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December 18, 1996

TO: NCTR Members

FROM: Cindie Moore, Washington Counsel

RE: Legislative Update

GAO to Probe Nondiscrimination Rules' Effect on Public Plans

The Ways and Means Committee has asked the General Accounting Office to study the application of the nondiscrimination rules to governmental plans. The Committee has not revealed which member initiated the request. Whether the study will help or hurt our effort to get relief from the rules is unclear. We will keep you posted on developments.

Senate Dems Unveil '97 Pension Priorities

Senate Democrats cite lack of pension coverage as a key issue for 1997. Of principal concern, they say, are lower income workers in the private sector and workers in small business. The coverage rate for both groups is 20%. The Senators also expressed concern about the pension coverage rate for women. They are more than twice as likely as men to hold part-time jobs, which usually provide no pension coverage. They also tend to work in industries with low rates of pension coverage, such as retail and service. The Senators working on this effort are Ted Kennedy (MA), Jeff Bingaman (NM), and Carol Moseley-Braun (IL).

Although the Senators were not specific, their concerns appear to concentrate on the private sector. Senator Kennedy did raise an issue that could spill over into public sector plans, however, when he said, "[w]e intend to reform the tax subsidies to make them more beneficial to low-income workers and their employers. We need to reform the "Alice in Wonderland" effect of the tax laws that grant the greatest subsidy to the wealthiest employees."

The "tax subsidy" is the "loss" of revenue to the federal government from the special tax treatment accorded pensions. Specifically, the tax on employer contributions to a pension plan and earnings from trust fund assets are deferred until the employee retires. No loss actually occurs; the taxability of the pension is simply delayed. Of all the various "tax subsidies," pension contributions and earnings are the largest, estimated to be $380.7 billion over five years. Because of this high number, the tax treatment of pensions is vulnerable. Just placing blame on high paid workers does not reveal the whole story, however.

The Employee Benefit Research Institute (EBRI) points out that "[m]ost analysts focus on the proportion of those at given income levels who participate in pension plans and declare that this indicates that pensions favor high-income persons." Looking at the numbers of participants presents a far different picture. For example, among employees making less than $10,000, 10.1% participated in a plan pension in 1991, or 3.6 million individuals. Compare this to a pension participation rate of 64.8% for workers with income over $100,000, who number only 71,728 individuals. (1991 data, EBRI calculations) Moreover, 86.7% of workers participating in a pension plan in 1991 earned less than $50,000.

We will work to ensure that any changes do not adversely affect the millions of public employees of all income levels who currently participate in pension plans.

Education Employee DC Plan in Michigan Hinges on Full Funding

The Michigan Legislature recently approved several bills that will require most new state employees to be covered by a defined contribution (DC) plan and give education employees, assuming certain funding issues are resolved, the option to participate in the plan. The bill has now been enrolled and the Governor is expected to sign it into law shortly.

The provision for members of the Michigan Public School Employees Retirement System (MPSERS), which covers both teachers and educational support personnel, is somewhat more complicated. It contains three parts: 1) a voluntary DC plan for both existing and new employees; 2) a revised retiree health care premium, the subsidy of which depends on a member's years of service (i.e., the fewer the years, the smaller the subsidy); and 3) a change in the composition of the MPSERS Board.

The implementation of the DC plan and the graded premium subsidy for MPSERS members hinges on whether the State Treasurer can find the $6 billion needed to fully fund the system. He has between July 1, 1997 and January 1, 1998 to do so. At present, MPSERS is approximately 70% funded. Possible funding sources include issuing a bond that the school districts would have to re-pay. If the Treasurer fails to find the funding, the DC plan and the graded premium subsidy will not take place.

The change in the Board composition will go forward regardless of the outcome of the funding and subsidy issue. The State Treasurer and the Superintendent of the Department of Education will go off the Board. Teachers, educational support personnel, retirees, and the public will remain represented on the Board. School administrators, who were previously unrepresented, will have several slots.

The voluntary approach of the Michigan DC plan mimics a proposal introduced this year in California. It passed the Assembly, though not the Senate.

Ohio Expands Retirement Options for Educators

A bill has just passed the Legislature that would offer Ohio public school teachers and university faculty expanded retirement options. Higher education faculty and administrators with less than five years of service in the Ohio State Teachers Retirement System (STRS) will be offered a selection of private annuity plans in addition to the state plan. If a private plan is chosen, the individual is barred from participating in STRS in the future under the same employment. The university employer will continue to contribute to STRS' unfunded liability for all employees, including those who choose a private alternative plan. The Governor is expected to sign the bill.

All STRS members will now be eligible for interest payments on withdrawal of their accounts when they terminate employment. Depending on service some matching employer money will also be paid. An employee joining STRS may choose to withdraw his/her account at a future date or leave the money with STRS for future benefit collection. This choice does not need to be made until termination. It may alleviate the problem of employees feeling locked into STRS.