Federal Legislative Update

Jeannine Markoe RaymondDirector of Federal Relations

National Association of State Retirement Administrators

15th ANNUAL KLAUSNER, KAUFMAN, JENSEN & LEVINSON

CLIENT CONFERENCEMarch 10 - 13, 2013

The 112th Congress

• Numerous hearings on state/local finance• Public pensions implicated in all as “largest

driver of state and local fiscal problems” • Deluge of national studies/reports• Ongoing efforts to get out the facts

Public Employee Pension Transparency Act (PEPTA)• Highlighted in many hearings • Would require costly/conflicting

federal reporting requirements• Plan sponsors that fail to follow

correctly lose tax-exempt bond authority

• Told it was “not going anywhere”• Then…Almost included in Highway

Trust Fund/Flood/Student Loan Reauthorization “Pay-fors”

• Stay tuned…

Congressional Reports

• 12/8/2011 – Report released by Joint Economic Committee Co-Chair Kevin Brady (R-TX) saying public pension crisis is unavoidable and preemptive federal action is needed

• 1/10/2012 - Senate Finance Committee Ranking Member Orrin Hatch (R-UT) issues report stating DB plans are inappropriate for state and local governments

3/2/2012 - GAO issues report noting state pension reform effort and authoritatively declaring exhaustion date projections “not realistic estimates”

3/15/12 - JEC Vice-Chairman Brady releases second report on state finance that less directly implicates pensions.

7/27/2012 – Senate HELP Committee Chairman Tom Harkin (D-IA) released report to address retirement insecurity– Makes changes to Social

Security and establishes a new plan for those without access to a pension – based on following principles:

• automatic participation• shared responsibility and risk• pooled and professional

managementlif i i

SEC7/31/12 report requests authority to regulate state and local issuersPension disclosure “at forefront” of municipal securities market discussions– Discount rate– PEPTA– GASB– Enforcement actions

• 9/26/12 – JEC Republican Staff Commentary released on the “Pending State Pensions Crisis”

• Press conference and “No Pension Bailout” web site unveiled

• Fiscal Cliff• Tax Reform• PEPTA • Pick-ups• Normal Retirement Age• Definition of Governmental Plan

113th Congress

Continued Search for Revenue

• Many retirement-related areas:– Federal employee

benefits– Social Security benefits– Tax treatment of

retirement savings

Pension Pay-fors

• Pension provisions used this summer to pay for Highways/Student loans

• Roth conversions used in American Taxpayer Act (First postponement of sequester)

• Ways and Means Working Group on Tax Reform - Pensions/Retirement Chaired by Reps. Tiberi (R-OH) and Kind (D-WI)– What else will be recommended?

Debt Commission Recommendations

• Leave tax expenditure related to employer defined benefit retirement plans untouched

• Institute “20/20” proposal for other retirement savings vehicles

• Mandatory Social Security– newly-hired employees after 2020– “Future bailout risk,” simplification of benefit

coordination cited (GPO/WEP repeal could fuel issues)

• Public employee contributions to DB plans?

Tax Treatment of Public Employee DB Contributions

• IRC 414(h)(2) authorized tax deferral• Rev. Rul. 2006-43 clarified conditions

– Formal written action by employing unit– Employees must not have a cash or deferred election

right• Could affect DROPs, tiers, service credit purchase• Efforts to clarify broadly available, durable elections to

participate in another tier, plan or service level within the DB plan. (Treasury Guidance Plan, H.R. 205, Sanchez, D-CA)

• Continued concern 414(h)(2) could be eyed for revenue

Normal Retirement Age

Notice 2012-29– Removes 1/1/2013 effective date – Clarifies application of 2007 Regulations

hinges on whether plan provides for in-service distributions before 62

– National public sector organizations submit joint comments request proposed rules and tailored application

H.R. 3561 (112th Congress)– Kind (D-WI), Gerlach (R-PA) and Neal (D-MA)

introduced on 12/5/2011– Includes NRA provision for ERISA plans, and service-

b d A

Proposed SEC Muni Advisor Rules • Elected and ex officio board members

would be excluded from the definition of “municipal advisors”

• Appointed members NOT excluded• NASRA, NCPERS, NCTR, GFOA and others have

submitted comments urging the exclusion of all trustees (elected or appointment)

• Effective date extended to 9/30/13• Fix included in H.R. 2827 (112th Congress), which

passed House and received no further action

efinition of overnmental Plan

• ANPRM released on 11/8/2011• Town hall meetings, phone forums, hearings and public

comments• NASRA/NCPERS/NCTR/NAGDCA/GFOA

recommend safe harbors:– Fiscal responsibility– Elected board– Sovereign Powers– Government agent– Federal Tax Treatment – Other Federal Laws (Census of Governments)– Court ruling

• Grandfathering Rules• Transition Rules

Regulate Thyself or Be Regulated

NABL Pension Disclosure Taskforce

National Association of Bond Lawyers created in response to SEC settlements/investigations regarding pension disclosure in municipal bond offeringsClear message to self-regulate or the SEC will do so“Considerations in Preparing Defined Benefit Pension Plan Disclosure” finalized May 2012

State Budget Crisis Task ForceJuly 31, 2012

Six major threats to states’ fiscal sustainability:– Medicaid spending growth is crowding out other needs – Federal deficit reduction threatens state economies and

budgets – Underfunded retirement promises create risks for future

budgets

– Narrow, eroding tax bases and volatile tax revenues undermine state finances

– Local government fiscal stress poses challenges for states – State budget laws and practices hinder fiscal stability and mask

i b l

State Budget Crisis Task Force’s Pension Recommendations

• Neither calls for federal intervention nor proscribes a structural change in plan design

• Recommends stronger funding policies and disclosure:"Legislators, administrators, and beneficiaries alike need to develop and adopt rules for the responsible management of pension plans and mechanisms to ensure that required contributions are paid”

• Underscores necessity of efforts to establish and follow sound pension funding policies and practices

GFOA Recommended Practice on Pension Funding

• Actuarially determine plan contributions• Employ funding discipline• Maintain intergenerational equity• Manage costs to keep a consistent percentage

of payroll• Have clear reporting that shows how and

when plans will be fully funded

Congressional Education

• Congressional members and their staff appreciate learning:– How many of their constituents are covered by a public

pension– The amount of public pension dollars that flow to their

district – Facts (correcting misperceptions) on plan policies,

financing and governance– Plan changes underway– Key contacts at home on complex pension issues

Key Points, Particularly to Those in Leadership and on Tax

Committees:

One-size-fits-all Federal regulation is not needed and only undermines state and local recovery effortsStates are not ignoring the issue – changes are being made to benefits and financing – but there is no silver bullet

Since 2009, 45 states have made changes to their pension benefits, required employee

contributions, or both

• Higher required retirement ages• Longer vesting periods• Higher employee contributions• Fewer/lower cost-of-living adjustments• Greater use of hybrid retirement plans• Increased emphasis on employee-employer

cost-sharing

Key Issues Often MisunderstoodClosing a plan does not address unfunded liabilitiesState and local government pension contributions need to increase in many jurisdictions, but it is still small percentage of total spending

.0 4.1 4.2 4.1 4.1 4.2 4.0 3.9 3.7 3.5 3.3 3.1 2.9 2.9 2.9 3.0 3.0 3.1 2.7 2.6 2.3 2.1 1.9 2.12.7 2.6 2.6 2.8 2.9 2.9

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Pension Costs as a Percentage of All State and Local Government Spending, 1980-2009

Key Elements of Public Plans that Balance Stakeholder Needs• Retirement policies must balance needs of various

stakeholders (employers, employees, taxpayers)• Elements of public plans that best accomplish this:

– Mandatory participation– Employee-employer cost sharing– Assets that are pooled and professionally invested– Lifetime benefit payments– Benefit adequacy

• Presence/absence of SS• Survivor/disability

Scheduling Meetings

In the home districtWith key Washington staff– During winter meetings– Other times you visit

Washington, DC

Resources

Association StaffOther State Offices in DCTestimony/CorrespondenceIssue Briefs/Fact Sheets

Questions?