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Update July 1, 2002 by Cynthia L. Moore - NCTR Washington Counsel

SENATE ACTION ON PENSION BILL LIKELY

Senate Finance Committee staffers predict that action on the Pension Security Act, also known informally as the Enron-pension bill, may occur as early as July 9.  There is also talk of eventually attaching it to investor protection legislation (see discussion below) scheduled July 8 for Senate floor action. 

The Senate Finance Committee text is not yet available, but it may also include the notice requirements contained in the House Enron pension bill H.R. 3762.  The bill passed April 11.  Among other provisions, the House bill would require public and private defined contribution plans to provide certain notices to their participants. If they failed to comply, penalty taxes would be assessed.

NCTR MEMBERS ENCOURAGED TO COMMENT ON MINIMUM DISTRIBUTION RULES

CEOs of NCTR members discussed the minimum distribution rules among other federal issues at a recent meeting.  IRS recently released the rules in final form with an unexpected twist.  They include a separate set of temporary rules.  These temporary rules interfere with certain types of COLAs for retired state and local government employees.  All payments under a distribution must either be non-increasing or fall into one of four exceptions.  Two appear to be relevant to NCTR members. 

-First, increases may take place as “an annual percentage increase that does not exceed the annual percentage increase in a [federal] cost-of-living index.” This exception appears to exclude non-CPI-based COLAs. 

-Second, increases may occur if they “result from a plan amendment.”  Does this mean that a COLA is effective onlyin the year that the legislature amended the plan?  The temporary rules do not say. 

ACTION REQUESTED: Please review the temporary rules.  If you wish to comment directly to IRS by the July 16 deadline, refer to www.nctr.org for the relevant addresses.  You may also submit BY JULY 12 comments to me at cmoore@nctr.org.  I will combine all comments into one document (without attribution to the relevant system) and send it to IRS.  Several NCTR members have already sent information that will make the case that the temporary rules are unjustified and violate long-standing COLA programs.  Feel free to call me to discuss the issue (703-243-1667).

NCTR WILL BE INVOLVED IN PHASED RETIREMENT ISSUE

The CEOs at their recent NCTR meeting decided that the organization should provide Treasury and IRS with comments about phased retirement arrangements under qualified defined benefit plans (IRS Notice 2002-43).  Many meanings of phased retirement exist.  Under one definition, an employee nearing retirement drops from full-time to part-time work and begins to draw a portion of his/her pension.  The individual eventually moves into complete retirement by stopping work and receiving his/her full pension. 

The issue is drawing attention because state legislatures have approved arrangements whereby retired teachers may return to work either part- or full-time without losing their pension benefits.  Complicating the issue is IRS’ lack of guidance. 

At this point, NCTR’s involvement in the issue has been through a resolution adopted in 2001.  The resolution explains the issues raised by phased retirement/return to work.  It advises policy makers that such arrangements should have no adverse actuarial impact on the affected retirement system.  The comments to Treasury and IRS will expand on NCTR’s views.   As we move forward on this matter, I’ll be in touch.

NCTR URGES IMPROVED INVESTOR PROTECTIONS; SENATE ACTION 7/8

NCTR supports legislation to improve investor protections.  As an organization made up of 75 state and local government retirement systems, it has a direct interest in measures intended to prevent future Enrons and WorldComs.

In April, the NCTR Executive Committee approved a resolution that calls on Congress to make auditors more independent of the public companies they audit and provide stricter oversight of auditors.  A copy of the resolution will be posted shortly on www.nctr.org.

The Senate Banking Committee passed S. 2673, the Public Company Accounting Reform and Investor Protection Act of 2002 on June 18 by a vote of 17-4.  Six of the 10 Republican senators joined a solid Democratic bloc.  The full Senate will consider the bill beginning on July 8.  Meanwhile, the House approved H.R. 3763, the Corporate and Auditing Accountability, Responsibility, and Transparency Act on April 24.  Although both bills address investor protections, S. 2673 does so in a stronger manner.

-Prohibited Activities by Auditors. S. 2673 prohibits audit firms from performing, for the same public company, both an external audit and any of nine types of non-audit activities.  Prohibited activities include financial information system design, internal audit services, and other services related to actuarial, management, legal, or investment matters.  H.R. 3763 imposes only two restrictions: financial information system design and internal audit services.

-New Oversight Board for Auditors. Both H.R. 3763 and S. 2673 set up a new entity to oversee the regulation of auditors.  The entity’s board, consisting of a majority of non-accountants, has disciplinary authority.  Under the Senate, but not the House bill, the board has explicit standard-setting authority. 

-Funding of Oversight Board.  Each bill sets up a different way to fund the new board. Under the House bill, public companies and accounting firms pay fees to finance it. Under the Senate bill, only public companies fund the board.

-Independence of Board Members on Audit Committees.  S. 2673 requires strict independence of board members who serve on a company’s audit committee.  The bill forbids committee members from accepting any consulting, advisory, or other compensation from the company other than the standard director’s fee.  In addition, such members may not be affiliated persons of the company or any subsidiary.  In contrast, H.R. 3763 provides a study of corporate governance practices, including whether the rules, standards, and practices relating to determining whether independent directors are in fact independent are adequate.

Congress is not the only entity active on investor protections:

-A committee of the New York Stock Exchange (NYSE) recommended June 6 new standards and changes in corporate government and disclosure practices of NYSE-listed companies.  (See June 6 statement about the recommendations on www.nyse.com/press/press.html for more information.) 

-The Securities and Exchange Commission (SEC) voted on June 20 to propose rules to reform oversight and improve accountability of auditors of public companies. (See www.sec.org/news/press/2002-91.htm for more information.)  

-Finally, the Bush Administration may recommend that executives who sign intentionally misleading financial statement be prosecuted under criminal laws and imprisoned if convicted. 

This high degree of activity may lead to enactment before Congress adjourns this fall. 

HOUSE PASSES REPEAL OF SUNSET ON EGATRRA PENSION PROVISIONS

On June 21, the House approved by 308-70 H.R. 4931 to make permanent the pension provisions in the Economic Growth and Tax Reconciliation Relief Act of 2001 (EGATRRA). If enacted, the measure would eliminate the December 31, 2010 sunset of the Act’s pension provisions.   (Other EGATRRA provisions also expire then.)  The fate of H.R. 4931 is uncertain, however.  The House vote is seen as an election year exercise because, irrespective of the continued popularity of the pension issue, the Democratic leadership of the Senate will not likely act on the measure. 

If the sunset is not repealed at some point, many of EGATRRA’s helpful changes will expire.  Those changes include the greater portability of 403(b) and 457 funds and the age 50+ catch up provisions.  By the same token, items like the dreaded Maximum Exclusion Allowance (MEA), which EGATRRA repealed, would re-appear.

HOUSE APPROVES MEDICARE PRESCRIPTION DRUG PROGRAM

Many NCTR members are involved to some degree in providing health care to retired teachers and other public employees.  Consequently, NCTR is following legislation that establishes prescription drug coverage for Medicare beneficiaries.  The House passed such legislation, H.R.4954, on June 21 by a vote of 221-208.

The Republican bill is dramatically different from a plan put forward by Senate Democrats, especially in the delivery mechanisms.   Under the Republican version, private insurers compete to offer drug benefit programs.  Under the Democratic plan, the federal government retains most of the insurance risk.  Both Houses of Congress hope to gain election year advantage on the issue.

In addition the 10-year cost of the two versions differ.  The House has budgeted $320 billion for the program, while the Senate is willing to spend $500 billion.   Because of their different approaches and the election year posturing, final passage of any measure before adjournment is unlikely.

FINAL ITEMS: HEARING ON SOCIAL SECURITY NUMBERS BILL AND SOCIAL SECURITY REFORM HEARING

NCTR continues to work with other groups in Washington to clarify S. 848, which is intended to protect the privacy of Social Security numbers.  The bill is broadly drafted and may adversely affect retirement systems legitimate uses’ of the numbers.  The Senate Judiciary Committee passed S. 848 on May 16.  The Senate Finance Committee is holding a hearing July 11 on it.  NCTR and other groups are contacting Finance Committee members to alert them to our concerns.

Remember Social Security reform?  Late last year, a presidential panel released three alternative ways to reform Social Security through partial privatization.  House Democrats are trying to get the Republican leadership to bring the alternatives to the floor.  Meanwhile, the Senate Finance Committee announced that it will hold a hearing July 31 on the alternatives.