96th ANNUAL CONFERENCE. Tuesday, October 9, 2018 FEDERAL LEGISLATIVE UPDATE

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1 96th ANNUAL CONFERENCE Tuesday, October 9, 2018 FEDERAL LEGISLATIVE UPDATE

2 Summary Legislative Issues Old and New Regulatory Issues Old and New The Mid-Term Elections The Lame Duck 2019 and Beyond Questions 2

3 Legislative Issues Old and New Tax Reform 2.0 PEPTA Hatch Annuity Replacement Plans Joint Select Committee on Multiemployer Pensions UBIT Rothification and the Employer Pick-Up Infrastructure GPO/WEP Reform/Repeal Mandatory Social Security Bankruptcy Code Essential Services Pension Override 3

4 Tax Reform 2.0 House bill contains provision affecting cash-or-deferred elections (CODAs). Complete reversal of current Treasury view. Appears to permit current plan participants to individually elect into a new tier, even if it would change their take-home pay. Would it cover purchases of service credits, DROPs, other potential CODAs? What s really going on? Making it easier for current participants to elect a DC option? 4

5 Public Employee Pension Transparency Act (PEPTA) Sponsors of public plans to report funding info annually to Treasury using market value of liabilities, no asset smoothing; Treasury could impose new, yet to be defined comparability standards. Voluntary, but failure to report would lose sponsor Federal taxexempt treatment of muni bonds. Rep. Nunes (R-CA) has re-introduced as HR 6290; just 4 cosponsors. DANGER: Part of effort to include PEPTA on other legislation in

6 The Secure Annuities for Employee (SAFE) Retirement Act Annuity Accumulation Retirement Plan -- introduced by Senator Hatch (R-UT) in 113th Congress. Permissive: employers could not must -- purchase fixed annuity contracts from insurance companies for each employee every year. Attempts by Hatch to include a version in the Puerto Rico assistance package last Congress failed. Key staffer, Preston Rutledge, now at EBSA (DOL), but Hatch is retiring? Possibility in the Lame Duck? 6

7 Joint Select Committee on Multiemployer Pensions 8 from Senate, 8 from House, split evenly among GOP, Dems. Given until last week of November to address crisis affecting certain Taft-Hartley plans such as the Teamsters Central States Plan. If at least 5 Dems, 5 GOP agree, given expedited treatment. Danger of confusion with bailout-out of public pensions. PEPTA added as a sweetener? UBIT possible pay-for? 7

8 Unrelated Business Income Tax (UBIT) New tax, approximately 39 percent, on certain public pension earnings; in the House-passed 2017 tax bill but not in Senate version. Applies to income derived not just from an unrelated trade or business, but to debt-financed property. Would impose significant, complex compliance costs that could impact portfolio construction, diversification of public funds. Narrowly avoided at literally the last moment, but could reappear! 8

9 Rothification and the Employer Pick-Up Moves Federal revenues from the future to the present. Not based on retirement security policy considerations. It s all about the money! If adopted, then only public employees could contribute to their DB retirement savings with pre-tax dollars, thanks to employer pick-up. Do you really see a GOP Congress permitting this favorable tax treatment for public pensions to continue?? Leadership staff: Rothification is still very much alive, and is the only large source of potential Federal $$ left to pay for other programs. 9

10 Infrastructure Trump s plan: $200 billion in Federal $$ (cut from other areas of budget, not new money), to leverage $1.5 trillion in infrastructure spending. Favors little-populated rural areas to the detriment of urban America: Will pressure for infrastructure repair result in in-kind contributions of infrastructure to public plans? Two birds with one stone approach: free up revenues for sponsors; put burden on plans to improve and enhance the asset to preserve its value. GOP historically opposed to infrastructure legislation; still a hard sell. 10

11 GPO/WEP Repeal? GPO/WEP repeal bill (H.R. 1205) currently has 185 cosponsors; S. 915, introduced by Brown (D-OH), has 25 cosponsors. Support for total repeal waning: earlier bills had as many as 334 House cosponsors. Primary problem continues to be cost of repeal, which could be about $90 billion combined. Potential linkage of GPO/WEP repeal to mandatory SS is also a problem. Dual entitlement rule in private sector: beneficiary receives higher of his/her SS or of spouse/widow(er) s benefit, but not both; repeal, to provide parity with public employees = $500 billion over 5 yrs. 11

12 GPO/WEP Reform? Brady (R-TX), Neal (D-MA) reform bill replaces WEP with new proportional formula -- replacement rate calculated using both covered, non-covered earnings, multiplied by covered earnings. Strong bipartisan support for proportional approach. Winners and losers -- workers who are currently impacted by WEP and have reported non-ss pensions will win; workers who didn t vest, or have between 30 and 35 yrs. of SS earnings could lose. Latest version: $100 monthly rebate (indexed) begins in 2020; new formula in 2026; yet to be introduced; would not pay for itself. 12

13 Mandatory Social Security No serious proposals to impose Social Security on all public employees introduced. So is mandatory Social Security a serious threat? YES! Raises $78 billion over 10 years, so could be seen as a pay-for for non-social Security reform legislation (GPO/WEP reform/repeal?). Also, proponents argue it offers missing safety net for those not covered, and therefore not really a part of fixing SS financing. 13

14 Bankruptcy Code Essential Services Pension Override Amends Bankruptcy Code to provide states with authority to override any public pension protections if state passes law finding pension funding damage performance of essential state services. State then files petition in Bankruptcy court that could authorize changes to pensions. Could be prospective, retrospective, or both, and could include modifying vesting, qualification requirements, or cuts to pensions. Avoids Federal bailout without bankruptcy, thereby protecting creditors and state bondholders. No infringement on states rights. 14

15 Regulatory Issues Old and New Normal Retirement Age Final Regulations Definition of a Governmental Plan ANPRM Determination Letters Pension Cost Principles for Federal Grants/Awards Revision of FICA Replacement Plan Guidance Actuarial Standards of Practice (ASOP) Revisions 15

16 Treasury: Normal Retirement Age Regulations Problems with original NRA proposed rules. Proposed final rules for governmental plans released on 1/27/16: regulations would only apply to plans with in-service distributions before age 62. Additional safe harbors when this was the case. Looking good, but still not final. Are NRA regs subject to Two-for-One Trump Regulatory Rule? 16

17 Treasury: Definition of Governmental Plan ANPRM BIG DEAL!!! If governmental plan, then exempt from reporting, participation, vesting, and fiduciary standards of ERISA. Rules and circumstances test: Five main factors and eight other factors. Unclear as to de minimis rule; grandfathering. It is expected regs will apply prospectively and will include a delayed effective date. 17

18 Treasury: Determination Letters Effective January 1, 2017, the staggered 5-year determination letter remedial amendment cycles for governmental plans stopped. The vast majority cannot now secure IRS review of plan amendments. In April, IRS issued Notice , potentially expanded the scope of Determination Letter Program to once again include public plans. NCTR/NCPERS/NASRA joint letter supported permitting governmental plans to voluntarily apply if they deem it beneficial. Applications much more limited in scope, can only address changes since last determination letter, thereby simplifying process. 18

19 OMB: Pension Cost Principles for Federal Grants/Awards Some federal cost negotiators want to disallow pension contributions in excess of the GASB 68 calculated pension expense. Others want fixed rate plans or those with employer rate stabilization features to refund reimbursement amounts in excess of actuarially determined contribution (ADC.) Some Feds misinterpreting the requirement that contributions be made in a timely manner as limiting the contribution to normal cost. Proposed modifications to OMB regulations have long been expected. Change in Admin set back their release, but expected soon. 19

20 Treasury: Revision of FICA Replacement Plan Guidance FICA Replacement Plan requirements are outdated, need to reflect plan design changes made over last 27 years. Currently, no requirement that full-time participants be vested or that a minimum level of benefit be refunded upon termination. However, for part-time, seasonal, or temps, refund of employee contributions plus interest must equal at least 7.5 percent of comp. Some suggesting a version of part-time rule should also apply to full-time employees who leave employment prior to vesting. 20

21 ASB: Actuarial Standards of Practice (ASOP) Revisions Actuarial Standards Board) proposing changes to ASOP 4 to require market-based alternative liability measurement to be calculated, disclosed for all valuations for funding purposes. Defeasement measure = estimated cost to settle the liability, such as by transferring all risk, including investment and mortality risk, to an insurance company; could use present value of future benefits accrued to date using unit credit method, US Treasury rates. Equivalent to Market Value of Liabilities (MVL). NCTR, NASRA and NCPERS filed joint response; some expect new Exposure Draft to be issued. 21

22 The Mid-Term Elections Who the heck knows?!! Retirement issues do not seem to be on very many radar screens. Opponents of public plans focusing on crowding out message. Could be seen by GOP as a way to attack unions, Dems. Will the student anti-gun movement and teacher strikes serve to motivate and effectively mobilize Democrats and Moderates? Stay tuned! 22

23 The Lame Duck Again, depends on who won! If Democrats win House, then last best chance for GOP to push through priorities. Could affect SEC issues re: corporate governance. Hatch, Wyden likely to use a technical corrections tax bill to combine their Retirement Enhancement and Savings Act (RESA) with House-passed retirement provision included in Tax Reform 2.0. Could be opportunity to get Hatch s annuities proposal passed, perhaps include PEPTA and new CODA provision. Joint Select Committee on Multiemployer Pensions deal on Taft- Hartley plans, if reached, could include PEPTA sweetener for GOP. Lame Ducks can be treacherous! 23

24 2019 and Beyond Once again, who won? New House, Senate members will need to be educated on public pension issues. Also, much will depend on the status of the Special Counsel investigation. Impeachment proceedings will suck all the air out of the room. Democratic control of one or both Houses will likely much improve outcomes on issues of concern to public pension plans in However, our opponents outside the Congress will remain busy, and the issues of legacy costs and their impact on funding will continue to fan the crowding out flames. And this will only increase pressure for some kind of Federal solution. 24

25 Questions? 25