Tuesday, January 29, 2013

January 2013 Federal E-News Update

On January 16, 2013, the Business Roundtable (BRT) announced that it was recommending mandatory Social Security coverage for all new State and local government employees as part of any “comprehensive economic growth and deficit-reduction strategy” that Congress and the Administration develops.   (The BRT is an association of chief executive officers of leading U.S. companies with more than $7.3 trillion in annual revenues and nearly 16 million employees.)

In an Op-Ed in the Wall Street Journal, Gary W. Loveman, CEO of Caesars Entertainment Corporation and Chair of the Business Roundtable’s Health and Retirement Committee, wrote that about one in four State and local government workers is exempt from Social Security payroll taxes and that Congress and the White House should eliminate this “special exemption” for all new state and local government workers.  It is believed that this is the first time that the BRT has endorsed such a proposal.

Based on a report prepared for the Committee to Preserve Retirement Security (CPRS) by the Segal Company in 2011, it is estimated that the governmental employer and employee cost of Social Security coverage for newly hired governmental workers for the first five years of coverage would be $53.5 billion. This increased cost in payroll taxes would have an impact in every state.   (CPRS is composed of individuals and organizations having an interest in maintaining a Social Security system which does not impose mandatory participation on state and local governmental units and their employees.)

The BRT’s “Social Security Reform and Medicare Modernization Proposals” also include recommendations to gradually raise both the Social Security retirement age and the Medicare eligibility age to 70, exempting anyone who is currently 55 or older.

On Thursday, January 24, 2013, President Obama announced his intention to nominate Mary Jo White to become Chair of the Securities and Exchange Commission (SEC).  White was the U.S. attorney for the Southern District of New York (Manhattan) from 1993 to 2002, and is now the partner in charge of litigation at Debevoise & Plimpton in New York City.  If confirmed by the Senate, which some observers are saying could happen as early as April, White will replace Elisse Walter, who is currently serving out the remainder of the term of Mary Schapiro, the former SEC chair who resigned in December.

Among White’s claims to fame are her convictions of the terrorists responsible for bombing the World Trade Center, and John Gotti, the head of the Gambino crime family.  She would be the first prosecutor to head the SEC in its 79-year history, and her appointment is widely believed to be a strong message that White will “give high priority to expanding the [SEC’s} enforcement efforts,” according to an article by the Associated Press.  The Wall Street Journal agrees, saying that her nomination “could signal tougher policing of Wall Street.” 

Others are concerned with her lack of regulatory experience.  “What we need now, it seems, is someone who can lay down the rules, still not finalized from Dodd-Frank, that will not just hopefully limit Wall Street malfeasance but its propensity for stupidity as well,” argues Stephen Gandel, senior editor for Fortune, writing for CNNMoney on January 24th.  (Indeed, according to a new Government Accountability Office (GAO) report, Federal regulators have issued rules for less than half of the Dodd-Frank provisions that require them.)  Gandel calls White “the right woman at the wrong time.”

Jeff Mahoney, general counsel for the Council of Institutional Investors (CII), told Pensions and Investments that CII’s members look forward to working with White to further corporate governance measures.  “She obviously has outstanding credentials,” Mr. Mahoney was quoted as saying.

White’s appointment could also be good news for those who were concerned with some of the reform recommendations in the SEC’s recent report on the municipal bond market that Chairman Walter had helped to spearhead, which included improving disclosures in muni bond offerings, such as those related to pensions.    According to The Bond Buyer, White, “in an attempt to make the most of the SEC’s limited resources, may chose to focus more on addressing issues in the corporate market, and less on muni market issues.”
Congressman Devin Nunes (R-CA), the chief sponsor of the Public Employee Pension Transparency Act (PEPTA) in the last Congress, has been named as the chairman of the House Ways and Means Committee’s Subcommittee on Trade.  This is Nunes’ first leadership position on the powerful House tax-writing committee, and it is unclear if this will affect his interest in public pensions.

Congressman Nunes, who was previously an unknown when it came to public pension reform, first introduced his PEPTA legislation during the lame duck session of the 111th Congress in 2010, and then re-introduced it in the last Congress (the 112th) on February 9, 2011.  He pursued an aggressive media campaign in connection with the legislation that year, famously telling Fox News that he was “trying to smoke the rats out of their holes” with his bill.  It was also showcased in five separate hearings in the House of Representatives in 2011.

Since then, Nunes has had relatively little to say directly with reference to his legislation, which has nevertheless become a focal point for many opponents of public sector defined benefit plans.   Now, as chairman of the Trade Subcommittee, he will have jurisdiction over tariffs, import and export policies, customs, international trade rules, and commodity agreements.   Nunes himself has said that his focus for the next two years will be on creating a free trade agreement between the U.S. and the European Union and expanding the Trans-Pacific Partnership, a pact formed in 2011 to boost trade and investment between Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and the U.S.  No small tasks.

Will Congressman Nunes still have the time, or the interest, for pensions?  Once the 112th Congress ended, his PEPTA legislation also expired, and will have to be reintroduced in the 113th Congress.   Will Mr. Nunes continue his leadership role with the issue, or will it be picked up by others.  As of the date of this writing, Congressman Nunes has NOT reintroduced his PEPTA legislation in the new Congress.

On the other hand, as a member of the Ways and Means Committee leadership, Nunes will have an increased ability to move his legislation if he so desires, even if it has not been formally re-introduced.  For example, in 2012, the substance of the PEPTA bill was briefly – and eventually, unsuccessfully -- in play as a potential addition to a must-do piece of legislation dealing with student loans and highway funding, suggesting how the legislation may ultimately move – not as a free-standing bill but as part of a larger package of urgent legislation. Finally, while the flames may have died down since 2011, those behind the scenes stoking the fires of Federal intervention in the public pension arena are still very much active and alert to any possibilities to advance their cause.

It is hard to believe that, given the investment of time and effort that opponents of public pensions have put into advancing PEPTA, it will not reappear in the 113th Congress in some form, even if not reintroduced by Congressman Nunes.  

Joshua Rauh, now a professor of finance at Stanford University’s Graduate School of Business, is still active in spreading inflammatory accusations and misinformation concerning public pensions.   However, he is not going unchallenged.  Recently, NASRA’s research director, Keith Brainard, publically called Rauh out, asking why he and other academics are not held accountable for false statements and their consequences like public officials would be.

A new video prepared by the Stanford University Graduate School of Business published on January 25th on YouTube features Professor Rauh discussing the “Looming Pension Crisis.”  For example, Rauh warns that there is going to be “a great deal of competition between municipal bond holders and the recipients of the [governmental] pensions as to who is going to get paid first.”  Also, did you know that 10% of the population (public employees) is owed $4.5 trillion by the other 90%?  (Rauh continues to make these claims concerning taxpayer liabilities associated with unfunded pensions despite the NCTR/NASRA brief debunking his research in this regard.) 
In the new video, Rauh provides his explanation for what is wrong with the way that state and local governments budget for employee pensions; what happens if public sector pension funds do not achieve targeted returns; how would a public sector pension crisis impact financial markets; and why should the business community be concerned about a pension crisis.  And he does it all in less than 5 minutes!

Playing soon at a theater near you – or on a state legislator’s iPad? 

However, Professor Rauh is no longer getting away with making false statements unchallenged.  In an article in the January 21, 2013, issue of Pensions and Investments, NASRA’s Keith Brainard calls out Professors Rauh and his colleague, Professor Robert Novy-Marx, for their long-running campaign of misinformation.  A function of negligence or fraud, Brainard asks. 

As well credentialed academics on the staff of highly respected institutions of higher education, they should know better, Brainard asserts.  “Given their backgrounds and positions,” he observes, “one would assume they are capable of basic research and are making their claims based on solid information.”  However, apparently the two are not, if an op-ed piece in the December 10, 2012, Providence Journal, is any example, Keith explains.

In that piece, Rauh and Novy-Marx state that Rhode Island’s anticipated annual return of 8.25% in pension investment has for the past decade come in at about one-third that rate, only 2.4%.  That is simply false, Brainard points out.  In fact, information made public by the Rhode Island retirement office regarding its investment return for the past decade, prepared by an independent consultant, shows the Rhode Island pension fund's annualized return for the 10-year period ended last Sept. 30 was 8.3%, not 2.4%.  In addition, Brainard notes, since 2010 the Rhode Island retirement plans have used an anticipated annual return of 7.5%, not the 8.25% rate claimed by the professors.  

In the past, Rauh’s “misinformation” has also been called into question by none other than the U.S. Government Accountability Office (GAO), which observed, in connection with Rauh’s study purporting to identify the dates when specific public plans were expected to exhaust their assets, that these projected exhaustion dates were “not realistic estimates of when the funds might actually run out of money.”

Pointing out that if a public or corporate official distributes false financial information that serves as the basis for unwarranted action by others, they are guilty of either fraud or negligence depending on whether it was signed off on knowingly or carelessly, Brainard asks:  “Why then are academics not held to the same level of accountability?” 
Why, indeed.

The National Institute on Retirement Security (NIRS) has just released a new issue brief providing a comprehensive overview of the public pension investment process.  Given the increased attention to public pension investments by the media and critics of governmental plans following the market turndowns of the last decade, this NIRS primer should prove very helpful in educating policymakers and the public, providing the basics as to how public pensions allocate assets and set expected rates of return.

The new publication, “How Do Public Pensions Invest?  A Primer,” is co-authored by Ronnie Jung, CPA, the former executive director of the Teacher Retirement System of Texas and a past president of NCTR; and Nari Rhee, PhD, NIRS manager of research.   It focusses on several aspects of the investment process, including:
  • Distribution of investments across stocks, bonds, and other asset classes in order to maximize returns and minimize risk;
  • Principles that guide how public pension funds invest and the institutionalized practices through which plan trustees set investment policies;
  • Evaluation and management of investment related risk; and
  • Investment return assumptions among public pension funds in comparison to historical performance and the future outlook.
NIRS also conducted a webinar on its new release, and produced a PowerPoint presentation with helpful charts and tables explaining the overall investment process.

A review of contributions data for the nation’s largest teacher pension systems collected by the Public Fund Survey, which is a joint project of NCTR and NASRA, was recently compared to education spending data published by the U.S. Census Bureau.  The results show that, on average, teacher pensions account for only 3.96% of all state and local spending on education. 

This may come as a surprise to the National Council on Teacher Quality (NCTQ) and others who claim that the structure of teacher pension systems is untenable and who have argued for years that the quality of education suffers as already strapped school systems are required to commit increasing shares of their current funds to pay for retired teachers’ benefits.

Pension Dialog recently distributed a table based on research conducted by Alex Brown, research manager at NASRA, which shows the rates calculated for statewide retirement systems whose only members are teachers and/or education workers for FY 2010.

Note that the States whose teachers do not participate in Social Security are italicized in the table.  According to Alex, this factor helps to explain why these states may have higher percentages of spending associated with pensions than other states in the table.

The Employee Benefits Research Institute (EBRI) as well as the Government Accountability Office (GAO) have both issued recent reports concerning differing aspects of annuitization.   EBRI looks at how plan design – namely the ability to make a lump sum withdrawal --directly affects the chances that a retiree will choose to annuitize his or her retirement savings, while GAO examines new forms of annuitization that offer guaranteed lifetime withdrawal benefits, and discusses their potential appeal as well as their downsides.

EBRI reports that annuitization decisions are directly linked to plan design.  If a lump sum distribution is not offered in a DB plan, then annuitization rates are very high.  If lump sums or partial lump sums are available, annuitization rates drop dramatically.  In short, EBRI says that the rate of annuitization “varies directly with the degree to which plan rules restrict the ability to choose a partial or lump-sum distribution.”  

Therefore, in the context of overall retirement security for all Americans, the challenge in providing retirees with a benefit that they cannot outlive may have less to do with a lack of knowledge about annuities and how they work, or their costs, or a desire to have access to assets in cases of emergencies, and more to do with simply having the chance to cash out their retirement savings.  The study focuses on DB plans and cash balance plans, but perhaps the real lesson here is for DC plans? 

The new EBRI issue brief also looks at annuitization decisions of both older workers and younger workers; annuitization trends by account balance; and annuitization trends by tenure.

The GAO has also issued a report recently concerning annuities.  Its focus is on two specific products: variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB), and contingent deferred annuities (CDA), which are relatively new.   A recent five-minute GAO “podcast” is now also available that covers the report’s highlights.

Unlike more traditional annuities, the assets of purchasers of VA/GLWBs and CDAs are not annuitized.  Consumers can withdraw any or all of their funds at any time.  Also, under a CDA, the guarantee of lifetime withdrawals can, in certain cases, be applied to existing investment assets.  That is, instead of having to first sell the assets and then use the proceeds to purchase the annuity, as is typically the case, existing investment assets may be able to be used to purchase a CDA to cover them.

The GAO report explains how the two products function, including how investment gains and losses are treated, how withdrawal amounts are determined, and what happens when a consumer’s investment account is depleted.  The report also discusses some of the risks that can be associated with these products.  

As the Congress and other policymakers examine the future of retirement security, could these products have an increasingly important role to play?
The Bureau of Labor Statistics (BLS) has produced what it refers to as a “visual essay” consisting of a number of charts and graphs documenting the decline of the traditional defined benefit pension in the private sector and focusing on what remains.  BLS examines current plan features, changes to the data over time, and additional details about defined benefit plans, documenting, for example, which private sector industries and areas of the country still utilize the DB model.    

As the BLS notes, defined benefit plans are becoming rare for workers in private industry, with only 10 percent of all private sector establishments providing defined benefit plans in 2011, covering 18 percent of private industry employees.  

In addition to the decline in coverage, BLS identifies recent trends among private sector DB plans reflecting employer decisions to convert to cash balance plans or limit future accruals.
The Bureau of Labor Statistics of the U.S. Department of Labor is an independent statistical agency responsible for measuring labor market activity, working conditions, and price changes in the economy. Its mission is to collect, analyze, and disseminate essential economic information to support public and private decision-making. 

A bipartisan group of House members has proposed legislation to freeze the current Congressional pension plan, preventing current members from accruing any more benefits, and shutting down the system completely for new members of Congress.

On January 4th, Congressman Tim Griffin (R-AZ) introduced the “End Pensions in Congress” Act (EPIC Act), that would terminate further retirement benefits for Members of Congress, except the right to continue participating in the Thrift Savings Plan (TSP).  The TSP is the defined contribution plan for Federal employees.  The bill has seven cosponsors:  Ron DeSantis (R-FL); Trey Gowdy (R-SC); Mick Mulvaney (R-SC); Steven Palazzo (R-MS); Trey Radel (R-FL); Reid Ribble (R-WI); and Kevin Yoder (R-KS).

On January 25th, Congressman Mike Coffman (R-CO) introduced HR 423, similar legislation.  His version has five cosponsors:  David Cicilline (D-RI); John Fleming (R-LA); Virginia Foxx (R-NC); Jared Polis (D-CO); and David Schweikert (R-AZ).

Griffin has said in the past, when introducing similar legislation in the 112th Congress, that eliminating pensions for those who will be elected in the future “will show we are serious about addressing Washington’s unsustainable spending.” 

According to a press statement issued this year, Congressman Coffman believes that “Congress needs to set an example for the country and I believe that ending our pension plan would be a good start.” Huh?  “It makes no sense for congress to continue to reward itself, using taxpayer dollars, with a defined benefit plan,” Coffman said, “when much of the country has moved to a defined contribution plan like a 401K.”  Coffman said that “We need to end this perk.” 

Both bills have been referred to the Committee on House Administration, and in addition to the Committee on Oversight and Government Reform.  Their legislation introduced in the 112th Congress was similarly referred, but did not receive action before that Congress adjourned.   

And you thought that you were the only ones to have to deal with DB/DC conversion efforts.