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by Cynthia L. Moore
NCTR Washington Counsel

Great News on DB Plan Front: Michigan DC Plan for School Employees De- Authorized

The Michigan Senate and House agreed last week to legislation (S. 719, as amended) that removes from the statute authority to start a DC plan for members of the Public School Employees Retirement System (MPSERS) if the DB plan is fully funded. The bill also makes several changes in the actuarial assumptions and valuation of the MPSERS' assets. These actuarial and valuation changes are a separate effort to fully fund the DB plan. The retirement provisions are part of a larger bill to reimburse Michigan schools for underpayment of special education funds. Governor John Engler (R) is expected to sign the bill into law shortly.

When the Michigan legislature approved DC plans last year, it treated school employees differently from state employees. The DC plan for school employees was to go into effect only if MPSERS, a DB plan, was fully funded. The State Treasurer was responsible for seeking the additional funding. Many expected him to use bonds to finance the shortfall, much as New Jersey did this year for its retirement systems. Thus, it was not certain whether the DC plan for school employees would ever go into effect. S. 719, as amended, strikes all references in the statute to the DC plan for school employees, therefore ensuring that it will never become effective.

The DC plan provision for state employees is much different than that for school employees. Starting this year, newly hired employees are required to be in a DC plan. Existing employees may remain in the DB plan or move to the DC plan.

S. 719, as amended, also makes changes intended to eliminate the underfunding of MPSERS. Among other things, it changes the asset valuation from book to fair market value. It also sets the actuarial rate of return on investments at 8%.

Key to the success of the retirement provisions of S. 719, as amended, was Representative Eileen DeHart (D) who chairs the Public Retirement Committee of the House. She provided leadership by holding a series of hearings to ensure a full airing of the DC/DB plan issue. From the hearings, she concluded that the DC plan provision should be eliminated. Also instrumental was Rep. Robert Emerson (D), the House negotiator on the provisions.

Although DB plans have been holding their own in the DC plan onslaught, this repudiation of a DC plan in favor of an existing DB plan is a sweet victory indeed.

Defined Contribution Activity Anticipated in 1998

We expect the DC plan activity to continue to percolate next year.

Iowa Study Complete. The General Assembly directed the Iowa Public Employee Retirement System (IPERS) in 1996 to determine, among other things, whether or not the basic structure of the plan should be altered from the existing defined benefit model to a defined contribution design. The DB/DC evaluation is part of several issues that IPERS studied and just released. With respect to the DB/DC issue, IPERS concluded the existing DB plan "offers the majority of [IPERS] members the kind of benefits which a defined contribution plan structure cannot." It also recommends two changes to make the plan more valuable to short service employees. First, IPERS should provide an incentive for vested, terminated members with 10 or more years of service to keep their money in the system until retirement. This would be accomplished by indexing the value of their accrued benefit at termination by up to 2% per year until they retire. Second, a distribution to vested employees upon termination of public service would include a portion of the employer's contribution on their behalf, if they request a refund following termination, and provide IPERS with documentation proving that their refund will be directed to another retirement vehicle. The General Assembly will take up the recommendations next year.

Florida Study Underway. The Florida General Assembly created a Workforce 2000 Study Commission this year. Its purpose is to look at "an innovative, efficient retirement and benefits program along with setting appropriate personnel administrative policy." As part of its mandate, it is to review various benefit plans as applied in the private sector and recommend options "with the objectives of minimizing cost while maximizing motivation and work initiative among public employees" and to review and recommend "specific alternative benefit plans for nonpermanent employees in the public sector." The recommendations are due December 1 and will likely be a subject of debate during the 1998 legislative session.

Groups Organize 1998 Push for DC Plans. The Americans for Tax Reform (ATR) and the American Legislative Exchange Council (ALEC) hope to have introduced and passed in as many as 15 states next year model DC legislation. The legislation, called the Portable Retirement Option (PRO) Act, would authorize state and local public sector employers to provide optional portable retirement plans for state and local government employees. The plans would allow employees to participate in the optional plan instead of continued membership in their existing retirement system. If an existing employee selected the optional plan, his/her retirement system would be required to transfer the actuarial present value of his/her benefit, as defined in the proposal, to the optional plan.

Congress Gone; IRS Re-Structuring Plan Moves in House; Abolition of Income Tax Debated

Congress adjourned November 13 and will return in January. We expect pension simplification to continue to capture Washington's attention. The White House is hinting that it may include a new pension initiative in the President's State of the Union address. We will provide an overview of possible pension issues in next month's update. Meanwhile, the only tax issue that occupied Congress' attention recently was IRS restructuring.

IRS Re-Structuring Would Change Agency Governance. The full House approved a restructuring bill on November 5 (H.R. 2676). The bill draws on ideas set out in a report by the National Commission on Restructuring the IRS, chaired by Rep. Rob Portman (R-OH) and Sen. Bob Kerrey (D-NE). Among other things, the bill would change the governance of the IRS. Under the proposal, the Agency would be governed by an 11-member board of directors, 8 of whom would be from the private sector. The other three would be the IRS Commissioner, the Secretary of the Treasury, and a representative of the National Treasury Employees Union. The Board would be responsible for IRS' strategic director.

Moving at a more leisurely pace on the issue is the Senate. It has held hearings on the proposal but does not, according to Finance Committee Chairman, Bill Roth (R-DE), intend to move a bill until next spring.

"Scrap the Code" Road Show. Taking re-structuring one step further are House Majority Leader Dick Armey (R-TX) and Rep. Bill Tauzin (R-LA). They recently returned from a nationwide "Scrap the [Internal Revenue] Code" tour. Each member promoted his own way of banishing the Code to the trash can of history: Rep. Armey proposes a 17% flat income tax and Rep. Tauzin goes a step farther by advocating the elimination of the federal income tax and replacing it with a 15% federal retail sales tax.

Under Rep. Armey's proposal, individuals will pay the flat tax on wages, salaries, and retirement distributions, after subtracting allowances. The allowances are similar to the current standard deduction and would amount to $11,000 for a single person, $22,000 for a married couple filing jointly, and $5,000 for each dependent child. The Social Security and Medicare payroll taxes would not be affected. The proposal would significantly simplify qualified pension plan rules by: repealing all nondiscrimination rules for private plans (the Taxpayer Relief Act effectively eliminated these rules for public plans), eliminating the contribution and benefits limits of Section 415, abolishing the limitation of elective deferrals for 401(k) plans and 403(b) tax sheltered annuities, and repealing the restrictions on distributions. It would allow state and local governments to offer 401(k) plans.

The Tauzin proposal de-authorizes the IRS as of fiscal year 2001 and repeals all federal personal and corporate income taxes and estate and gift taxes. A tax of 15% would be imposed on the gross receipts from the sales of any taxable property or service sold in the United States. Income diverted into savings and investments, as well as the income earned from savings and investments, would not be taxable until consumed.

Moore Questions First Lady on Social Security Reform

At a recent policy forum, NCTR Washington Counsel, Cindie Moore, asked Hillary Rodham Clinton for her prediction on how Social Security would be reformed. Mrs. Clinton replied that the President wants to create a national consensus on the issue and he intends the issue to be a top priority during the balance of his term of office. The First Lady pointed out that if the strong economy continues, a broad variety of options will be available to deal with the issue. The passage of the Balanced Budget Act this summer also helps. Mrs. Clinton added, "as someone who just turned 50, the Social Security issue is no longer abstract to me, but is very personal."

Congressional Staff Learn About State and Local Government Plans

Over 60 congressional staff members learned about the operation of state and local government plans and how they differ from private plans. Also in attendance was Rep. Earl Pomeroy (D-ND) who served on the North Dakota State Investment Board when he was in state government. The briefing was sponsored by the Retirement Savings Network, a coalition of private and public pension groups, of which NCTR is a member. Jeannine Markoe Raymond, National Association of State Retirement Administrators gave an overview of the key features of the plans. NCTR Washington Counsel, Cindie Moore, explained how the regulation of state and local plans compares with that of private plans. Fred Nesbitt, International Association of Firefighters, reviewed the role of public employee unions in setting state and local government pension policy. Randy Hardock, National Conference of Public Employee Retirement Systems, moderated.

NCSL Pension Guides Available

Copies of Public Pensions: A Legislator's Guide are available from Cindie Moore. Published by the National Conference of State Legislatures (NCSL) in 1995, the guide provides a helpful overview of state and local government plans. NCSL recently provided NCTR with re-prints of the publication.