Wednesday, January 11, 2012

GASB Update: Report by the Center for Retirement Research at Boston College, entitled “How Would GASB Proposals Affect State and Local Pension Reporting"

The recent report by the Center for Retirement Research (CRR) at Boston College, entitled “How Would GASB Proposals Affect State and Local Pension Reporting,” contains an appendix that has been creating some confusion and concern.  Specifically, Appendix B shows a column listing the year in which each of the 126 plans covered in the report will run out of money.   As I noted in my posting, these dates are not actual projections by CRR of when a plan will become insolvent.  

In an effort to further clarify the situation, PensionDialog discussed these dates with CRR and has posted its interview, which notes that: 
  • These dates are not reflective of an ongoing plan, and are intended only for use in implementing GASB’s particular liability concept; 
  • The methodology used to calculate the “run-out” dates was GASB’s, based on an accounting method that does not accurately portray all aspects of an ongoing plan; and
  • Purported exhaustion dates previously developed by CRR in March of 2011 (and also found in Appendix B) present a “worst-case” scenario.
 The full interview can be found here.

Monday, January 9, 2012

Happy Holidays? 3% Withholding Law Repealed and State Legislature Opposes PEPTA, but New JEC Report Suggests Stormy Weather Ahead

As expected, on November 16, 2011, the House of Representatives agreed to the Senate’s changes to H.R. 674, legislation to repeal the imposition of a 3 percent withholding on each payment of $10,000 or more for property and services made to vendors by governmental entities, including public pension plans.  Five days later, on November 21st, President Obama signed the bill into law (PL 112-056).

Adopted at the last minute in 2006 in conference committee, and delayed on several occasions thereafter, the withholding requirement was to have begun applying in 2013 to all payments made by most governmental pension plans for goods or services, but not benefits.  The withheld amounts were to be a credit against the tax liability of the recipient of the payment, and were to be shown on an information return after the end of the tax year, similar to backup withholding or withholding on wages.

Repeal of the withholding requirement was one of NCTR’s major legislative goals, as it would impose administrative burdens, increased technology costs, and could also result in higher prices as vendors attempted to deal with its impact.  Efforts to do away with the mandate therefore began almost as soon as it became law.  These were led by the National Association of State Auditors, Comptrollers and Treasurers (NASACT).  

However, despite significant advances toward repeal, it was not until the Chamber of Commerce made it a priority and flooded Congressional offices with letters from businesses large and small calling for terminating the requirement that interest in repeal began to increase substantially. 

And when doctors realized that the definition of government contractors would include physicians who bill Medicare for health services, things really began to pick up.  (While most individual payments for physicians would not reach the $10,000 per payment threshold imposed by regulation, some health practices aggregate claims, and could therefore exceed that threshold.)  The American Medical Association and several other healthcare organizations warned Congress that the withholding requirement would cause cash-flow problems at practices and facilities if it were to be implemented.

In addition to repeal of the withholding mandate, the new law provides:
  •  tax credits for veterans hiring; 
  •  a Treasury study of tax delinquency among Federal contractors; 
  • a technical clarification about the application of the existing federal levy program to reflect Congressional intent that payments for property can be levied along with payments for goods and services.
The repeal is expected to “cost” the Federal government about $11 billion in lost revenues that would have been gained by the withholding provision.  This loss was offset by closing what was considered to be a coverage loophole in the “Patient Protection and Affordable Care Act,” the Obama healthcare reform law passed in 2010.  Under that law, some people with annual incomes up to about $60,000 might have become eligible for Medicaid when the program expands in 2014 because the healthcare reform law did not count Social Security benefits toward Medicaid income eligibility.  The withholding repeal fixes this and the revenue that will be saved by this Medicaid modification will then be used to offset the loss from the withholding repeal.

At their annual meeting in November of 2011,  the National Conference of Insurance Legislators (NCOIL) approved a resolution in opposition to the “Public Employee Pension Transparency Act" (PEPTA), introduced as H.R. 567 in the House of Representatives by Congressman Devin Nunes (R-CA) and in the Senate as S. 347 by Senator Richard Burr (R-NC).  (NCOIL is an organization of state legislators whose main area of public policy concern is insurance legislation and regulation. Many legislators active in NCOIL either chair or are members of the committees responsible for insurance legislation in their respective state houses across the country.)

New NCOIL President Senator Carroll Leavell (R-NM), the sponsor of the resolution along with NCOIL Past President Representative Kathie Keenan (D-VT), said that the bill had “big brother undertones” that are “too much for those of us that have worked hard in the states to protect the retirement security of our constituents and to make sure hard-earned taxpayer dollars are used wisely.”  Senator Leavell said that “We do not need the distant Federal government to insert itself into state and local pension plan decisions.”

The action by NCOIL’s executive committee came three days after their Financial Services & Investment Products Committee voted fifteen to one in support of the resolution following a presentation by NCTR’s Director of Federal Relations encouraging them to oppose PEPTA and answering legislators’ questions concerning the Federal legislation.  The Financial Services Committee also approved a 2012 charge to monitor state and federal pension reform initiatives, so the issue will remain on their radar.

In addition to opposing PEPTA, the NCOIL resolution calls on Congress to let state and local officials manage their own unique pension systems.  Among other things, the resolution argues that PEPTA would unnecessarily inject the Federal government into the administration of state and local pension plans and would threaten funding for state and local government projects by conditioning continued tax benefits for government bonds on plan compliance with new federally directed reporting requirements.

As far as PEPTA’s current status is concerned, there have been no further hearings dealing with the subject in the House of Representatives since the May 5, 2011, hearing on “Transparency and Funding of State and Local Pension Plans” by the House Committee on Ways and Means’ Oversight Subcommittee.  That was the fifth hearing in the House in 2011 that examined the PEPTA legislative proposal either directly or indirectly.  There were no Senate hearings on the subject in 2011.

H.R. 567 has a total of 51 cosponsors; none have signed onto the bill since May 10, 2011.   In the Senate, S. 347 has 8 cosponsors, with the latest, Senator Kirk (R-IL) having signed up on July 27, 2011.   As 2012 will be the second session of the 112th Congress, the two bills are still pending and do not need to be reintroduced. 

While no further action has yet to be scheduled, the Republican staff of the Joint Economic Committee (JEC) issued a staff commentary in December of 2011 entitled "States of Bankruptcy Part I: The Coming State Pensions Crisis."   Relying almost exclusively on work by Professors Joshua Rauh and Robert Novy-Marx, this report claims that " a number of plans are projected to run out of money in just over five years based on private sector accounting standards" and that the combination of massive unfunded pension liabilities and poor economic policies "are setting many states up for a Greek-style fiscal death spiral."  The report concludes by stating that "the state pension crisis is virtually unavoidable" but that the federal government's role in "bearing the burden of irresponsible states" can be mitigated through "preemptive actions that will help prevent a taxpayer bailout of state pension systems," no doubt a lightly-veiled reference to the “PEPTA" legislation.

Senator Jim DeMint (R-SC), a member of the JEC, also was quoted in the press in connection with the GOP staff report, saying that “The deeper we get into this research, the clearer it becomes that federal legislation may be necessary to force states to use honest accounting, fix their pension debt and protect taxpayers from the mother of all bailouts."  In addition, the JEC commentary also notes that there will be “future reports” that will examine “the prospects for pension reform (including promising measures to confront existing unfunded liabilities and to establish fully sustainable pension plans).”  This suggests that another round of Congressional hearings on state and local governmental pensions could be in the works, perhaps in connection with these subsequent JEC Republican staff reports.