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To: NCTR Members From: Cindie Moore, Washington Counsel
Date: February 3, 2000

Re: Legislative Committee Meetings in Washington

How will the internet affect Congress’ consideration of issues? Should the teacher shortage issue be linked to retirement policy? What are the chances for pension reform legislation?

These and other issues were discussed by the NCTR Legislative Committee in Washington last week.

The Committee met on January 23 to discuss NCTR’s legislative priorities for 2000. They then convened on the 25th with representatives of the National Association of State Retirement Administrators (NASRA) and the National Conference of Public Employee Retirement Systems (NCPERS) to hear congressional and Administration speakers discuss the outlook for action this year.

Legislative Committee Meeting on January 23

The Search for a Legislative Vehicle and Re-framing the Issue

Prospects for action on NCTR’s pension priorities turn on whether a larger legislative vehicle is available to carry them. The most likely possibility is one of the small, targeted tax bills that House Speaker Dennis Hastert (R-IL) has proposed. Rather than pursue last year’s strategy of a large tax bill (H.R. 2488), the Speaker intends to move several slimmed down bills. The bills will tackle such issues as the marriage tax penalty (certain married couples pay more in taxes than if they were single) and educational tax breaks. The President is also interested in these issues. Washington observers believe that the Speaker wants to tailor bills that will win the President’s support and avoid last year’s situation in which the President vetoed H.R. 2488 as consuming too much of the expected budget surplus over the next 10 years.

Two areas of uncertainty exist for action on pension legislation. First, Speaker Hastert has not stated whether pension reform legislation, including the provisions of the Portman-Cardin bill (H.R. 1102) will be part of the bills. Interest by Congress in retirement issues remains high and NCTR will push for inclusion of the Portman-Cardin provisions as part of the Speaker’s legislation.

Second, pension reform legislation has recently encountered controversy. It is being unfairly characterized by the Center on Budget and Policy Priorities as disproportionately benefiting high income individuals. Many Democratic Members of Congress who had been predisposed toward supporting pension reform are now questioning the Portman-Cardin provisions because of the Center’s report.

To address the concerns of these Members of Congress, NCTR is working to re-frame the issue by pointing out that pension reform includes important pension portability provisions for public employees. Public employees are, by and large, a middle income workforce. Because they will be helped by the pension reform legislation, it is wrong to characterize such legislation as helping high paid workers only. Instead, it will significantly benefit middle income workers.

To help make the case, NCTR members submitted to me real life examples of participants in their plans who will benefit from the portability changes. These illustrations were combined into a document. We are meeting with the staffs of Democratic Members of Congress who serve on the tax committees, explaining the benefit of pension reform to middle income workers and giving them the real life examples to reinforce our arguments. The meetings have been useful in reassuring them that their continued support for pension reform is warranted.

In addition to the meetings, we have learned that the National Governors Association (NGA) is very interested in the portability proposals. Many NCTR members will be asking their individual governors to 1) support the proposals and 2) indicate that support to the NGA.

Action on Social Security Reform Unlikely in 2000, but Watch for 2001

Although Social Security will be unable to meet its future obligations to beneficiaries, no agreement on reform is likely this year. The culprit is the proposal to funnel a portion of a worker’s payroll tax into a private account. The money in the account would be invested by the worker in a variety of stock and bond funds. Many Republicans and a few Democrats strongly support this approach as a way of infusing more money into the system. The Administration and most other Democrats fiercely oppose it as a risky way to provide part (or all, depending on the proposal) of Americans’ Social Security benefit. This difference of opinion contributed to a stalemate on the issue last year.

Some reform proposals would require newly hired state and local government employees to be covered by Social Security. Lack of action, therefore, is good news for states, localities, and employees who do not participate in Social Security.

Next year might be a different story, however, if either Governor George W. Bush or Senator John McCain is elected president and if both Houses of Congress remain Republican. Both candidates support private accounts. If they push them, Congressional Republicans will likely line up in support and the accounts will become part of American workers’ Social Security benefit. On a related issue, action on private accounts would open up the Social Security debate in general and the mandatory coverage issue might re-surface.

Virtually No Activity on Cash Balance; DC Interest Continues; DB Competitiveness Promoted

In preparation for the Legislative Committee Meeting, Committee Chairman Bill Leighty, Virginia Retirement System, and I surveyed NCTR members for feedback on issues. One of the questions dealt with whether cash balance plans or defined contribution (DC) plans were being considered in any states.

According to the survey results, only one state is looking at cash balance plans. Two issues are driving the interest: 1) the need to attract and retain qualified teachers and 2) the desire to head off efforts to create a DC plan.

Although cash balance is not an issue of much concern, DC plans continue to draw interest. Seven states are looking at them: Wisconsin, South Carolina, Utah (just for legislators or the Governor), Arizona (limited interest), Ohio, Oregon, and Colorado.

Rob Gray, Government Relations Director for Colorado PERA, described his system’s successful efforts to improve its competitiveness of their defined benefit (DB) plan and thereby help neutralize efforts to create an alternative DC plan. PERA identified problems and persuaded the Colorado legislature to adopt solutions. Summaries of three such initiatives follow.

• More equitable treatment of short-service members. The legislature adopted an employer match targeted for such members. Terminating members now receive a 50% match if they withdraw their money before retirement eligibility. They receive the higher of the DB formula or a 100% match if they are eligible for retirement.
  
  
• Improved benefit structure. The benefit formula was changed to 2.5% of highest average salary (HAS) per year of service, and unreduced benefits are available as early as age 50 with 30 or more years of service. PERA’s contribution toward retiree health care premiums also was increased.
  
  
• Enhancements for existing DC programs.The legislature approved a 2% of salary match (or more if the DB plan becomes overfunded) of members’ voluntary contributions. The program, which goes into effect after PERA’s unfunded liability is eliminated, will encourage voluntary contributions by PERA members in whatever voluntary DC program they participate. (Grandfathered 401(k)s, 403(b)s, and 457s are offered.)

NCTR Members Diverge on Whether Teacher Shortage and Retirement Policy Intersect

The NCTR feedback survey also asked whether phased retirement should be considered. Rep. Earl Pomeroy has proposed (but not yet introduced any legislation) allowing employees age 55 and older to stay on the job but receive part or all of their retirement benefit provided by their current employer. NCTR members divided into three schools of thought on the issue. Approximately one-third support the idea because it keeps qualified teachers on the job which helps alleviate the teacher shortage. Another third were strongly opposed. The most common reasons for opposition were, first, phased retirement would likely mean earlier retirement thus making retirement benefits more expensive to fund; and second, the public may view public employees who are allowed to stay on the job while earning a pension benefit as double dippers. The remaining third were neutral.

The Legislative Committee looked first at the issue of the teacher shortage. They saw a videotape featuring former Speaker Newt Gingrich pointing out that finding adequate numbers of teachers is no longer simple. Until recently, women were a "captive workforce" for the teaching profession because they were not hired for other positions. Now that women have more employment opportunities teacher recruitment is much more difficult.

They also heard from Dr. Howard Nelson from the American Federation of Teachers. Howard discussed such issues as teacher age and experience, subjects areas in which shortage is greatest, and conditions contributing to the shortage of teachers.

• Teacher Age and Experience. The number of teachers over age 50 has been gradually increasing. In 1976, 15.5% were over that age. By 1996, the rate had grown to 25.8%. The rate of teachers with over 20 years of experience was 14.1% in 1976; it had increased to 38.1% twenty years later.
  
  
• Subject Areas In Which Shortage is Greatest. Teachers of special education, math, speech therapy, and bilingual education/English as a Second Language are in greatest demand.
  
  
• Conditions Contributing to the Shortage of Teachers. The most frequently cited were increased special needs students, fewer graduates from teaching programs, increased enrollment, and reduced class size.

Sean Neilon, Intergovernmental Relations Director for the Massachusetts Teacher Retirement System (MTRS), integrated the teacher shortage issue with retirement policy. He presented a case study of his system’s efforts to meet the teacher shortage. Several reasons spurred MTRS to act: recognition that teacher unions continue to advocate for early retirement benefits; a shortage of qualified teachers in math, science, technology, and language arts; a lack of school administrators; rising school enrollment; and pressure for smaller classrooms. To meet these challenges, MTRS is proposing the following action plan:

• Reduce vesting from 10 to 5 years
  
  
• Increase interest paid on member contributions
  
  
• Establish a statewide employees "SAVERS" program (a voluntary savings program to complement the MTRS defined benefit plan)
  
  
• Create a pilot optional retirement program Remove restrictions on re-employing retirees Improve the retirement formula for the 30 plus year teacher

Internet May Negatively Affect Congress

In the "Food for Thought" category, the Legislative Committee Members viewed a videotape about the internet’s effect on federal decision making. Former Secretary of Labor Robert Reich and former Speaker Newt Gingrich said that the internet allows citizens to register their views with their Member of Congress instantaneously. They merely go on line and send them an email. Both Reich and Gingrich worried that such instant reactions would detract from the deliberative nature of congressional decision making. The deliberation helps ensure that all view points on the issue are aired and strong reactions to an issue can be calmed before a decision is made.

Joint Legislative Committee Meeting on January 25

Bush Could Win White House; House Might Go Democratic; No Change Likely in the Senate

Greg Valliere, Managing Director, Schwab Washington Research Group, opened the session with an outlook on 2000. He made predictions about who will win the race for the White House and whether the House and Senate will stay Republican. For President, Greg says Governor Bush will probably win because his campaign war chest is larger than other candidates’ and the key battleground states – Ohio, Michigan, and Illinois – are strongly Republican now. He says the Governor must be careful on two issues where the Democrats have an edge: health care and education.

Control of the House of Representatives will be fiercely fought this Fall. Only six seats need to change for it to flip from Republican to Democratic control. Labor will play an important role by supporting Democratic candidates. A change in the Senate leadership is less likely. At present, the Republicans have 55 members and the Democrats, 45. Leading Democrats, such as Bob Kerrey of Nebraska and Pat Moynihan of New York, are retiring. The Republicans running to succeed each of them stand a good chance of winning in Greg’s view.

In the area of issues, watch for Social Security reform if Governor Bush is elected, Greg advises. All presidents have a honeymoon period of about a year in which they can push their priorities. Social Security reform might be one such issue that George Bush might want to tackle. If he does and if he’s successful, look for private accounts being added to the Social Security program as a means to invest trust fund money by each individual American worker. Greg predicts that the program would not allow a great range of investment choices, but rather "plain vanilla accounts" with only a few options.

Rep. Martin Frost, a Democrat from the Dallas-Fort Worth area, followed Greg and provided his take on the House race this Fall. He pointed out that 21 House Republicans are retiring this year as opposed to 6 Democrats. Because open seats are the most likely to change, the Democrats have the advantage with fewer retirements. He also predicts Democratic success because members of that party are perceived more favorably than Republicans on health care reform and the prescription drug issue. Finally, he says the public wants the federal debt to be paid down more than they want tax cuts. The Republicans, in his view, want a tax bill, which is out of step with the wishes of the people. (Rep. Tom Davis, a Republican from Virginia, was invited to speak to give an outlook from a GOP perspective, but scheduling problems prevented him from taking part.)

On the issue of pension reform, Rep. Frost said no guarantee of action exists. He does believe that a minimum wage increase will pass. At present, the bill to increase the wage includes miscellaneous tax provisions, including pension reform. That bill might pass but, the Congressman cautioned, 2000 is an election year which means a short legislative session and the possibility of few accomplishments.

Social Security Big Help for Women

While the first two speakers concentrated on the political scene, former Congresswoman Barbara Kennelly, now with the Social Security Administration, spoke about the program’s safety net for women. Sixty percent of the program’s beneficiaries are women and 72% of the recipients 85 and older are female. In addition, a woman earns 74 cents for every dollar earned by a man. Because Social Security’s safety net is geared to lower earners (like many women) and because it serves more women than men, women in particular have a strong reason to favor ensuring the program’s solvency. She then reviewed the President’s proposals to strengthen the system including investing a portion of the trust fund in the stock market by some independent federal entity.

The former Congresswoman discussed the common proposals to help Social Security: reducing benefits (which, because Social Security benefits are weighted to low earners, a reduction would disproportionately hurt them) and raising the retirement age (which adversely affects those in physically demanding jobs). She said neither is a likely solution. She mentioned the proposal to require newly hired state and local government employees to participate in Social Security. Because it was one of only a few provisions recommended by all members of the Social Security Advisory Commission of a few years ago, she said that opponents of the proposal had reason to be concerned that it continues to be mentioned as an issue.

Action on Pension Bill Unclear

Two speakers concentrated on pension issues. Rep. Rob Portman, a Republican from Ohio, is one-half of the team who authored H.R. 1102, the pension reform package supported by NCTR. He reviewed the bill’s provisions of critical interest to public plans. He cautioned that the package results in a revenue loss to the federal government of $15 billion over 10 years, thus, it is competing against other proposals for scarce dollars. Bridget Flynn, an aide for Rep. Earl Pomeroy, a Democrat from North Dakota, discussed pension portability legislation that is similar to that in the Portman-Cardin bill (H.R. 1102). Then she talked about the "next wave" of pension reform, including whether federal law should be changed to allow phased retirement. Under current law, individuals may not under most circumstances both remain on the job and receive part or all of their pensions from their current employers. Rep. Pomeroy is looking at allowing this type of phased retirement. Neither speaker expressed confidence that pension reform would be enacted this year.

IRS’ New Division, "Tax Exempt and Government Entities," Covers Public Plans

IRS official, Carol Gold, then described the agency’s restructuring plan. The plan recognizes that governments, tax exempt organizations, and retirement plans (including public plans) are not typical taxpayers, i.e., they pay no tax, but they are customers of the IRS because of the large number of dollars they represent. Accordingly, these types of entities will be grouped together under a new division called Tax Exempt and Government Entities. The division was previously called Employee Plans and Exempt Organizations. The new division will focus on customer education and outreach as well as dealing with customers on specific problems.

Comments to Pay for Play Proposal Mostly Negative

Gerri Madrid of the National Conference of State Legislatures (NCSL) discussed the Securities and Exchange Commission’s (SEC) proposal known informally as "Pay to Play." The proposal would bar any investment advisor who makes a campaign contribution to a government official from doing business with the governmental entity that the official represents for 2 years. The SEC sought comments on the proposal, which were due November 1. Gerri has reviewed the comments and summarized them.

NCSL, GFOA, the National Governors Association, CalPERS, and the Missouri State Employees Retirement System commented that actual efforts to influence the investment process are a serious threat, but that no empirical data of abuse exists. In addition, the tone of the regulations unfairly characterized public officials. They recommended that the proposal be withdrawn, delayed, or significantly changed. They also raised concern that the proposal preempts the states’ authority to regulate in the area of public retirement and campaign finance. States already have broad laws such as, fiduciary standards and exclusive benefit rules applicable to their retirement systems, anti-fraud rules, and state contracting procedures. Finally, they pointed out that many of the definitions of the proposals are overly broad and therefore difficult to apply.

Gerri says SEC Chair, Arthur Levitt, is strongly interested in going forward with the proposal. GFOA and the National Association of State Treasurers (both of whom are very active on the issue) are trying, therefore, to open a dialoguewith other SEC commissioners to ensure the views of the states are heard. NCTR is not lobbying on this issue but is monitoring it for those members of the organization interested in it.