Washington Outlook. Presentation to The California State Teachers Retirement Board. John S. Stanton February 1, 2017

Transcription

1 Washington Outlook Presentation to The California State Teachers Retirement Board John S. Stanton February 1, 2017

2 Key Federal Initiatives The New Administration s Team Overview of the Coming Months in Congress Tax Reform Implications for Public Plans Health Care Dodd-Frank Repeal? Rollback? Fiduciary Retirement Investment Advice Rule Social Security: o Mandatory Social Security o Brady WEP Relief Bill Legislation Aimed at Public Plans: o PEPTA o Senate Finance Chairman Hatch s SAFE Retirement Act Infrastructure 2

3 New Administration s Cabinet Nominees Trump s cabinet nominations, to date In order of succession to the Presidency Secretary of State Rex Tillerson Secretary of the Treasury Steven Mnuchin Secretary of Defense James Mattis Attorney General Jeff Sessions Secretary of the Interior Ryan K. Zinke Secretary of Agriculture Secretary of Commerce Wilbur Ross Secretary of Housing and Urban Development Ben Carson Secretary of Labor Andrew Puzder Secretary of Transportation Elaine Chao Secretary of Health and Human Services Tom Price Secretary of Energy Rick Perry Secretary of Education Betsy DeVos Secretary of Veterans Affairs Secretary of Homeland Security John Kelly Sources: National Journal, December 23, 2016.

4 New Administration White House Senior Staff and Special Advisers Reince Preibus Chief of Staff Mick Mulvaney Director of Office of Management and Budget Michael Flynn National Security Advisor Steve Bannon Chief Strategist and Senior Counselor to the President Kellyanne Conway Counselor to the President Donald F. McGahn White House Counsel Gary Cohn Chairman, National Economic Council Jason Greenblatt Special Representative for International Negotiations Carl Icahn Unpaid special adviser on regulatory overhaul 4

5 Overview of the Coming Months in Congress Key Legislative Agenda Items: Budget for FY 2017 (which began October 1, 2016) FY 2017 Budget Reconciliation Legislation Vehicle to Repeal Affordable Care Act and Then? Budget for FY 2018 (begins October 1, 2017) FY 2018 Budget Reconciliation Legislation Vehicle for Tax Reform Appropriations for FY 2017 to Keep Federal Government Operating Appropriations for FY 2018 Debt Ceiling Extension Tax Reform Legislation 5

6 Tax Reform Overview of Key Elements Business Tax Reform: 20% corporate tax rate (down from 35%) 25% rate pass-throughs business income Full immediate write-off of capital investment Repeal of interest expense deductibility Applies to all businesses other than financial institutions Territorial tax system overseas earnings free of U.S. tax Repatriation of existing overseas earnings at concessional tax rate VAT-like Border Adjustment U.S. exports free of U.S. tax; U.S. imports taxed at 20% 6

7 Tax Reform Overview of Key Elements Individual Tax Reform: Top rate cut to 33% (other rates 25%, 12%) Capital gains, dividends, interest taxed at 16.5% (12.5%, 6%) Tax exemption of State and municipal bonds in play Trump says not, but who knows? Mortgage interest and charitable deductions retained, but may be revised State and local tax deduction may go Estate tax repealed 7

8 Tax Reform Implications for Public Plans Potential implications for CalSTRS as State retirement plan: Stated W&M goal: Consolidate and reform the multiple different retirement savings provisions under current law. Possible one-size-fits all approach to everyday pension plan rules loss of myriad of special Federal tax rules tailored to unique features of public plans. Funding rules Tailored limits on benefits Exemption from nondiscrimination Consolidation of supplemental retirement plans: 401(k), 403(b), 457. Possible revenue source to help pay for tax reform: Employer pick-ups (employee contributions to plan on pre-tax basis): $4.8 billion over 10 yrs. Possible legislative vehicle for Chairman Hatch s SAFE Retirement Act or even PEPTA. 8

9 Tax Reform Implications for Public Plans Potential implications for CalSTRS as investor: Repeal of deductibility of business interest expense. Impact on debt markets and availability of fixed income investments for CalSTRS portfolio. Border Adjustment System for taxing exports/imports: Heavy U.S. direct exporters benefit U.S. Federal tax removed on export revenue. Heavy U.S. importers could suffer Imports taxed at a flat 20% (effectively on gross value). o o o o U.S. industry sectors which could be most adversely affected: retailers, auto, computer and electronics, apparel, oil refining (especially gasoline), furniture, primary metals. Highly-leveraged, low margin, import-reliant businesses could be most affected. Proponents says U.S. dollar will increase in value from export demand, offsetting hit faced by importers. Brave assumption in a complex world : Incomplete dollar adjustment could pressure importers profit margins and trigger consumer price inflation. 9

10 Health Care Repeal Affordable Care Act and Then What? The factions in Congress: o o o Repeal, Replace, and Rebrand Repeal, Declare Victory, and Go Home Deficit Hawks: Why Stop There, Let s Go On to Reform Medicare and Medicaid Traditional GOP ideas: Expand Health Savings Accounts, coupled with high deductible catastrophic coverage High-risk pools for those with pre-existing conditions who can t get affordable coverage Tax credits for those with low incomes to buy insurance on private market Health plan competition across State lines Small business employer pooling The brick in the middle of the wall : the mandate to purchase health insurance The Concern: Without a mandate to buy, many younger and healthy people don t, pushing rates up significantly for everyone else. 10

11 Health Care Repeal Affordable Care Act and Then What? What happens in the interim after repeal with delayed effective date? How to keep insurers in existing exchanges from fleeing the market? What about all of the Governors, particularly the GOP Governors, who expanded Medicaid coverage in their States under the Affordable Care Act? How does the GOP keep all of its factions together in the House to pass a replacement and then in the Senate which likely will require 60 votes amid a 52 vote GOP majority? 11

12 Dodd-Frank Repeal? Rollback? The Key Players: House: House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) and Ranking Member Maxine Waters (D-Ca.) Senate: Senate Banking Committee Chairman Mike Crapo (R-Id.) and Ranking Member Sherrod Brown (D-Ohio) Administration: Nominee for SEC Chairman Jay Cutler, Wall Street securities transaction lawyer Former Goldman Sachs partner, Treasury Secretary nominee Steven Mnuchin Wither the populist campaign message of Steven Bannon? Administration Wild Card: Carl Icahn, who is to advise on regulatory overhaul generally, but is expected to give special focus to SEC rules and supports universal proxy ballot. Who will come through the door: Icahn the businessman? Icahn the investor who tells the financial press, We don t hold our managements or boards accountable enough? 12

13 Dodd-Frank Repeal? Rollback? The Template in the House: Chairman Hensarling s Financial CHOICE Act Repeal or weaken Dodd-Frank corporate governance reforms: Repeal SEC authority to issue proxy access rules Reduce frequency of say-on-pay votes on executive compensation Reduces scope of executive compensation clawback to those who control financial reporting, rather than all who were unjustly enriched Repeals disclosure of hedging by executives and directors Broadens exemption from Sarbanes-Oxley internal controls requirements: outside auditors no longer need attest to internal financial controls for companies below $250 million in market capitalization Requires registration and regulation of proxy advisory firms Repeals registration, disclosure (fees, conflicts), and SEC examination requirements for advisors to private equity funds Imposes new barriers on SEC s ability to issue guidance on fiduciary role of investment advisors 13

14 Dodd-Frank Repeal? Rollback? Replaces SEC s existing economic analysis for rulemaking with onerous cost-benefit analysis requirement, where benefits to protecting investors are not easily measured. Repeals the Volcker Rule that bars banks from proprietary trading and restricts banks ability to invest in private equity or hedge funds. Subjects the Consumer Financial Protection Bureau (CFPB) to the Congressional control and oversight of funding through annual appropriations; replaces sole director with a commission. Repeals Financial Stability Oversight Council s (FSOC) ability to designate non-bank financial institutions as systemically important financial institutions. Repeals FSOC s ability to take over troubled systemically important financial institutions, and substitutes a new untested bankruptcy process. 14

15 Dodd-Frank Repeal? Rollback? The Way Ahead in the Senate Legislation to revise Dodd-Frank likely will require 60 votes in the Senate, meaning at least 8 Democrats must join with their GOP colleagues in support. This gives Senate Democrats a significant say in any effort to revise Dodd-Frank. Incoming Senate Banking Chairman Crapo has worked across the aisle with Committee Democrats on a more modest package of revisions to Dodd-Frank principally aimed at small and regional banks (which remain unenacted). What Happens on the Regulatory Side? The sheer breadth of Dodd-Frank left much of the detail to agency rule-making. While efforts may be made to roll back some of these rules by executive action, reversing final regulations can be a cumbersome process, especially where industry has spent hundreds of millions or more developing new systems for compliance and is concerned about the rules of the game continually changing. 15

16 DoL Fiduciary Rule for Retirement Investment Advice U.S. Labor Dept. s controversial best interest rule for retirement advice Retirement investment advice fiduciary duty to act in client s best interest Advisor must adopt policies and procedures to mitigate conflicts of interest Advisor must disclose conflicts that may interfere with best interest Compensation must be reasonable in relation to services provided to client Rule does not ban common compensation practices e.g., commissions, revenue-sharing Financial advisors can still provide general education on retirement savings Delayed effective date until April, 2017 for implementation 16

17 DoL Fiduciary Rule for Retirement Investment Advice Outlook Again, brokerages have spent tens of millions on implementation in the face of the April 2017 deadline, with such efforts likely to continue for the near term. Possible Administration Executive Order to delay or block application of the final rule. While Congressional Republicans have voiced their displeasure with the DoL fiduciary rule, it remains to be seen whether legislation to delay or reverse the rule could surmount the necessary 60-vote Senate threshold H.R. 355 Protecting American Families Retirement Advice Act (Rep. Joe Wilson, R-SC) would delay effective date 2 years after bill is enacted. 17

18 Social Security Mandatory Coverage; Relief from WEP Offset Mandatory Social Security Social Security reform not seen as a front-burner issue so far in the new Congress Eternal vigilance still necessary: remains a politically attractive revenue-raiser: front-end revenue and Feds always come out ahead (never reverses into revenue-loser) WEP Relief Proposal (H.R. 711) Reps. Brady (R-Tex.), Neal (D-Mass.) WEP offset to be based on actual earnings and work history, not current arbitrary formula Approach: SS benefits computed using all earnings (SS covered and non-covered), then multiplied by percentage of all earnings that were covered by SS Problem: How to pay for it, so the legislation is revenue neutral Once dropped controversial provision seeking repayments for the past from retirees who should have been subjected to WEP but were not, then relief for current retirees reduced from 50% of the WEP penalty to very modest amount (reportedly about 15%), costing public employee group support. 18

19 Public Employee Pension Transparency Act (PEPTA) H.R in the last Congress Number of Co-Sponsors dropped from 51 to 8 over the last 2 Congresses. Plan MVL Reporting Required as Condition for Federal Tax Exemption for State s Bonds No Federal Bailouts of Public Plans 19

20 Secure Annuities for Employee Retirement (SAFE) Act Sponsor: Senate Finance Chairman Hatch (R-Utah) Intended to shift retirement benefit risk away from public employer Voluntary for State/local employers Approach: Private sector life insurance company fixed income, lifetime annuity purchased annually for each employee thru employer contributions. Employer conducts annual competitive bidding process for each year s annuities Annual contribution for employee limited to 20% of employee s compensation up to limit of $255,000 No plan trust Exemption from Federal tax law requirements for pension plans Backed by State life company guaranty associations v. full faith and credit of the State Public employer can also establish DB or DC plan 20

21 Infrastructure Trump campaign platform o Private sector financing approach for $1 trillion of infrastructure investment over 10 years o Central concept: 82% tax credit to private investors willing to invest in equity portion of projects Government to recoup tax credit cost from taxes on wages from new jobs, contractor profits Tax on U.S. multinationals accumulated offshore earnings o Congressional Democrats (Trump also?) Use toward new infrastructure spending o Congressional Republicans Use toward lower corporate rate under tax reform Hill R s also wary of costly new spending program for infrastructure Next step for Trump Administration: Appoint a Task Force 21

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