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PENDING BEFORE CONGRESS

Prepared by

National Conference of Public Employee Retirement Systems (NCPERS),

National Association of State Retirement Systems (NASRA), and

National Council on Teacher Retirement (NCTR)

The Senate Finance Committee adopted legislation (S. 1971) to protect workers who suffered from the collapse of Enron Corporation. The House passed a similar bill, H.R. 3762.  Both bills affect public sector plans. They would require such plans to comply with transaction restriction notices, benefit statements, and investment guidelines.  These disclosure and reporting activities are already carried out by public plans, but the bills would require such plans to either conform to the federal format or duplicate their current activities.

We support the intent of the legislation – to protect workers who were harmed because of the action by Enron and the many issues it raised.  Public plans, however, are different and already carry out the disclosure and reporting activities required by the bills.  The bills’ sponsors have described the problems that prompted them to act.  Enron employees held large amounts of company stock in their 401(k) plans.  The employees were prohibited from selling the stock during a critical period.  These are problems that can occur in the private sector only.  In other words, they have no bearing on public plans.  Accordingly, we urge Congress to exempt public plans from the legislation.

Should public pension plans be affected by the pension legislation arising from the Enron collapse?

NO.  The unique features that led to Enron workers losing their pensions would not occur with public plans. Most public employees have a guaranteed defined benefit pension as their core benefit. While many public employees are offered a supplemental self-directed plan, they too are governmental plans and would not have employer stock as part of a pension contribution.  There is no risk that public sector workers would see their pension assets or benefits drop due to their employer’s financial condition.  While public employers and employees are supportive of the need to prevent future Enron-type situations where workers see their retirement savings vanish, this situation could not occur in the public sector.

Are public pension plans already subject to extensive regulation?

YES.  States and localities have comprehensive > laws that provide for rigorous disclosure and reporting by retirement plans as well as > strong protections for plan participants and assets. Public plans are governed by boards of trustees, which almost always include employee representatives. Congress long ago recognized that unlike private pension plans > that are preempted from State statutes and solely regulated by federal law, public pension plans are subject to extensive state and/or local regulation>. There is a concern that the proposed legislation will not take these existing state/local laws as well as the unique features of public plans into account, thus resulting in duplication, conflicts between state/local and federal laws, and requirements that are unworkable in a public plan setting.

Would the enforcement mechanism under the bills be problematic for States and localities?

YES.  The provisions of S. 1971 and H.R. 3762 would impose an excise tax or a monetary penalty (depending on the bill and the particular provision) as a means of enforcing their requirements. This poses constitutional questions and violates the principle that the federal government does not tax or assess fines against State and local governments. Further, the bills fail to take into account that public plans are often administered by an independent agency covering multiple jurisdictions or third party administrators or plans separate from the employer.

Do public pension plans already provide notices to their members?

YES.  Public pension plans have a strong commitment to retirement security, and provide disclosure of all kinds of information, as well as investment education and benefit statements.  S. 1971 and H.R. 3762 would require pension plans to provide investment education information and benefit statements as well as a 30-day notice for blackout periods.  While public plans only institute a so-called blackout period in rare instances (which have nothing to do with the financial status of the employer, but sometimes arise from a technology upgrade or if a public plan is being switched from one third party administrator or payroll provider to another) they have always provided notice well in advance of any period where participants would be unable to redirect the investments within their self-directed accounts.

Is there a concern over unintended consequences? 

YES.  The federal government has long recognized the unique features of state and local government’s regulation of public plans.  Given that S. 1971 and H.R. 3762 are not written with public pension plans in mind, there is great concern that there will be a host of unintended consequences as bills are merged and regulations issued.  There is concern that these bills are a departure from long-standing policy and may require States and localities to go through expense and disruption to retool their notification and investment education processes in order to duplicate requirements written for private company stock plans.

CONCLUSION:  No evidence exists that public plans are structured so that they can offer employer stock, which created the problems for Enron employees.  The bills referenced above seek to prevent future Enron-type situations and do not, therefore, apply to the circumstances of public plans.  Further, the proposed requirements of the bills are essentially the same as existing State and local government regulations.  Their imposition on public plans would, in effect, subject the plans to a duplicate set of regulations.  Thus, public plans should be exempted from S. 1971 and H.R. 3762.