ savings rate is very low; and

WHEREAS, the number of Americans reaching retirement age will accelerate in the next few decades;

WHEREAS, NCTR is working through its LIFEPLAN website to educate teachers, other state and local government employees, and members of the public about the need for retirement savings; and;

WHEREAS, many other organizations, individual employers, and employee associations are also conducting campaigns to educate Americans about retirement savings, now therefore be it

RESOLVED, that the National Council on Teacher Retirement urges Congress to provide incentives to ensure pension coverage for all Americans, including the encouragement of programs that educate the public about the need to save for retirement. Submitted by the Legislative Committee

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Last Update: November 16, 2006