While the “big picture” impact of the Republican victory, particularly in the House, will be significant, the individual policy implications are still being closely analyzed. Therefore, it is difficult to predict specifics at this point. Clearly, however, there is much support among many House Republicans for a concerted effort to repeal the Affordable Care Act, the historic (and controversial) healthcare reform legislation approved in March of this year. The more recent Dodd-Frank financial services reform legislation is also a likely target for some degree of dismantling.
Nevertheless, even if the House of Representatives were to pass healthcare repeal, it is very unlikely that it would clear the Senate, let alone do so with a veto-proof majority. Piecemeal repeal of sections of Dodd-Frank might be more likely, but what is more probable is a very strong effort to delay implementation of both massive pieces of legislation by means of the appropriations process. This could bring the huge regulatory efforts that both new laws set in motion – and which are so vital to their effectiveness -- to a screeching halt.
Another likely delaying tactic is for the House to hold numerous oversight hearings, which will serve to further slow down the Federal bureaucracy through requests to testify. The incoming Chairman of the House Committee on Oversight and Government Reform, Congressman Darrell Issa (R-CA), is already talking about a huge increase in oversight by his committee in 2011, including new investigations into the bank bailout, the financial stimulus legislation, and health care reform. He has been quoted as saying that he wants each of his seven subcommittees to hold one or two hearings each week. ”I want seven hearings a week, times 40 weeks,” Issa said. (By comparison, Congressman Henry Waxman (D-CA), the Committee’s current chair, held a total of 203 oversight hearings in the two years of the 110th Congress when George W. Bush was President.)
Therefore, to the extent that healthcare implementation was of interest to some in the public pension community, the GOP win in November could signal major delays ahead in its implementation – and possibly even interruptions in the funding of some of its assistance programs. Also, it is very likely that the activist role of the Securities and Exchange Commission (SEC) in the area of corporate governance, and in the implementation of other features of the Dodd-Frank reforms of concern to the business community, will be another focus of the House Republican leadership.
There are also a number of other indications that the going may be a little rougher, specifically for public pensions, in the 112th Congress that will convene on January 3, 2011.
The House of Representatives
In the House, a significant factor will be an increasingly anti-public employee tone of the Republican leadership and many of its newer “Tea Party” members. While this is focused primarily on Federal employees at this point, its negative implications for government at all levels will be difficult to contain.
For example, as the election campaign began to heat up over the summer, the incoming Speaker of the House, John Boehner (R-OH), complained about what he characterized as the increasing gap in pay between Federal employees and the private workforce, blaming the Democrats for exacerbating the problem at a time when many Americans had no jobs at all.
In a speech to the City Club of Cleveland on August 24th, Mr. Boehner said that “Since February 2009, the private sector has lost millions of jobs while the federal government has grown by hundreds of thousands of workers.” Furthermore, he said that “We’ve seen not just more government jobs, but better-paying ones too,” arguing that “Federal employees now make on average more than double what private sector workers take in.” (This clearly echoes similar criticisms of State and local government salaries.) Congressman Boehner argued that “It’s just nonsense to think that taxpayers are subsidizing the fattened salaries and pensions of federal bureaucrats who are out there right now making it harder to create private sector jobs.”
Furthermore, as an indication of the spread of this anti-government employee mood to the State and local government workforce, Mr. Boehner was also critical of the $26 billion in stimulus monies approved over GOP objections earlier that same month. The legislation included $10 billion in funding aimed at saving 161,000 teacher jobs and $16.1 billion in Medicaid assistance to the states that was intended to preserve police and firefighter jobs by reducing state shortfalls.
However, it should also be remembered that in 2005, before he was elected as the GOP Leader in the House in early 2006, Mr. Boehner was Chairman of the House Education and the Workforce Committee, and was one of the major proponents of H.R. 2830, the House's version of pension reform legislation at the time. He was instrumental in getting this legislation through the House with a provision making permanent the pension provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, which was a major goal of NCTR.
(This legislation, which ultimately cleared Congress in 2006, included a number of other very important provisions strongly supported by NCTR, including revisions to IRC Section 415(n) dealing with the purchase of service credits, specifically permitting their purchase for periods for which there is no performance of service (e.g. airtime), and in order to qualify for an increased benefit (e.g. a higher tier/formula in the same plan). In addition, the legislation clarified that (1)trustee-to-trustee transfers of 403(b) and 457 funds into a governmental defined benefit plan to purchase service credit does not need to be tested under the 415(n)limits on after-tax contributions to the plan. )
The incoming House leadership’s focus on public employees includes their pensions. Congressman Eric Cantor (R-VA), who will be the new House Majority Leader, has proposed that Federal employee pensions should be “updated” to “reflect private sector practices,” including basing pensions on the average of an employee's highest earnings over five years, not three, and by eliminating the current early retirement benefit for those who retire voluntarily. (Currently, Federal employees who retire at age 55 or older with at least 30 years of service or at age 60 with at least 20 years of service can receive an early benefit equivalent to Social Security until they reach age 62.)
However, perhaps the most disturbing indication of a new focus on public sector pensions, including those of State and local governments, comes from the incoming Chairman of the House Oversight and Government Reform Committee, Darrell Issa (R-CA), mentioned above. For example, Congressman Issa has indicated that the Federal DB plan has a “structural flaw” which, in his words, “incentivizes our most qualified employees to take … retirement rather than stay around.”
In a Q&A with the Washington Post’s “Federal Diary” in March of 2009, Mr. Issa was asked what problems he saw with a defined-benefit plan. He answered as follows: “Simply stated, defined-benefit plans lack portability, and there is no incentive to say, ‘I have my retirement already, but every day I stay, I am better off.’ Currently, our defined-benefit plans almost mandate retirement for our federal workers. This is a problem which has existed for decades. This system encourages our federal workers to retire, and to take their knowledge and experience to the private sector. We have got to come up with a plan where it is in the best interest of the federal employee to remain in the workforce, either directly or in a post-retirement role, for as long as possible, because the skills these experienced federal workers have are essential.”
Most alarming, however, is a report that Mr. Issa’s staff has recently indicated he is concerned "that calls for a federal bailout to avert a fiscal disaster for state and local governments may be just over the horizon." According to “Business Week” (October 13, 2010), Issa is currently drafting a report about underfunded state and local pension plans in connection with this impending failure. While his Committee would have no authority to actually consider new Federal laws to address whatever problems are identified, Congressional oversight hearings on such a report would be very problematic.
Based on Congressman Issa’s sponsorship of the new “‘Public Employee Pension Transparency Act’’ (see story above), it seems likely that he is preparing just such a hearing for next year when this very troubling legislation will be re-introduced. Such a hearing would create pressure for a legislative response by the committees with appropriate jurisdiction.
One such committee is Ways and Means, to which the new Public Employee Pension Transparency Act has been referred. Its incoming Chairman, Congressman Dave Camp (R-WI), has recently said that he plans to push for comprehensive tax reform during the 112th Congress. While this is not exactly a revolutionary notion for a new Ways and Means Chairman, it does signal that he may well be more interested than others have been in recent years to tackle tax reform as part of a more comprehensive budget deficit reform effort, particularly since he serves on the President’s Commission on Fiscal Responsibility and Reform.
This, in turn, could mean that recommendations affecting retirement security (see the following story on the deficit commission’s proposals) could be more in play that some might otherwise think. And if so, this should be of major interest to pension plans, both public as well as private.
Otherwise, Congressman Camp has been involved in a number of pension issues over the years in his leadership capacity on the Ways and Means Committee, and is clearly interested in the overall issue of retirement security. It is therefore possible that some legislative proposals in this general area could be on the Committee’s agenda in the next two years, but they would clearly have to have bipartisan support, which will be all the more difficult to obtain in a divided Congress with one party controlling the House and the other the Senate.
One such proposal that has been mentioned as a possible candidate is automatic workplace individual retirement accounts, an idea that was developed by Mark Iwry, formerly Treasury Benefits Tax Counsel under President Clinton and currently senior adviser to Treasury Secretary Geithner and deputy assistant Treasury secretary for retirement and health policy. Mr. Iwry, while working at the Brookings Foundation, was joined in the development of this idea by David Johns at the Heritage Foundation. The proposal builds on payroll-deposit saving; automatic enrollment; low-cost, diversified default investments; and individual retirement accounts (IRAs).
Finally, what about legislation to address Social Security? Again, given its partisan nature, a consensus decision on what the best reform approach to follow looks like may be very difficult to achieve. However, as discussed below, it is well to note that the proposals coming out of the several “deficit reduction” panels do not include private investment accounts, which have been the focus of this partisan dispute over the last decade. Since the incoming Chairman of the House Budget Committee, Congressman Paul Ryan (R-WI), continues to support providing workers with the voluntary option of investing a portion of their FICA payroll taxes into personal savings accounts, some think that Democrats may consider more seriously trying to get a compromise proposal on the table that has the possible support of other key Republicans working on President Obama’s Commission on Fiscal Responsibility and Reform than they might otherwise have been had Democrats remained in charge in the House.
Also, mandatory Social Security for public employees would definitely be in play should reform be considered, and such a proposal seems to be gaining some traction in deficit reduction discussions. This could not be coming at a more potentially dangerous time, given the increasing anti-government employee mood of the Congress and the country. Furthermore, as discussed below, mandatory coverage is now being discussed outside the scope of Social Security reform. If the Ways and Means Committee takes up the new Public Employee Pension Transparency Act in the next Congress, mandatory coverage could be considered in the context of ”reform” of public pensions.
Congressman Earl Pomeroy (D-ND)
Before turning to look at the changes in the Senate, one of the most disappointing results of the November 2nd election for the public pension community in the House was the loss of Earl Pomeroy (D), who has represented North Dakota in the that body since 1992. Mr. Pomeroy is a member of the House Ways and Means Committee, with more direct control over legislation of interest to public pensions than probably any other committee in the House. His Congressional career has been distinguished by his interest in retirement policy, especially the revitalization of the defined benefit plan, and Pomeroy has been called a "champion of pensions on Capitol Hill" by Institutional Investor.
Mr. Pomeroy and his staff have been of tremendous help to public plans in ensuring that our unique nature was taken into account whenever Federal tax laws, rules and regulations were being drafted and implemented. For example, in 1998, Mr. Pomeroy agreed to sponsor important portability legislation that would permit amounts in 403(b) and 457 plans to be used to purchase service credit in defined benefit plans, and to allow the rollover of distributions between defined benefit plans and 403(b) or 457 plans. These provisions were added to his Retirement Account Portability Act that subsequently was included in the Portman-Cardin legislation that became law as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)in 2001.
A recent example of his attention to public pension concerns was the Congressional roundtable in September of 2008 on the Internal Revenue Service’s Governmental Plans Compliance Initiative. Congressman Pomeroy chaired the two-hour meeting, which included representative of the public pension community, to discuss the IRS’ initiative to gather information on and significantly increase its audits of governmental pension plans. As a direct consequence of this meeting, the draft IRS survey of public plans was opened up to further review and comment by governmental plan representatives, and Congressman Pomeroy has continued to stress the importance of a more collaborative focus for the IRS in this area. His efforts truly helped to reshape this overall initiative.
Congressman Pomeroy was the first recipient of the "National Council on Teacher Retirement Award for Outstanding Service to Public Pensions" in 2006. There is currently probably no other member of Congress who understands public pension plans better, and who is more committed to the defined benefit plan as a model for true retirement security. He and his staff will be truly missed.
The Senate
With regard to the Senate, thanks to the arcane rules of that body, partisan gridlock is likely to continue, even with the gains the GOP made in the mid-term elections. Perhaps the most significant change of interest to public pensions is the move of Senator Charles Grassley (R-IA) from his Ranking position on the Senate Finance Committee to a similar spot on the Senate Judiciary Committee. Senator Grassley was required to leave his post on Finance due to a 6-year term limit for such positions imposed by Senate Republicans.
Senator Grassley has repeatedly expressed concerns with the state of public pensions over the years. For example, in 2006, when he was chairman of the Finance Committee, Senator Grassley asked the GAO to study the funding status of public pension plans, citing concern that many such plans are “poorly funded and have no back-up source for guaranteed benefit payments, as private pension plans have.”
More recently, Grassley has focused on public pension investments, particularly in alternatives such as hedge funds, and requested the GAO to examine investment practices and governance structures of public defined benefit plans. This GAO report, which was released in late summer of this year, found that State and local plans “appear to have moved toward investing in higher-risk assets with the goal of achieving a balanced, diversified portfolio that seeks higher returns and manages risk over the long term,” and did not make any recommendations. However, the study also noted that, as plans look to diversify their investment risk through the increasing use of alternative investments, “they could expose plan assets to new types of risk,” and if state and local pension plans and their sponsors are unable to properly monitor and manage these new risks, then “they may exacerbate recent market losses, which could result in increased employer contributions—costs that many governments are unable to afford.”
Senator Orrin Hatch (R-UT), who will take Grassley’s place as the Ranking Republican on Senate Finance, has a history of support on public pension issues. For example, in the late 1990’s, Senator Hatch was the primary Senate sponsor, along with Senator Kent Conrad (D-ND) , of legislation to provide a permanent moratorium on the application of the IRS non-discrimination rules to public pensions. In support of the legislation, Senator Hatch stressed that State and local government pension plans face a high level of scrutiny: “State law generally requires publicly elected legislators to amend the provisions of a public plan. Electoral accountability to the voters and media scrutiny serve as protections against abusive and discriminatory benefits.” One can only hope that, moving forward, Senator Hatch will remember those reassurances he offered to his fellow Senators at the time.
However, it is widely believed that the experience of his colleague, Senator Bob Bennett (R-UT), will have a major influence on Senator Hatch. Conservative activists were successful in ousting fellow Senator Bennett earlier this year at the Utah Republican state convention for not being conservative enough, and Senator Hatch will likely face a similar primary challenge in 2012 according to press reports. Therefore, it is expected that Hatch, who has a reputation as a deal-maker willing to work with Democrats, is going to have much less room to maneuver in the coming Congress. If entitlement reforms are undertaken, Senator Hatch will play a key role, and this pressure from his right flank could mean that a bipartisan compromise will be a much more difficult goal to achieve.
In another Senate development, some observers think that the election of former Ohio Republican Congressman Rob Portman to the Senate could provide a possible replacement for the leadership role on pensions that Congressman Pomeroy has played. Mr. Portman was very involved in pension reform legislation during his years in the House, and his return to Congress has raised some hope that a rekindling of the Portman-Cardin partnership that helped focus attention on pension reform in the House could be in the making in the Senate. (Former Congressman Ben Cardin (D-MD) has been a Maryland Senator since 2006.)
However, both Portman and Cardin were members of the House Ways and Means Committee when pension reform legislation advanced under their names. Senator Cardin is not on the Finance Committee and it does not appear likely that Senator-elect Portman will be named to that panel either. Therefore, reports of a possible Portman-Cardin pension “reunion” may be premature at best.
The 112th Congress
So the overall forecast for public pensions in the upcoming 112th Congress is probably cloudy with an increasing chance of rain. However, none of this is to suggest that Congressional Republicans are, across the board, somehow uniquely anti-public pension – or any more so than Democrats are. Nonetheless, it is clear that there is a growing concern within the Republican leadership that public salaries are too high, public retirement benefits may need to be adjusted and that state and local government pension plans are in financial trouble. It would be irresponsible not to be alert to the possible implications for our community as a result. Already, other members of Congress – including some Democrats -- have warned of a growing danger that public pensions are the next Federal bailout waiting to happen, and that there is therefore a need for Washington to become involved. Once again, the legislation introduced by Congressmen Nunes, Ryan and Issa is a perfect example of this attitude.
Complicating the issue are the funding problems of multiemployer plans in certain industries. Hearings were held in the Senate this year and more are likely in 2011, but finding a workable, bipartisan solution will be difficult, according to some. The problems of these plans are often confused with press reports of funding problems for public pensions, and some Hill staffers are equating the two, only intensifying the fear that a disaster is imminent for public plans.
In short, the tinder is very dry, and a small spark has the potential to set off a firestorm of Federal interest and involvement in public pensions not seen since the proposals in the late 1970’s for a Public Employee Retirement Income Security Act (PERISA) to create Federal rules, similar to those imposed by ERISA on private sector plans, for the public sector. Congress may well be very leery of extending any Federal protections to public employees, which could raise the question of participation in some form of a Pension Benefit Guarantee Corporation (PBGC). However, the idea of linking any further Federal benefits with the requirement for a “reform” of State and local pension systems may be a frightening idea whose time – at least in the view of some members of Congress – is fast approaching.
The introduction of the Public Employee Pension Transparency Act is a clear sign that the time has arrived for at least three key GOP members.
Let us hope, should Congress entertain the idea of an increased Federal role in public pensions, that it recalls the admonition of the Advisory Commission on Intergovernmental Relations (ACIR) in its December, 1980 Report on State and Local Pension Systems. In that report’s preface, the then-ACIR Chairman, Abraham D. Beame, former mayor of New York City, cautioned that “At a time when rising pension costs have prompted growing public support for increased state regulation and reform, imposing federal controls on state and local policymakers would be ill-timed as well as deleterious to our federal system.”
Those words are as true today as they were thirty years ago!
(The ACIR was an independent, bipartisan intergovernmental agency established by Public Law 86-380 in 1959 and subsequently disbanded in September of 1996. As it was established, ACIR's mission was to strengthen the American federal system and improve the ability of federal, state, and local governments to work together cooperatively, efficiently, and effectively.)
• 1980 ACIR Report on State and Local Pension Systems
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