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By Cynthia L. Moore, Washington Counsel

National Council on Teacher Retirement
July 9, 1998

The pension portability provisions supported by NCTR continue to be folded into various pieces of legislation. The latest is a broad-ranging bill to be introduced shortly by Senators Graham (D-FL), Grassley (R IA), Jeffords (R-VT), and Baucus (D-MT). Under the first portability provision that NCTR advocates, state and local government employees could freely move 403(b) and 457 money into and out of a variety of pension vehicles. The second provision would allow the use of 403(b) and 457 money to purchase service credit. These two provisions originally appeared in Congressmen Earl Pomeroy's (D-ND) and Jim Kolbe's (R-AZ) Retirement Account Portability (RAP) Act (H.R. 3503). They were then picked up in the Retirement Security for the 21st Century Act by Reps. Rob Portman (R-OH) and Ben Cardin (D-MD) (H.R. 3788).

We appreciate all the support, but how about a means to make broader pension portability a reality this year? Well, don't get your hopes up. Pension legislation does not move on its own. Instead, it is generally attached to a larger bill, usually tax legislation. At the beginning of the year there were several good candidates for a tax bill. First, the budget surplus could have provided a solution except that the President has reserved that money for saving Social Security and few in Congress disagree with that stance. Second, the tobacco settlement, which had some spare money for a tax cut, has gone up in smoke, so to speak. There are no current contenders and with fewer than 30 legislative days left before adjournment, the possibility of a vehicle becomes more and more remote.

IRS RESTRUCTURING APPROVED; AWAITING PREZ'S OKAY

The Senate gave final approval to the IRS restructuring bill the week of July 6. The centerpiece of the bill is an independent board to govern the agency. It will have nine members made up of six private citizens, the Treasury Secretary, the IRS Commissioner and an IRS employee representative. The Board would set long range strategy and monitor the agency's management. The bill also includes the following other items of interest.

Roth IRA "Pay For."

The restructuring bill is paid for by a change in the treatment of Roth IRAs. The proposal would make it easier for older taxpayers to convert from traditional IRAs to Roth IRAs. Under current law, taxpayers must generally begin to withdraw money from traditional IRAs at age 70-1/2. The money they take out of traditional IRAs now counts as income and causes some taxpayers to exceed the $100,000 income limit for Roth IRAs. Under the restructuring bill, money withdrawn from traditional IRAs would no longer count as income towards the $100,000 limit. That would make more older Americans eligible for Roth IRAs. It would also create a short-term windfall for the U.S. Treasury if taxpayers withdrew money from traditional IRAs, pay tax on the withdrawals, and then move the money into Roth IRAs. Congress uses this windfall to pay for the bill.

Capital Gains Change. Tucked into the restructuring bill during conference committee is a capital gain change sponsored by Ways and Means Committee Chairman Bill Archer (R-TX). The provision would shorten the investment holding period to 12 months. Under the current law, investors must hold onto investments at least 18 months to qualify for the lower capital gains tax rate.

The President is expected to sign it into law.Ð

Changes in the Internal Revenue Code

Tired of filling out that pesky IRS Form 1040 each year? The House of Representatives may have provided a solution when it voted recently to abolish the current tax code by December 31, 2002. The bill does not state what would replace the Code, but instead directs Congress to enact a new tax system by July 4, 2002. Even though this action is highly symbolic, should it become a viable issue, it brings into question how pensions would be treated under a new tax structure. Under current law, retirement benefits get significant tax preferences. Any new tax code might not provide the same level of favorable treatment.

GAO STUDYING WHETHER FEDERAL EMPLOYEE PENSION PLAN SHOULD ADOPT DC MODEL; LOOKING AT STATE PENSION PLANS FOR PRECEDENTS

House Speaker Newton Gingrich has expressed interest in defined contribution (DC) plans. He commended Michigan's new DC plan for state employees in his speech at the Retirement Saving Summit last month. As part of this general interest, the Republican leadership asked the General Accounting Office (GAO) to look at the possibility of converting the current federal government retirement plan from a defined benefit/defined contribution hybrid to a pure DC plan. The GAO is Congress' investigatory arm. In making the request, they asked GAO to look at pension plans that serve state employees (not teacher retirement systems) as a model under the mistaken impression that many states have converted their DB plans to DC plans as Michigan has.

As shown in NCTR's recent publication, The Preservation of Defined Benefit Plans (3rd edition), few broad-based conversions from DB to DC plans have actually taken place. The only exceptions, besides Michigan, are a 1991 plan was created for teachers in West Virginia and the two plans in Nebraska (one for state employees, the other for county employees), which have been in existence since the 1960s.

Not surprisingly, GAO has concluded preliminarily that there is less DC plan activity among the states than they expected. They have also found several states that have what GAO terms a "DC Overlay." Under this type of plan, the retirement system makes multiple calculations to determine a member's retirement benefit. In some cases, the member ends up with the benefit that is more like a DC plan. GAO found these types of overlays in Alabama, Colorado, Ohio, Oregon, and Wisconsin.

GAO has contacted 29 states so far as part of its research. It expects a final report to be released in February 1999.

PENSION SHORTS

Uniform Management of Public Employee Retirement Systems Act (UMPERSA). UMPERSA was introduced in Oklahoma, Washington, and Nebraska in 1998. All died at the end of their respective states' legislative sessions. However, parts of UMPERSA were picked up by the South Carolina legislature. There, the legislature used the UMPERSA fiduciary provisions to govern the retirement system's investments in equities. In 1996, the voters of South Carolina amended their constitution to allow the retirement systems to invest in equities. In order to implement this change, investment and fiduciary standards had to be enacted.

Health Care. A House Republican Task Force has proposed a health care program that will give patients more power in dealing with their health plans. The bill would broaden patients' rights in various ways:

• Requiring coverage of emergency room care in most cases;
• Ensuring that women have the right to see gynecologist and children have the right to have pediatricians as their primary doctors;
• Prohibiting health plans from limiting discussions between doctors and patients on treatment options; and
• Requiring quick resolution of coverage disputes through internal reviews.

The bill does not address the controversial issue of whether the broad ERISA preemption of suits brought against health care plans in state courts should be modified.

Social Security. The national forums to discuss Social Security's long range challenges are continuing. The American Association of Retired Persons (AARP) and the Concord Coalition held a forum in Providence, Rhode Island on July 1. The next forum will be on July 27 in Albuquerque, New Mexico. Previously, a forum was held in Kansas City, Missouri. The forums are to provide a sounding board for various reform approaches. They were first suggested by President Clinton in his State of the Union address last January.

Bankruptcy. Amendments to protect a debtor's interest in his/her pension plan is being advocated by a coalition of private and public pension organizations (including NCTR). The amendments will be recommended for inclusion in S. 1914, the Business Bankruptcy Reform Act by Sen. Charles Grassley (R-IA) which is currently pending before the Senate Judiciary Committee.