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October 20, 1999

TO: NCTR Members

FROM: Cindie Moore, NCTR Washington Counsel

RE: Legislative Report from Annual Convention with Updates

This report will:

• update you on recent events in Washington;
  
  
• provide you with my comments from the Legislative Forum October 5 at NCTR’s annual convention;
  
  
• inform you about West Virginia’s decision to issue bonds to help fund its Teachers’ Retirement System;
  
  
• and update you on the defined benefit/defined contribution issue. Please contact me if you have any questions about these issues.

Minimum Wage Bill Provides Vehicle for Pension Provisions

Action Possible

The public pension provisions we support may receive action before adjournment as part of H.R. 3081, the Wage and Employment Growth Act, known for short as the minimum wage bill. The provisions include the portability sections of H.R. 1102, the Portman-Cardin bill, that would allow rollovers among 403(b)s and 457s and other types of plans and also permit pre-tax purchase of service credit with 403(b) and 457 money. The pension provisions were also in H.R. 2488, the Taxpayer Refund and Relief Act of 1999, which was vetoed by the President.

The House Ways and Means Committee had been scheduled to mark up H.R. 3081 on Thursday, October 21. The mark up was cancelled at the last minute because of lack of consensus about how to proceed. Proponents of both the minimum wage increase and the pension provisions are hoping for agreement to proceed. Activity in the Senate on the issue has not come into focus yet.

A minimum wage increase is a key Democrat issue for next year’s campaign. Accordingly, some Congressional Republicans are eager to get the issue "off of the radar screen" and will attempt to pass a measure this year. H.R. 3081 would raise the minimum wage from $5.15 an hour to $6.15 over three years. To offset the increase’s approximately $18 billion in higher cost to small business, H.R. 3081 includes sweeteners, including the pension provisions and relaxation of the federal estate tax, which add up to around $35 billion.

Watch your fax machine or email for updates on action on this issue.

Brouhaha on Effect of Pension Provisions

As consideration of H.R. 3081 gets underway, a news story and a study by a Washington think tank were published that mischaracterize the pension provisions of the bill. Specifically, the New York Times dubbed the Portman-Cardin bill (H.R. 1102), the source of the pension provisions in the minimum wage bill, as a "vast expansion of retirement tax breaks for business owners, executives, and highly paid workers." The Center on Budget and Policy Priorities (CBPP) deemed the bill’s major impact to be the expansion of pension-related tax preferences for high-income individuals.

Neither publication gave sufficient weight to the important provisions in H.R. 3081 that would help low and middle income workers such as the pension portability sections supported by NCTR. We are working to educate Congress about the broad and beneficial effect of these pension provisions in order to offset the statements in the Times and the CBPP study.

Bankruptcy Bill Close to Dead for the Year

Both House and Senate sources doubt that bankruptcy reform legislation, which includes a provision to protect all forms of pensions from creditors, will pass before adjournment. Under current law, pension assets in ERISA and governmental plans are generally protected, but assets in arrangements such as IRAs are not. The House approved their version of the bill, H.R. 833 on May 5. The Senate Judiciary Committee passed S. 625 on May 11. The Senate briefly considered it on the floor in September until an effort was made to add a minimum wage increase to it (note, the increase was not the same version as H.R. 3081, mentioned above). Also complicating consideration of S. 625 is a proposal by Senator Charles Grassley (R-IA) to cap the amount of pension assets that would be protected from creditors. The cap is reportedly $500,000, which to some sounds high, but the pension of a middle-income, long service employee could exceed that amount. Thus, NCTR and other pension groups strenuously oppose the cap. These and other factors have led to the common conclusion that the bill won’t be enacted before adjournment. Because the assets in NCTR member plans are already generally protected from creditors, this lack of action will have no bearing on them.

AARP Commissions Study on Mandatory Coverage

The AARP has created a stir among states, localities, retirement systems, and affected employees by issuing an RFP to "investigate the validity" of claims by opponents of mandatory social security coverage. The study would challenge the findings of the study done by the American Federation of State, County, and Municipal Employees (AFSCME) and the Segal Company which concluded that covering newly hired state and local government employees would cost states, localities, and workers $26 billion over five years.

During 1999, opponents of mandatory coverage shored up their position in Congress. As a consequence, virtually none of the Social Security reform bills introduced this year contained mandatory coverage. Those opposed to mandatory coverage fear that an AARP study would give renewed credence to the issue and make it a candidate for inclusion in Social Security reform if it is taken up by Congress next year. The AARP study will be completed in the next few months.

Report from Legislative Forum at 1999 NCTR Annual Convention

Congress’ general mood, pension reform, social security, pay-to-play, the Defined Benefit Revitalization Act, and IRS re-organization were featured at the Legislative Forum. 1999, a Year of Dysfunction for Congress

1999 has been a year with a surplus of posturing and a deficit of bipartisan achievement. January began with promise of action on Social Security reform, Medicare, and a tax bill that would contain provisions supported by public pension plans. Instead, efforts on Social Security and Medicare have bogged down and the President vetoed the tax bill (but the pension provisions we support are now in the minimum wage bill, as noted above.) Moreover, Congress failed to meet the September 30 deadline for passing the fiscal year 2000 spending bills, so the government is operating under a temporary measure called a "Continuing Resolution." The President and Congress are currently at loggerheads on a host of issues which almost guarantees that Congress won’t meet its October 29 adjournment date. The only mention of Social Security at this point is the promise made by the President and Republican Congressional leaders on October 19 not to use the surplus in the trust fund for ongoing government spending, as has traditionally been done.

What has accounted for Congress’ inability to act this year?

For starters, for the first time since the early 1950’s, control of the presidency, the House, and the Senate are up for grabs in the year 2000 election. The margins of Republican control is slight in both the House and the Senate and the Democrats may be able to take control. By the same token, Texas Governor George W. Bush may be propelled into the White House, thereby giving the GOP control of the Executive Branch. Because the stakes are so high, everyone is trying to avoid any mistakes. By the same token, neither side wants to ruin dramatic campaign issues by letting the other side share credit for addressing them.

Second, the President’s credibility is diminished. Some Republicans seem genuinely uncomfortable about sitting across the negotiating table from the man whom they tried to remove from office earlier this year. Thus, prospects for massive reform on issues that require intensive negotiating, such as Social Security and Medicare, are dim.

Third, national prosperity has created a lack of urgency. America is not at war. Even though problems exist because of low farm prices, dissatisfaction with HMOs, and school violence, most Americans are fairly content so they aren’t pressuring Congress for dramatic legislative initiatives.

Pension Reform, See Report Above on Minimum Wage Bill

No Action On Social Security Likely Before Adjournment

As is well known, the first of the 77 million baby boomers begin to retire in 2011. By 2014, the Social Security System will be paying out more in benefits than it is collecting in payroll taxes, and by 2034, the System’s trust fund will be empty. At that point, Social Security beneficiaries will receive only 75% of their promised benefits.

In January, President Clinton said that he wanted to use the budget surplus to save Social Security first. That was the last positive thing anyone in Washington said about Social Security this year. The issue evolved into a debate about privatization, i.e., who should invest surplus Social Security funds (i.e., when collections through the payroll tax are greater than pay out in benefits). Investment of the funds was originally viewed as a far superior solution than cutting benefits, increasing the payroll tax, or raising the retirement age.

Privatization was framed as: should the federal government invest money similar to state and local government retirement systems or should each American worker have an account and decide for themselves how to invest the money? Some people characterized the issue more starkly: the Republicans don’t trust the federal government to invest the money and the Democrats don’t trust individual Americans to invest the money.

Although many believe that the earlier a solution for Social Security’s shortfall is found, the less draconian will be the changes. However, the lack of agreement on reform bodes well in the near term for state and local government employees and their employers who do not participate in Social Security. It means that mandatory SS coverage is off the front burner for now. (Note above, the development on mandatory coverage with respect to an AARP study on the issue.)

Comments on "Pay to Play" Proposals Due November 1

The Securities and Exchange Commission (SEC) issued proposed regulations on August 8, 1999 that 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 proposal is called "Pay to Play." The deadline for comments is November 1.

The SEC has jurisdiction over investment advisors and other professionals in the securities industry. The agency has heard stories, but has conducted no scientific surveys, that some elected state and local government officials allegedly require investment advisors to contribute to their campaign in exchange for which the advisors get business. The proposal directly affects investment advisors only, not teacher trustees or retired trustees because they are not elected officials. It would indirectly affect state treasurers, most of whom are elected, in that it might reduce the amount of their campaign contributions.

Rep. Pomeroy Looking to Make Defined Benefit Plans More Attractive

Rep. Earl Pomeroy (D-ND), a pension champion in Congress, is planning to sponsor the Defined Benefit Revitalization Act (DEBRA). Since it passed ERISA in 1974, Congress has done nothing except add regulatory burdens to private sector defined benefit (DB) plans. Conversely, it has made defined contribution (DC) plans, especially in the form of 401(k)s, an attractive savings vehicle for private sector employers to offer their workers. As a result of these competing forces, a great many private sector employers have replaced their DB plans with DC plans. Although some states are interested in converting their DB plans to DC, the level of activity is miniscule compared to the private sector. What factors account for the difference? The regulatory burden on public DB plans is somewhat less than private sector plans. In addition, state and local government workers and others have worked strenuously to oppose the conversions.

To stem the tide of fewer and fewer private sector DB plans, Rep. Pomeroy is planning legislation to promote them. Many of the proposal’s provisions would apply to both public and private plans. Of particular interest is a provision to facilitate partial retirement. It would allow employers to permit workers age 55 or older to begin receiving part or all of their pensions while still working for their employer. Under current IRS rulings, an individual is generally not permitted to both work and draw a benefit. This impermissible event is called an "in service distribution." Congressman Pomeroy’s proposal would represent, therefore, a significant shift in policy.

Advocates of partial retirement argue that it gives employers a carrot to encourage older workers who wish to retire, but whose skills are needed, to stay on the job. In addition, partial retirement would ease the expected future labor shortage caused by the baby boomers’ retirement. They also contend that partial retirement is helpful for employees, who may enjoy work, but want to cut back the number of hours they work.

Opponents question the effect of partial retirement on pension funding. They also point out that partial retirement would create a "casual workforce" of older workers that makes it more difficult for younger workers to either be hired or, if on the job, to be promoted. Finally, opponents fear that taxpayers will perceive public employees who both work and draw a pension as double dippers.

IRS "Wants to Understand the Customer’s Point of View"

This statement and others like it are in a publication on IRS’ website called "Modernizing America’s Tax Agency: IRS Organization Blueprint." The publication explains IRS’ redefining of its business practices and its desire to deliver improvements in service and productivity. At present, IRS labors under a structure made up of 43 units (33 districts and 10 service centers), each of which is charged with administering the entire tax law for every type of taxpayer, large and small, in a defined geographical area.

Under the modernization, IRS will be built around organizational units with end-to-end responsibility. The idea appears to be that a single unit will handle a problem from beginning to end. Four operating divisions will be responsible for serving specific groups of taxpayers, including one called "Tax Exempt and Government Entities." This division will house the Employee Plan Division that currently has jurisdiction over state and local government plans and will continue to do so under the modernization. According to IRS staff, the current location of activities will not change. Instead, the management structure will change. For example, the director of the Employee Plans Division does not, at present, have authority over all aspects of pension plans. Under modernization, he/she will have such authority. Some practitioners see modernization as an advantage that will speed turn around time for requests for rulings and determination letters and may also create a group of IRS employees who are familiar with the special nature of governmental plans.

West Virginia to Fund Teachers Retirement System with Bonds

The West Virginia Department of Administration has developed a plan that could totally fund the state teachers, public safety, and judges’ retirement plans while saving the state as much as $500 million or more over the next 34 years. It involves the issuance of $4 billion in pension obligation bonds that would fully fund the plans. However, the bonds will not be issued until interest rates are at a level that would result in fixed payments which are less than the current annual payment schedule recommended by the State Actuary.

The expected annual savings is the difference between the projected annual contributions on the 40 year plan and the fixed debt service on the pension obligation bonds. The savings would be divided with 50 percent going to a newly created "Retirement Trust Fund" and 50 percent contributed to the Public Employees Insurance Agency (PEIA) Trust Fund.

Other governments have used pension obligation bonds to shore up their retirement systems’ funding. The State of New Jersey, Los Angeles County, California, and the City of Philadelphia, Pennsylvania have issued pension bonds in amounts as much as $3 billion. New Jersey recently reported that its pension plan is now overfunded at 106% as a result of the bond issue.

For more information, contact Betty Scott Ireland, Administrator of the West Virginia retirement systems, at 304-558-3570.

Some Activity on DB/DC Issue in 1999, NCSL Reports

The National Conference of State Legislatures (NCSL) recently took a brief look at 1999 activity by state legislatures in converting defined benefit (DB) pension plans to defined contribution (DC) plans. A number of states looked at the issue and a few actually created new DC plans. All new plans are optional and most are targeted to a narrow band of employees. No K-12 teachers are affected by the changes.

Montana. An optional DC plan was created for members of the Public Employees’ Retirement System. Existing employees will have 12 months to decide whether to remain in the DB plan or transfer to the new DC plan. New employees will be placed in the DB plan, but have the same time period in which to decide whether to transfer. If they fail to choose by the deadline, they will remain in the DB plan. The election is irrevocable.

Arizona. An optional DC was put into place for exempt state employees (e.g., top managers) and elected state officials who are subject to term limits.

Louisiana. Approximately 100 state employees, including statewide elected officials and political appointees, are eligible for a new optional DC plan.

North Dakota. A new optional plan was approved for exempt or non-classified state employees, 75% of whom are in higher-education. Present members of the North Dakota Public Employees Retirement System (PERS) may irrevocably choose whether to join the DC plan by December 31, 1999.