New FBAR Rules Finalized
Following much confusion as to whether public pension plans and plan employees with signature authority over foreign investments would be required to file Foreign Bank and Financial Accounts (FBAR) reports, NCTR, NASRA and NCPERS wrote the Treasury Department in October, 2009, arguing that such a requirement would not further the aims of Federal law in this area, but would instead create an unproductive and unnecessary administrative burden for governmental plans.
Subsequently, in 2010, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed revisions of the regulations stating their intent to exempt public plans from the filing requirements. However, there were some perceived ambiguities between the filing instructions and the regulation’s language that left some unclear as to whether there would be an obligation for governmental plans to file FBAR reports that may fall due before June 30, 2011. NASRA, NCTR and NCPERS therefore once again filed comments suggesting a clarification.
On February 24, 2011, FinCEN issued final regulations regarding FBAR reporting. These are effective March 28, 2011, and apply to FBARs required to be filed by June 30, 2011(including any deferred filings that were originally due in June of 2010). According to the release accompanying the final rules, FBAR instructions are revised to reflect the language adopted in the final regulations. Specifically, the rules and instructions will now clearly provide a filing exemption for the accounts of governmental pension plans for both the plan itself and the plan's employees with signature authority over foreign investments.
Private Sector Pensions Regulated to Death, according to New NIRS Issue Brief
The National Institute on Retirement Security (NIRS) has issued a new report finding that private sector employers have been closing and freezing their pensions due to onerous laws and regulations enacted since the 1970s, including the Pension Protection Act of 2006. According to NIRS, these regulations created complicated funding rules, and increased contribution volatility.
According to Ilana Boivie, author of the research brief and director of programs for NIRS , “What’s particularly interesting is that the research shows that the trend away from pensions is not driven by the costs of pensions.” Instead, she said that the “heart of the issue is the volatility and unpredictability of plan funding, which impacts cash flow and income statements.” For example, NIRS found that among some 26% of plan sponsors who would consider forming a new pension plan, the vast majority said they would do so if there were more predictability and less volatility.
GAO Issues Several New Reports of Interest to Governmental Plans
The Governmental Accounting Office (GAO) has issued three new reports in the last several months that should be of interest to many public plans.
- 401(k) Conflicts of Interest. Perhaps the most significant report found that improved regulation could better protect 401(k) plan participants from conflicts of interest. In this report, GAO said that “The presence of conflicts of interest and the potential for financial harm hinder participants’ retirement security and call into question the integrity of the 401(k) system.”
GAO found that the sponsors of 401(k) plans face conflicts of interest from service providers assisting in the selection of investment options because of third-party payments and other business arrangements. They also found that in certain situations, participants face conflicts of interest from providers that have a financial interest when providing investment assistance.
GAO recommended that the Department of Labor amend pending regulations to require that service providers disclose compensation and fiduciary status in a consistent, summary format and revise current standards, which permit a service provider to highlight investment options in which it has a financial interest. GAO also recommended that the Department of the Treasury amend proposed regulations to require disclosure that investment products outside a plan typically have higher fees than products available within a plan. - GASB’s Role and Importance in the Municipal Securities Markets; GASB Funding . The Dodd-Frank financial reform law directed the GAO to study the role and importance of the Governmental Accounting Standards Board (GASB) in the municipal securities markets as well as the manner and level at which GASB has been funded. GASB is recognized by the American Institute of Certified Public Accountants as the body that sets generally accepted accounting principles (GAAP) for state and local governments.
The GAO reported a number of interesting findings, including: all state governments use GAAP for state-level financial reporting; State requirements regarding the use of GAAP by local governments vary, but institutional investors and rating agencies generally agreed that most municipal issuers use GAAP; stakeholders viewed GAAP-basis financial statements as highly useful for assessing the quality of municipal securities; and stakeholders generally agreed that governments are not always timely in issuing audited financial statements, making them less useful to analysts and other users, although a few stakeholders maintained that other publicly available information compensates for the lack of timeliness.
One finding of particular significance with regard to calls from some politicians and academics for better comparability among plans was that stakeholders generally agreed that use of GAAP’s reporting framework provides consistency and facilitates comparability of financial information across different municipal issuers and securities.
With regard to funding, GAO found that the Financial Accounting Foundation (FAF), which is responsible for the oversight, administration, and finances for GASB and FASB and currently receives its funding from subscription and publications revenues, accounting support fees for FASB pursuant to the Sarbanes-Oxley Act of 2002, and voluntary contributions in support of GASB, has had to use FAF funds from its reserve to compensate for annual shortfalls in GASB’s funding. Furthermore, GAO found that officials from most issuer organizations agreed that GASB needed a steady, sustainable stream of funding.
However, the GAO made no recommendations with regard to whether or not the Securities and Exchange Commission (SEC) should use its authority, granted under Dodd-Frank, to require a registered national securities association to establish a reasonable annual support fee to adequately fund GASB, and rules and procedures to provide for the equitable assessment and collection of the support fee from the members of the national securities association. - Prescription Drugs Pricing Trends. The GAO was asked to examine recent trends in drug prices for brand-name and generic pharmaceuticals. In this report, they (1) looked at usual and customary price trends for commonly used prescription drugs from 2006 through the first quarter of 2010, the latest available data at the time of our analysis, and compared these trends to those of other medical consumer goods and services, and (2) examined price trends using drug prices other than usual and customary.
GAO found that the price index for their sample of commonly used prescription drugs increased at an average annual rate of 6.6 percent from 2006 through the first quarter of 2010 compared with a 3.8 percent average annual increase in the medical CPI. The increase in the price index from the first quarter of 2009 through the first quarter of 2010—prior to passage of health reform in March 2010—was 5.9 percent, less than the increase for the 2 years prior but higher than in 2006.
GAO also found that the price index for their sample of 55 brand-name drugs increased at an average annual rate of 8.3 percent during our time period. In contrast, the price index for their sample of generic drugs decreased at an average annual rate of 2.6 percent.
Finally, when shifts in consumer utilization between brand-name and generic versions of the same drug were included in the analysis using drugs selected by active ingredient, the price index increased about 2.6 percent per year, a much lower rate than the 6.6 percent annual increase observed when shifts in utilization were not included.
SEC Adopts Say-on-Pay Rules
On January 25th, the Securities and Exchange Commission (SEC) finalized so-called “Say-on-Pay” rules implementing the provisions of the Dodd-Frank financial reform law relating to shareholder approval of executive compensation and “golden parachute” compensation arrangements.
Under the new rule, effective for annual meetings taking place on or after Jan. 21, 2011, not less frequently than once every 3 years, a proxy or consent or authorization for an annual or other meeting of the shareholders shall include a separate resolution, subject to shareholder vote, to approve the compensation of executives. However, the shareholder vote to approve executive compensation “shall not be binding on the issuer or the board of directors of an issuer,” according to the rule. At least once every six years, the rule requires that there also be advisory votes on the frequency (every one, two or three years) with which shareholders want “say-on-pay” votes.
In addition, the new rules require additional disclosures related to “golden parachute” arrangements in merger transactions, and give shareholders an advisory, non-binding vote on such arrangements, effective for filings on or after April 25, 2011.
However, companies with market capitalizations of less than $75 million will not be required to follow the new “say-on-pay” requirements until January of 2013.
New Boston College Paper Finds Little Link Between Pension Funding, Bond Ratings
A paper released in February from the Center for Retirement Research at Boston College looked at the impact of pensions on state borrowing costs. The research was done in response to concerns that governmental pension plan underfunding could be having an impact on bond ratings similar to that found in the private sector, where numerous studies have shown that pension underfunding affects corporate bond ratings.
However, the results of the study indicate that, while the rating agencies say they consider pensions, in fact “pension funding does not have a statistically significant effect on bond ratings.” However, it was found that pension funding does have an effect on the spread of from 3 to 7 basis points.
The report states that this result is “not surprising given that pension expense accounted for only 3.8 percent of state budgets in 2008.” However, the report also cautions that this could increase to the extent that pensions become an increasingly important component of state budgets.
New Paper Looks at Collective Bargaining, Pensions
The Employment Policy Researcher Network (EPRN) researchers have recently written a white paper, "Getting it Right: Empirical Evidence and Policy Implications from Research on Public-Sector Unionism and Collective Bargaining," in response to the events in Wisconsin. Authors of the paper were UCLA Professor David Lewin and MIT Sloan School of Management Professor Thomas Kochan, with help from several others, including New School for Social Research's Teresa Ghilarducci and University of Massachusetts, Boston's Christian Weller.
The paper finds that the principal cause of public pension underfunding is the investment loss that occurred during the Great Recession. It also finds that a “secondary cause is the failure of some governments to make annual payments to cover the ‘normal costs’ of pensions,: and that this can be addressed by requiring governments to make promised annual pension-fund payments.
The paper also finds that public employers and employee unions also “need to address and, where appropriate, reform certain pension-design and administrative features, such as those that increase pension benefits based on an employee’s final years or year of service. “ However, the researchers also caution that “putative short-term savings in pension costs achieved by shifting to 401K and other defined-contribution plans covering public employees risk imposing additional, hidden costs on the public, and are based on faulty assessment of the reasons for the public- sector pension shortfall.”
The paper calls for (1) getting the facts right about the real costs of public-sector pay and benefits and future funding liabilities and communicating these findings to the public; (2) using these findings as inputs into state-level “public-sector summit meetings” that clarify and better define the problems and challenges requiring immediate attention and can be used to “negotiate a new state wide ‘Grand Bargain’ that addresses the most critical budget challenges, while also being fair to public employees;” and (3) using the lessons learned from this experience to “carry out an evidence-based analysis of what else should be done to modernize public-sector bargaining practices to fit the needs of today’s more transparent and financially strapped environment, while remaining true to core values.”
New Pension Funding Case Studies Look at Four Plans
The Center for State and Local Government Excellence has produced a series of case studies that focus on a sample of states and what they have done to maintain a funding ratio of over 80 percent in their defined benefit plans, even after the economic downturn of 2008. Included are Delaware, Illinois Municipal, Iowa, and North Carolina
The studies examine pension funding; employer and employee contributions; and what is referred to as “Strategies for Success,” which include such things as “Ad-hoc cost-of-living increases (COLA) that are not imbedded in the pension statute, are considered annually by the legislature based on fund performance, and are funded over five years when granted.
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