2006 Retirement Roundup and Insights for 2007: Public Sector Pension Plans May Come under Scrutiny from Congress during 2007

By Berger, Barrie Tabin | Government Finance Review, December 2006 | Go to article overview

2006 Retirement Roundup and Insights for 2007: Public Sector Pension Plans May Come under Scrutiny from Congress during 2007


Berger, Barrie Tabin, Government Finance Review


Despite active campaigning for the 2006 mid-term elections, members of Congress spent significant time this year considering important changes in the areas of pension and retirement. In 2007, finance directors and pension professionals can expect to see continued attention paid to these issues as the U.S. Departments of Treasury and Labor flush out the specifics of the Pension Protection Act, Congress requests information about public sector benefit plans, and the President and Congress jockey to restructure Social Security.

PENSION PROTECTION ACT OF 2006

President Bush signed the long-anticipated Pension Protection Act of 2006 on August 17 (P.L. # 109-280). Although most of this legislation is aimed at shoring up private sector defined benefit (DB) plans and stabilizing the finances of the Pension Benefit Guaranty Corporation (PBGC), a coalition of representatives from state and local governments, public pension plans, and public sector employee unions (referred to as the Public Pension Network (PPN)) worked hard to ensure that several provisions important to the public sector were included in the final legislation. These provisions are discussed in more detailed in the accompanying chart (see page 59).

Over the next several months, the Departments of Labor and Treasury will be crafting regulations to implement the new legislation. Questions are arising regarding the enforcement of certain provisions of the Act, including tax-free distributions from plans for public safety retiree health and long-term care, the exception to the 10 percent early withdrawal penalty for public safety employees, and several new rollover provisions. During the regulation stage, the GFOA and other PPN members will continue to provide comments to the implementing federal agencies and offer guidance to GFOA members.

CONGRESSIONAL INQUIRES INTO PUBLIC DB PLANS

During the negotiations and enactment of the Pension Protection Act, Congress closely examined private sector DB plans. The general sentiment on Capitol Hill is that the legislation successfully remedied many private sector funding issues. This feeling of achievement, coupled with increased media attention to the underfunding of public plans and liabilities for other post-employment benefits (OPEB), seems to have persuaded Congress to turn its attention to the current state of public sector DB plans.

This past July, Senators Chuck Grassley (R-IA), chairman of the Senate Finance Committee, and Max Baucus (D-MT), ranking member of that committee, sent a letter to the Government Accountability Office (GAO) asking the agency to "explore a variety of issues regarding state and local DB pensions and the accompanying retiree health benefits." The letter noted that the study was needed "to help public employees avoid the benefit losses and reduced accruals experienced by their private sector counterparts ..."

In response to this study request, the PPN sent a letter to Senators Grassley and Baucus as well as to David Walker at the GAO clarifying some common misperceptions regarding the financial conditions of public plans and expressing a desire to assist GAO in compiling accurate information for its study.

In late August, the Subcommittee on Employer-Employee Relations of the House Committee on Education and the Workforce held a field hearing in Springfield, Illinois, entitled" Examining the Retirement Security of State and Local Government Employees: GFOA, along with 26 members of the PPN--representing state and local governments, public employee unions, and public retirement systems--submitted written testimony.

In its testimony, the PPN group noted that "public sector plans are in good shape, on the aggregate having pre-funded over 86 percent of future retirement benefits." The testimony pointed out that public plans are backed by the full faith and credit of their sponsoring state and local governments, which provide greater protections to plan participants than those offered by the Employee Retirement Income Security Act (ERISA) or the PBGC. …

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