<DOC> [106th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:57737.wais] H.R. 807, FEDERAL RESERVE BOARD RETIREMENT PORTABILITY ACT ======================================================================= HEARING before the SUBCOMMITTEE ON THE CIVIL SERVICE COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS FIRST SESSION ON H.R. 807 TO AMEND TITLE 5, UNITED STATES CODE, TO PROVIDE PORTABILITY OF SERVICE CREDIT FOR PERSONS WHO LEAVE EMPLOYMENT WITH THE FEDERAL RESERVE BOARD TO TAKE POSITIONS WITH OTHER GOVERNMENT AGENCIES __________ FEBRUARY 25, 1999 __________ Serial No. 106-19 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.house.gov/reform ______ U.S. GOVERNMENT PRINTING OFFICE 57-737 WASHINGTON : 1999 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania JOHN L. MICA, Florida GARY A. CONDIT, California THOMAS M. DAVIS, Virginia PATSY T. MINK, Hawaii DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York MARK E. SOUDER, Indiana ELEANOR HOLMES NORTON, Washington, JOE SCARBOROUGH, Florida DC STEVEN C. LaTOURETTE, Ohio CHAKA FATTAH, Pennsylvania MARSHALL ``MARK'' SANFORD, South ELIJAH E. CUMMINGS, Maryland Carolina DENNIS J. KUCINICH, Ohio BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois DAN MILLER, Florida DANNY K. DAVIS, Illinois ASA HUTCHINSON, Arkansas JOHN F. TIERNEY, Massachusetts LEE TERRY, Nebraska JIM TURNER, Texas JUDY BIGGERT, Illinois THOMAS H. ALLEN, Maine GREG WALDEN, Oregon HAROLD E. FORD, Jr., Tennessee DOUG OSE, California ------ PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont JOHN T. DOOLITTLE, California (Independent) HELEN CHENOWETH, Idaho Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director David A. Kass, Deputy Counsel and Parliamentarian Carla J. Martin, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on the Civil Service JOE SCARBOROUGH, Florida, Chairman ASA HUTCHINSON, Arkansas ELIJAH E. CUMMINGS, Maryland CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington, JOHN L. MICA, Florida DC DAN MILLER, Florida THOMAS H. ALLEN, Maine Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California George Nesterczuk, Staff Director Garry Ewing, Counsel John Cardarelli, Clerk Tania Shand, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on February 25, 1999................................ 1 Text of H.R. 807................................................. 6 Statement of: Kelley, Edward W., Jr., Governor, Federal Reserve System; and William E. Flynn, III, Associate Director, Retirement and Insurance Services, Office of Personnel Management......... 13 Letters, statements, etc., submitted for the record by: Cummings, Hon. Elijah E., a Representative in Congress from the State of Maryland, prepared statement of............... 9 Flynn, William E., III, Associate Director, Retirement and Insurance Services, Office of Personnel Management: Information concerning portability....................... 47 Prepared statement of.................................... 31 Kelley, Edward W., Jr., Governor, Federal Reserve System: Information concernign Thrift Savings Plans.............. 51 Prepared statement of.................................... 16 Norton, Hon. Eleanor, a Representative in Congress from the District of Columbia, followup questions and responses..... 54 Scarborough, Hon. Joe, a Representative in Congress from the State of Florida, prepared statement of.................... 3 H.R. 807, FEDERAL RESERVE BOARD RETIREMENT PORTABILITY ACT ---------- THURSDAY, FEBRUARY 25, 1999 House of Representatives, Subcommittee on the Civil Service, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10:37 a.m., in room 2247, Rayburn House Office Building, Hon. Joe Scarborough (chairman of the subcommittee) presiding. Present: Representatives Scarborough, Morella, Cummings, and Norton. Staff present: George Nesterczuk, staff director; Gary Ewing, counsel; John Cardarelli, clerk; Ned Lynch, senior research director; Jeff Shea, professional staff member; Tania Shand, minority professional staff member; and Jean Gosa, minority staff assistant. Mr. Scarborough. Good morning. Let me begin by welcoming my colleagues to the first hearing of the Civil Service Subcommittee for the 106th Congress. Continuing their service on the subcommittee for the majority is the former chairman, Mr. Mica, and Mrs. Morella. The new members for the majority are Mr. Hutchinson, the gentleman from Arkansas, and Mr. Miller, my friend from the great State of Florida. For the minority, the ranking member is Mr. Cummings, who is continuing his service, as is the gentlelady, Ms. Norton. Mr. Allen of Maine is a new member on the minority side. I would like to welcome all the Members and look forward to a productive working relationship with my colleagues on the subcommittee. Our jurisdiction is rather broad, covering pay and benefits for Federal workforce employees, and includes the rules for hiring, rewarding, and disciplining the employees. For those times when disputes arise or disciplinary actions are taken, a fairly elaborate appeals system has been established. This will also be falling in our jurisdiction. As we deal with these matters, I want to assure everyone of my commitment to the principle that excellence in the workplace should be rewarded consistent with the contribution to public service. We do have a responsibility, as stewards of the public interest, to ensure that our investment in human capital provides effective service for the American people so that their hard-earned tax dollars are spent wisely. We have already begun our work with the markup of H.R. 416, the Retirement Corrections bill, on February 3rd. I expect that bill will be taken to the floor of the House in the next few days. Next month we will hold hearings on extending long-term care insurance benefits to Federal employees, and examine some additional employee benefit issues. Today we are going to review the operation of two different pension systems within the Federal benefits structure. The examples before us compare a well-funded system, supported by long-term investments, with a system that has--for nearly 80 years--existed on a ``pay-as-you-go'' basis, with no substantial investment directed to the payment of future benefits. Under current law, employees of the Federal Reserve System, which is a well-funded system, who might desire to continue their Federal service with other agencies, face portability problems. These barriers limit their ability to gain credit under the Federal Employment Retirement System for their service with the Federal Reserve Board. After this hearing we will mark up legislation that will finally remove this impediment to greater mobility in Federal agencies. Because nearly 80 percent of the Fed's pension program is invested in a diversified portfolio of equities, it is thriving. Over the past 10 years it has averaged nearly a 16 percent annual return on investment, and the Fed has no unfunded liability. Instead, it has assets with an estimated value of more than $7 billion that enable it to provide a better benefit than FERS. In contrast, the Civil Service Retirement and Disability Fund has reported unfunded liabilities exceeding $512 billion. While the market has thrived, the system has experienced declining interest rates on its holdings of Treasury securities. Even worse, because taxpayers must redeem both the principal and any interest attributed to these Treasury securities, each year Federal employees and annuitants face the specter of COLA delays, increased retirement deductions from their pay, or possible changes in the terms of their benefits-- all traceable to the need to appropriate money to pay the accrued benefits. These pressures are not accidental. They are a direct result of a design flaw that relies on future tax receipts to pay for growing retirement liabilities. The Federal Reserve's management of its retirement system demonstrates that it is possible to fund full benefits for employees without imposing a growing burden on future taxpayers. [The prepared statement of Hon. Joe Scarborough follows:] [GRAPHIC] [TIFF OMITTED] T7737.001 [GRAPHIC] [TIFF OMITTED] T7737.002 Mr. Scarborough. I look forward to our witnesses' discussions on the differences between these systems, and I certainly hope that we can gain some useful insights on managing the Civil Service Retirement System more effectively and wisely. Now I would like to turn it over to my ranking member and friend, Mr. Cummings, for any comments he may have. Mr. Cummings. Thank you very much, Mr. Chairman. I want to congratulate you on your appointment, and I certainly look forward to working with you and all the other subcommittee members. I am glad that we are starting off this session with an issue that has bipartisan support. Under current law, if an employee of the Federal Reserve Board leaves to work for another Federal agency, the employee is required to join FERS, the Federal Employees Retirement System. Under the current FERS statute, time spent working at the Board after 1988 does not count as ``creditable service'' toward a FERS annuity. Though they have not had a break in Federal service, affected employees will receive smaller pensions upon retirement. This outcome resulted from an oversight that occurred when the FERS statute was written in the late 1980's. It affects Federal Reserve Board employees hired after 1983 who have worked at the Board after 1988. In human terms, the problem affects about 50 employees who have already left the Board for other agencies, and potentially affects about 1,000 people-- about 60 percent of the Board's current workforce--should they move to other agencies and then retire under FERS. Over time, unless the problem is fixed, an even larger proportion of the Board's workforce will potentially be adversely affected. It is worth noting that employees who come to work at the Board from other Federal agencies do not have a comparable problem, because the Board's retirement plan gives all Board employees full credit toward retirement for all their Government service. H.R. 807 solves this problem of unequal treatment. It makes post-1988 Board service ``creditable service'' under FERS. As a result, affected employees will get the pensions they have earned, the pensions they should get--pensions that reflect all their Federal service. The employees, however, will have to give up any Board pension they would otherwise get and make a contribution to FERS to ``buy'' credit for the Board time. This quid pro quo is fair, prevents ``double dipping,'' and ensures that those who benefit will be treated the same as other Federal employees under FERS. The bill is similar to language in current law that addresses the same problem for Foreign Service employees. I understand that this legislation has been discussed with staff at OPM, who agree that there is a problem, that the problem should be fixed, and that this legislation does so appropriately. [The text of H.R. 807 follows:] 106th CONGRESS 1st Session H. R. 807 To amend title 5, United States Code, to provide portability of service credit for persons who leave employment with the Federal Reserve Board to take positions with other Government agencies. ______ IN THE HOUSE OF REPRESENTATIVES February 23, 1999 Mr. Scarborough (for himself, Ms. Norton, Mr. Cummings, Mrs. Morella, Mr. Hoyer, Mr. Davis of Virginia, Mr. Moran of Virginia, Mr. Waxman, and Mr. Mica) introduced the following bill; which was referred to the Committee on Government Reform ______ A BILL To amend title 5, United States Code, to provide portability of service credit for persons who leave employment with the Federal Reserve Board to take positions with other Government agencies. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the ``Federal Reserve Board Retirement Portability Act''. SEC. 2. PORTABILITY OF SERVICE CREDIT. (a) Creditable Service.-- (1) In general.--Section 8411(b) of title 5, United States Code, is amended-- (A) by striking ``and'' at the end of paragraph (3); (B) in paragraph (4)-- (i) by striking ``of the preceding provisions'' and inserting ``other paragraph''; and (ii) by striking the period at the end and inserting ``; and''; and (C) by adding at the end the following: ``(5) a period of service (other than any service under any other paragraph of this subsection, any military service, and any service performed in the employ of a Federal Reserve Bank) that was creditable under the Bank Plan (as defined in subsection (i)), if the employee waives credit for such service under the Bank Plan and makes a payment to the Fund equal to the amount that would have been deducted from pay under section 8422(a) had the employee been subject to this chapter during such period of service (together with interest on such amount computed under paragraphs (2) and (3) of section 8334(e)). Paragraph (5) shall not apply in the case of any employee as to whom subsection (g) (or, to the extent subchapter III of chapter 83 is involved, section 8332(n)) otherwise applies.''. (2) Bank plan defined.--Section 8411 of title 5, United States Code, is amended by adding at the end the following: ``(i) For purposes of subsection (b)(5), the term `Bank Plan' means the benefit structure in which employees of the Board of Governors of the Federal Reserve System appointed on or after January 1, 1984, participate, which benefit structure is a component of the Retirement Plan for Employees of the Federal Reserve System, established under section 10 of the Federal Reserve Act (and any redesignated or successor version of such benefit structure, if so identified in writing by the Board of Governors of the Federal Reserve System for purposes of this chapter).''. (b) Exclusion From Chapter 84.-- (1) In general.--Paragraph (2) of section 8402(b) of title 5, United States Code, is amended by striking the matter before subparagraph (B) and inserting the following: ``(2)(A) any employee or Member who has separated from the service after-- ``(i) having been subject to-- ``(I) subchapter III of chapter 83 of this title; ``(II) subchapter I of chapter 8 of title I of the Foreign Service Act of 1980; or ``(III) the benefit structure for employees of the Board of Governors of the Federal Reserve System appointed before January 1, 1984, that is a component of the Retirement Plan for Employees of the Federal Reserve System, established under section 10 of the Federal Reserve Act; and ``(ii) having completed-- ``(I) at least 5 years of civilian service creditable under subchapter III of chapter 83 of this title; ``(II) at least 5 years of civilian service creditable under subchapter I of chapter 8 of title I of the Foreign Service Act of 1980; or ``(III) at least 5 years of civilian service (other than any service performed in the employ of a Federal Reserve Bank) creditable under the benefit structure for employees of the Board of Governors of the Federal Reserve System appointed before January 1, 1984, that is a component of the Retirement Plan for Employees of the Federal Reserve System, established under section 10 of the Federal Reserve Act, determined without regard to any deposit or redeposit requirement under either such subchapter or benefit structure, or any requirement that the individual become subject to either such subchapter or benefit structure after performing the service involved; or''. (2) Exception.--Subsection (d) of section 8402 of title 5, United States Code, is amended to read as follows: ``(d) Paragraph (2) of subchapter (b) shall not apply to an individual who-- ``(1) becomes subject to-- ``(A) subchapter II of chapter 8 of title I of the Foreign Service Act of 1980 (relating to the Foreign Service Pension System) pursuant to an election; or ``(B) the benefit structure in which employees of the Board of Governors of the Federal Reserve system appointed on or after January 1, 1984, participate, which benefit structure is a component of the Retirement Plan for Employees of the Federal Reserve System, established under section 10 of the Federal Reserve Act (and any redesignated or successor version of such benefit structure, if so identified in writing by the Board of Governors of the Federal Reserve System for purposes of this chapter); and ``(2) subsequently enters a position in which, but for paragraph (2) of subsection (b), such individual would be subject to this chapter.''. (c) Provisions Relating to Certain Former Employees.--A former employee of the Board of Governors of the Federal Reserve System who-- (1) has at least 5 years of civilian service (other than any service performed in the employ of a Federal Reserve Bank) creditable under the benefit structure for employees of the Board of Governors of the Federal Reserve System appointed before January 1, 1984, that is a component of the Retirement Plan for Employees of the Federal Reserve System, established under section 10 of the Federal Reserve Act; (2) was subsequently employed subject to the benefit structure in which employees of the Board of Governors of the Federal Reserve System appointed on or after January 1, 1984, participate, which benefit structure is a component of the Retirement Plan for Employees of the Federal Reserve System, established under section 10 of the Federal Reserve Act (and any redesignated or successor version of such benefit structure, if so identified in writing by the Board of Governors of the Federal Reserve System for purposes of chapter 84 of title 5, United States Code); and (3) after service described in paragraph (2), becomes subject to and thereafter entitled to benefits under chapter 84 of title 5, United States Code, shall, for purposes of section 302 of the Federal Employees' Retirement System Act of 1986 (100 Stat. 601; 5 U.S.C. 8331 note) be considered to have become subject to chapter 84 of title 5, United States Code, pursuant to an election under section 301 of such Act. (d) Effective Date.-- (1) In general.--Subject to succeeding provisions of this subsection, this section and the amendments made by this section shall take effect on the date of enactment of this Act. (2) Provisions relating to creditability and certain former employees.--The amendments made by subsection (a) and the provisions of subsection (c) shall apply only to individuals who separate from service subject to chapter 84 of title 5, United States Code, on or after the date of enactment of this Act. (3) Provisions relating to exclusion from chapter.--The amendments made by subsection (b) shall not apply to any former employee of the Board of Governors of the Federal Reserve System who, subsequent to his or her last period of service as an employee of the Board of Governors of the Federal Reserve System and prior to the date of enactment of this Act, became subject to subchapter III of chapter 83 or chapter 84 of title 5, United States Code, under the law in effect at the time of the individual's appointment. - Mr. Cummings. I would caution against using this hearing to determine whether or not retirement fund assets should be invested in the private market. Investing retirement funds is a proposition that should be examined thoroughly with testimony from the administration, investment experts, and all other affected parties before any decision is made or action taken. I thank the witnesses for coming today to testify and I look forward to the subcommittee taking swift action on the bill. [The prepared statement of Hon. Elijah E. Cummings follows:] [GRAPHIC] [TIFF OMITTED] T7737.003 [GRAPHIC] [TIFF OMITTED] T7737.004 [GRAPHIC] [TIFF OMITTED] T7737.005 Mr. Scarborough. Thank you, Mr. Cummings. Now I would like to recognize the gentlelady from the District of Columbia, who is a great friend of residents of this capital city, Ms. Norton. Ms. Norton. Thank you very much, Mr. Chairman. I would like to thank our new chairman, Mr. Scarborough, and the ranking member, Mr. Cummings, for working together to bring this important issue before our subcommittee in such a timely fashion. I recognize that only 50 employees are now involved, but that number will accumulate, and for even 1 employee, this is a great burden and a burden that the employee should not have to bear at all because the oversight is ours. The legislation we take up today will cure that oversight, one created when we adopted the Federal Employees Retirement System. Essentially what we do here is to ensure that the affected Board employees are able to carry retirement benefits to new positions within the Federal Government. If one of the affected employees transfers to another Federal agency, she begins to accrue retirement benefits under FERS as though she were a new Government employee. The bill allows affected Board employees to transfer to another agency and elect to be treated as though previously serving the amount of time under the FERS program that she did under the Board retirement program. This bill has particular importance for the Thrift Savings Plan, since the employee will be able to contribute to the plan and ultimately receive the amount she would have received had she otherwise been in the plan. Particularly today, when 368,000 Federal employees have been down-sized and another 300,000 civilian and military personnel are likely to be targeted for some kind of down-sizing or privatization over the next 5 years, the ability to move to other Federal agencies without being penalized is fair and is essential. I look forward to hearing from today's witnesses and to the continued bipartisan support that this committee brings to this issue today. Thank you very much, Mr. Chairman. Mr. Scarborough. Thank you, Ms. Norton. Now I would like to ask our witnesses, since Government Reform is obviously an investigative committee, if you would stand up and take the oath before your testimony. [Witnesses sworn.] Mr. Scarborough. Thank you. Be seated. Today we are honored to have the Honorable Edward Kelley with us, who is Governor of the Federal Reserve System, and we also have William Flynn, III, known as Ed Flynn, the Associate Director of Retirement and Insurance Services for OPM. I would like to start with you, Mr. Kelley. STATEMENTS OF EDWARD W. KELLEY, JR., GOVERNOR, FEDERAL RESERVE SYSTEM; AND WILLIAM E. FLYNN, III, ASSOCIATE DIRECTOR, RETIREMENT AND INSURANCE SERVICES, OFFICE OF PERSONNEL MANAGEMENT Mr. Kelley. Good morning and thank you, Mr. Chairman. I would like to request that my full statement be placed in the record of these hearings. Mr. Scarborough. Without objection, so ordered. Mr. Kelley. Thank you. Mr. Chairman, Representative Cummings, Representative Norton, I am pleased to testify on behalf of the Board of Governors on the Federal Reserve Board Retirement Portability Act, H.R. 807, and to provide the subcommittee with information on the Federal Reserve Retirement System. The Board strongly supports this legislation. The bill would allow certain employees who leave the Board to work for other agencies and who then retire under the Federal Employees Retirement System, or FERS, to receive pensions reflecting all of their Federal service, which is not the case under current law. On behalf of the Board and its employees, let me particularly thank you, Mr. Chairman Scarborough, and Representatives Cummings, Morella, Mica, Waxman, Norton, Davis, Hoyer, and Moran for introducing this important legislation. Quickly, by way of background, the Federal Reserve System has its own defined benefit retirement plan, composed of two parts: the Board Plan, covering Board employees hired before 1984--approximately 600 persons--and the Bank Plan, covering Board employees hired during and after 1984, and all employees of the Reserve Banks, in total about 24,000 persons. Mr. Chairman, the first half of my prepared statement covered the material which the three of you all, in your opening remarks, have already covered. I think it would be redundant if I repeated that. You all stated the issue very effectively. It is very clear that you understand it quite well, and I greatly appreciate your careful attention to this issue, which you have evidenced by your opening remarks. I think I will just skip over discussing the issues of this bill because you have effectively summarized it in virtually the same terms in which I was going to attempt to do it. Let me proceed, then, to respond briefly to the subcommittee's request for an overview of the Federal Reserve System Retirement Plan and information on the management of its pension plan assets. The Federal Reserve System Retirement Plan is a defined benefit plan, qualified under Section 401(a) of the tax code, consisting of the two benefit structures mentioned a moment ago. The plan provides retirement benefits for virtually all employees of the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Banks and the Board, as employers, are responsible to ensure the funding required to pay the benefits promised to participants, and have contributed to the plan at varying levels as determined necessary by the Plan Actuary. Since 1986, the Actuary has determined that no employer contributions are required, and currently the retirement plan's assets exceed both the plan's accrued liability, as well as its total liability. Plan assets based on a 5-year moving average as of January 1, 1998, were $4 billion, while the current value of plan assets at the end of 1998 was $5.8 billion. The total benefit obligation as of January 1, 1998, which includes both past and future service and future salary increases, was $3.5 billion, while benefits actually accrued to date were valued at $2.8 billion. The Federal Reserve Thrift Plan is the System's defined contribution savings plan, comparable to the Government's Thrift Savings Plan [TSP]. The Federal Reserve Thrift Plan differs from TSP in that it offers both pre-tax and after-tax savings components, a wider variety of investment options, and allows higher contribution rates--up to 20 percent of salary, subject to IRS limitations. The Federal Reserve System places fiduciary responsibility for the investment of both its defined benefit and defined contribution savings plans in a committee of five senior System officers. This oversight committee is currently comprised of three Federal Reserve Bank presidents, one member of the Board--and I serve in that capacity at this time--and the first vice president of the New York Reserve Bank. At the end of 1998, the pension and savings plans had investments valued at $8.1 billion, with $5.8 billion of that representing the pension plan assets. Our oversight committee distances itself from asset allocation and security selection decisions to avoid the appearance of a conflict of interest with the System. Instead, the committee functions as a ``manager of managers,'' selecting independent investment firms and giving them a common, balanced investment mandate, as set forth in our investment objectives and guidelines document, a copy of which has been provided to the subcommittee. This document is part of our investment advisory agreement with each firm, and delegates to them asset allocation decisions within broad parameters set by the committee, security selection, and the voting of proxies. Currently, eight firms are retained to manage our pension assets, of which about two-thirds were invested in equities as of year's end. I believe, Mr. Chairman, that you may have mentioned that 80 percent of our funds were invested in equities; it is actually about 65 or 66 percent, rather than the maximum allowable percentage of 80 percent. Managers are selected by written criteria that include past performance, desired equity and fixed income investment styles, trading and research capabilities, expense levels, and so forth. Management expenses for the entire plan are less than one-quarter of 1 percent of invested assets. A small staff in New York monitors portfolio activity and performance, reporting on both to the committee on a monthly basis. Performance of invested assets is measured against three benchmarks: first, versus the expected long-term rate of return for plan investments used in actuarial evaluation, which is currently 9 percent; second, versus a trailing 36-month composite return index; and third, in comparison to the plan's peer group in the Wilshire Trust Universe Comparison Service. I am pleased to be able to report that the plan has met or exceeded each of those benchmarks over many years. Thank you, Mr. Chairman. I would be pleased to attempt to answer any questions that the committee may have. [The prepared statement of Mr. Kelley follows:] [GRAPHIC] [TIFF OMITTED] T7737.006 [GRAPHIC] [TIFF OMITTED] T7737.007 [GRAPHIC] [TIFF OMITTED] T7737.008 [GRAPHIC] [TIFF OMITTED] T7737.009 [GRAPHIC] [TIFF OMITTED] T7737.010 [GRAPHIC] [TIFF OMITTED] T7737.011 [GRAPHIC] [TIFF OMITTED] T7737.012 [GRAPHIC] [TIFF OMITTED] T7737.013 [GRAPHIC] [TIFF OMITTED] T7737.014 [GRAPHIC] [TIFF OMITTED] T7737.015 [GRAPHIC] [TIFF OMITTED] T7737.016 [GRAPHIC] [TIFF OMITTED] T7737.017 [GRAPHIC] [TIFF OMITTED] T7737.018 Mr. Scarborough. Thank you, Mr. Kelley. We appreciate it. Mr. Flynn. Mr. Flynn. Mr. Chairman, good morning. I want to thank you and members of the subcommittee for inviting us to testify today to discuss the Federal Reserve Board's service credit proposal. The Board's proposal would make service credit available under the Federal Employees Retirement System for post-1988 Board service covered by its retirement system. Very briefly, in setting a context for today's hearing, I point out that very few Federal employees are covered under retirement systems other than the Civil Service and Federal Employees Retirement System. With that in mind, providing credit under the Federal Employees Retirement System for employment with the Federal Reserve Board is, we believe, warranted. To the degree that participants or sponsors of other plans may seek service credit in a similar fashion, we think it makes sense to examine each of them on their own merits. Now, generally, under the old Civil Service Retirement System, all periods of service as a Federal employee under Title 5 can be used for retirement purposes, but only under a single retirement system. When the Federal Employees Retirement System was created, it was designed as a fully funded system, paid for by employer and employee contributions. Following a transition period that ended at the end of 1988, service credit for civilian employment is available only for service that was covered under the system at the time that it was performed. The original Federal Employees Retirement System Act did, however, include one exception. It provided service credit for post-1988 non-covered service performed under the Foreign Service Retirement System, and under that exception a former Foreign Service employee waives credit under the Foreign Service System and pays a deposit equal to the contributions, with interest, he or she would have made to the Federal Employees Retirement System. Credit may be similarly transferred by an employee between retirement systems in the opposite direction. Now, by statute, there are no explicit funding provisions for these transfers covering employer contributions to the respective systems. The provisions work because there is reciprocity between the two systems. Since credit goes both ways, the effect is to offset the cost of credit by savings from service transfers. Now, there is no evidence that this mechanism for the Foreign Service was created exclusively for that system, so it is likely that the lack of similar provisions for Title 5 service in other retirement systems was inadvertent. Historically, transfers of employees between Title 5 employment and the Federal Reserve Board have been common. After 1988, however, the Board found that individuals were reluctant to transfer because they knew that the time could not be credited if and when they returned to Title 5 employment. Accordingly, we worked closely with the Board's staff to create the proposal before you today. In terms of both policy and funding, it was logical to provide for service credit on the same basis as for Foreign Service employment. We believe it is a good bill that provides a reasonable solution to the matter. Mr. Chairman, your invitation also posed several questions related to funding of the Government's retirement systems. In particular, your letter asks whether there are other Federal retirement systems invested in equities, and what the state of their funding is. The GAO report from 1996, mentioned in your letter, offers an answer to that question. While the figures could be updated, the investment placement in unfunded liabilities of all the retirement systems are in the appendix to that report. In the balance of your invitation letter, Mr. Chairman, you asked several additional questions relating to projected performance of the Retirement and Disability Fund under scenarios that envision investment of all or a portion of its assets in private securities. As you know, administration of the Civil Service and Federal Employees Retirement Systems and the Retirement and Disability Fund itself are matters that are governed by statute. As such, they reflect a broad consensus based on policy conclusions that have been ratified by Congress and the administration over many decades. Indeed, the creation of the Federal Employees Retirement System and the Thrift Savings Plan reflect the evolution of that consensus. The Federal Employees Retirement System explicitly recognizes that private savings can and do play an important and beneficial role in achieving income security in retirement. That system crafts a balance between the security of a defined benefit and the risks associated with private investment. The bottom line is that investment of retirement fund assets is an important and complex matter. We should be willing to regularly review those policies, but changes should be made only after careful and circumspect review, taking into consideration the views of all interested parties and mindful of the potential for profound budgetary and economic consequences from such changes. As just one example of that, I call the subcommittee's attention to the testimony of Mr. James Blum, referenced in your letter of invitation. His testimony from 1997 included a broad review of the policy issues associated with financing the Federal Government's retirement systems. He pointed out the consequences, both negative and positive, of varying approaches to funding retirement benefits, and those consequences remain as valid today as they were then. Mr. Chairman, that concludes my statement, and I would be happy to answer any questions you or other members of the subcommittee may have. [The prepared statement of Mr. Flynn follows:] [GRAPHIC] [TIFF OMITTED] T7737.019 [GRAPHIC] [TIFF OMITTED] T7737.020 [GRAPHIC] [TIFF OMITTED] T7737.021 [GRAPHIC] [TIFF OMITTED] T7737.022 [GRAPHIC] [TIFF OMITTED] T7737.023 [GRAPHIC] [TIFF OMITTED] T7737.024 [GRAPHIC] [TIFF OMITTED] T7737.025 [GRAPHIC] [TIFF OMITTED] T7737.026 [GRAPHIC] [TIFF OMITTED] T7737.027 Mr. Scarborough. Thank you, Mr. Flynn. I would like to start with some questions for Mr. Kelley, and I would like to just briefly compare the two systems that we are talking about today. As I read your attachment B to the Federal Reserve testimony, it appears that the Federal Reserve Bank Plan has a higher salary replacement and retirement than FERS, and that it costs the agency less. The numbers are pretty interesting. Of the two retirement systems that have comparable benefits, the Federal Reserve system appears to cost zero dollars to taxpayers--I think I went back to 1985 or 1986--whereas the Civil Service Retirement System right now does not have money in it. We are about half a trillion dollars in debt as far as liabilities go, and it costs the taxpayers and the Federal employees, I guess, if you add them together, an aggregate of about 11 or 12 percent. And that fluctuates, obviously, year to year. I would like to ask you, what provides the Federal Reserve System such an advantage in developing a retirement plan? Mr. Kelley. Well, the Federal Reserve System Plan was established in 1934, I believe, and it, from its earliest times, was able to invest more broadly than the Federal Government has invested its trust funds, and for many years it has had an equity component in it. As you know, since World War II the basic course of the equity market has been up, and that has obviously helped the funding position of the plan. Most particularly, since 1982, when the long bull market that we are presently in had its origins, the plan has done very well. Another point that I would make is that early on, right up until it became clear that we were substantially overfunded in this, when contribution ceased in 1986, the system itself had made very conservative--and by that I mean quite generous and substantial--contributions to the corpus of the fund. As a consequence, the funding was strong all along as a result of those contributions. Then that, of course, meant that there were funds in the plan to be able to take advantage of good markets when they came along. Mr. Scarborough. Are the taxpayers exposed to any liability for these Federal Reserve System benefits? Mr. Kelley. No, sir. We have built this plan so that the only way that taxpayers could in any way be adversely affected would be that if we had such an extended period of adverse investment results that our overfunding disappeared and we somehow got into an underfunded position, and had to make bookkeeping entries that recorded a debit against our income, which would result in us having to reduce the payments we made to the Treasury. Currently, this fund is better than just neutral for taxpayers. We are actually booking a credit against Federal Reserve income, in accordance with GAAP, as a result of this overfunded status of our plans, and that credit which we book into Federal Reserve income is remitted to the Treasury General Fund as a part of the income stream that we pay into the Treasury every week. So actually, the taxpayer is receiving a net benefit from this fund in that sense at this time. Mr. Scarborough. What is that credit currently? Mr. Kelley. I am not sure what the amount is. I believe it is on the order of $30 million or $40 million currently. It is a very complex calculation that is done in accordance with GAAP. Please do not ask me to recite to you how that accounting flows, but we would be glad to provide that to you if you would like to have it. Mr. Scarborough. I could ask you that question, but I would not understand the answer. [Laughter.] I went to the University of Alabama and I was very bad at math. Let me ask you this, though. I want to followup, because over the past 2 years this subcommittee has monitored the transition of assets managed by the District of Columbia Retirement Board to the Department of the Treasury. Like the Federal Reserve, the D.C. Retirement Board had equity assets, but these were funded at only about 45 percent of the retirement benefits. You know, in last year's omnibus appropriations bill the Secretary of the Treasury was directed to liquidate those assets, ``consistent with other Federal retirement programs,'' and to use $2.4 billion of that to pay for other spending. Now, the employees' pensions will be paid for by Federal taxpayers rather than out of the earnings of those investments. Let me ask you, if you will walk with me down this path, for a scenario for the Fed. Let's say we don't fix our Social Security problem, for instance, this year or any year, and at some point the economy drops into a recession and our surpluses disappear. Since we have not terminated any significant Government programs or reduced entitlement spending, we will reach 2013 with few resources and mounting Social Security deficits. The Secretary of the Treasury, who is short of funds, looks at the overfunded Federal Reserve Retirement Program and says, ``Hey, I have a deal for you. I will take the extra $20 billion in your retirement fund and assure you that your annuities will be paid from the full faith and credit of the American taxpayers.'' Mr. Kelley, how would you respond to the Secretary? That is question No. 1. Question No. 2 is, are there any firewalls that have been set up in this system to make sure that your surpluses are not raided? Mr. Kelley. Well, I think that the answer to the Secretary of the Treasury would be in terms of those firewalls. First of all, quite aside from the political implications of such a request, those funds that we are discussing that are in the Federal Reserve Retirement Plan do not reside with or under the power of the Board anymore. Once they go into that plan, they are exclusively and legally dedicated to funding the benefits that the Board has contracted for with its employees, and in that sense they belong to the beneficiaries. We have some good lawyers here in the room, and I am not a lawyer at all, but I do not believe it would be possible for us to touch that fund for that purpose if we should somehow desire to do so. Mr. Scarborough. OK. So your funds cannot be raided in the same way the D.C. funds were, then? Mr. Kelley. No, sir. Mr. Scarborough. OK. Let me ask you a question about whether there is any sort of rub here between your system and other systems. It has to do with the investing that you have talked about already in this committee. I have a couple questions for you. Alan Greenspan, in January, testified before the Ways and Means Committee, and they were talking about private investment of Social Security funds. Obviously, as you know, Chairman Greenspan opposed that, in part because there was the potential for politics getting involved in investment decisions. Nonetheless the Fed itself, in its own system, will invest with some guidelines; and the provision says, as you know, ``no investment should be made or continued in a company whose products or activities are subject to broad-based social or political censure.'' That vision is contained in a July 22, 1998 memo approved by the Committee on Investment Performance, and it certainly sounds like a preemptive strike against social investment. What was the first time it was introduced? When did such a provision first enter the Fed's guidelines? Mr. Kelley. My best recollection of that--and frankly, I am not very clear on the history of that provision--but I believe that it did come to the attention of the Investment Committee perhaps no further back than 1996 or 1997, and was considered for a period of time and eventually passed by the Investment Committee and became one of our guidelines. Mr. Scarborough. OK. And let me ask you this, because we are obviously comparing two systems, your system which is extremely successful--and one of the questions that we are going to have to ask not only about the future of other retirement systems, but also of Social Security, is how we walk this fine line, if you could provide me some guidance. Again, I want to key back on the words that are part of your guidelines which say that you are going to stay away from activities that are subject to broad-based social or political censure. Could you help put a little bit of meat on those bones? Would that include tobacco companies, gun companies, pharmaceutical companies that produce certain products that are objectionable? Help me out here. Mr. Kelley. Since that became one of our guidelines, it has not been further discussed in terms of any practical recommendation or suggestion that something be proscribed. So there is no flesh to put on those bones at this point. Mr. Scarborough. OK. Mr. Kelley. It has not been dealt with, as a practical matter, nor has any particular security of any sort been proscribed under that guideline. Mr. Scarborough. So there has not been an investment that your Board has wanted to move on that has been stopped because of that? Mr. Kelley. No, sir. Mr. Scarborough. OK. I wanted to ask a question or two of you, Mr. Flynn, briefly. When we read about the long-term problems facing the Social Security System, which is funded by the same pay-as-you- go mechanism, obviously, that most Federal retirement systems are funded under, citizens are alarmed because of a shortfall that could begin in the next 10 to 15 years, when the baby-boom generation starts to retire. Federal employees have been in such a shortfall condition for more than 20 years, and this year payroll deductions and employer contributions will provide less than one quarter of the funding needed to support current pensions. OPM's annual reports have projected that the shortfall will increase to more than $100 million annually within the next 20 years. In the 105th Congress, the Budget Committee directed this committee to reduce the deficit in direct spending by amounts of about $4 billion. The Budget Committee proposed options that included COLA delays, changing the retirement benefit calculation base from high-3 to high-5, and increased retirement contributions from employees and their agencies. Some tough choices have been made with respect to COLA delays and benefit cuts, but employees are paying more for their retirement benefits, and will be, at least for the next 4 years. Mr. Flynn, does the absence of funding that is independent of current receipts leave employees and annuitants continually vulnerable to proposals to delay cost of living adjustments, to reduce benefits in some other ways, or to increase contribution levels, or do other things that may not be helpful to Federal employees and retirees? Mr. Flynn. Mr. Chairman, that is a big question. Let me try and perhaps set a little context, and then give you an answer. The Civil Service Retirement and Disability Fund, the trust fund that we manage at the Office of Personnel Management, contains assets for two retirement systems: the old Civil Service Retirement System, that was essentially closed to new entrants in 1983, and the new Federal Employees Retirement System, to which almost all new Federal employees today are appointed. You talked a minute ago about the unfunded liability of the Retirement Fund. The unfunded liability, which is, as I think you indicated, Mr. Chairman, $512 billion or $518 billion, is an unfunded liability that is exclusively the product of the way in which the Government financed the older Civil Service Retirement System. The newer Federal Employees Retirement System is designed to be financed under Government financing mechanisms, to be financed on a fully funded, accruing basis, so that the employee contributions and agency contributions that are coming in every 2 weeks will finance the benefits of the participants in that system. So if I could, just real quickly, separate out where the unfunded liability is, and then talk about that just for a second, because it is something that oftentimes gets misunderstood and does in fact, from time to time, lead to suggestions in the context of the overall budget for reducing benefits, whether that be in the form of cost of living adjustments or different formulas for determining what a monthly annuity would be, and so on and so forth. The unfunded liability has been recognized. It has been recognized, disclosed, and reported since 1969. A series of amendments occurred in 1969 to limit the continued growth of the unfunded liability, and a series of legislative initiatives from 1969 until the creation of the Federal Employees Retirement System did the same thing. The Federal Employees Retirement System has a mechanism in it that ultimately will finance the unfunded liability of the Civil Service Retirement System. So there was, in 1983, specific legislative action agreed to by the Congress and ratified by the administration that deals with that unfunded liability over time. The second point that I want to make is that if you look at the Retirement and Disability Fund as consisting of two programs, the assets of the fund--that is to say, the assets of the older system and the newer system--are available to pay all the benefits required of the system. So even though, on an ongoing basis, receipts to the fund do not match outlays from the fund on a year-to-year basis, the fact of the matter is that the balance of the fund is available to pay benefits, and there will always be a balance available to pay benefits for as long as anyone cares to project into the future. Now, when it comes to the Federal budget at large--not just the retirement system--the manner in which Federal programs are financed does make these retirement programs, and other programs, subject to scrutiny from 1 year to the next. That is part of the process and that is something that we have all had to deal with. There have been hearings here and in other forums about protecting the Government's retirement fund from those kinds of situations, and there are views, obviously, on both sides of the question. But just to set that as a context, I hope that helps a little bit. Mr. Scarborough. It does. And I have a few more questions, but I would like to pass it over to the ranking member, Mr. Cummings. Mr. Cummings. Thank you, Mr. Chairman. I am trying to figure out, Mr. Kelley, the timing of this legislation here. Can you kind of just give us a little more background as to why we are acting now? And was there something in particular that made this happening right now very important? I understand what the problem is; I am just trying to figure out---- Mr. Kelley. No, you do indeed. Your summary was excellent. But there are two things that I would mention there. No. 1 is that if anyone who is caught in this situation at this time, whereby they have this split pension calculation under current law, if they were to retire now or before this legislation is passed, their retirement would be figured on the current law basis and they would be stuck. To my best knowledge that has not happened to anyone yet, but it could at any time, because of course, folks get a year older every year. It will happen if the law does not pass. We have been aware of this for some time, and I believe this legislation has been around for 5 years now, and another phenomenon is happening. I believe you were the one who summarized a number of employees at the Board who are in this dilemma at this time, in that they are covered by what we call the Bank Plan due to their post-1984 employment. The ones who have full reciprocity under present law are our older employees, who are covered by our Board Plan, which is fully fundable back-and-forth with the CSRS. But the phenomenon that I would point out to you is that these are older employees who currently enjoy adequate portability, and they are going to decline in number over time. And meanwhile, the ones who have come to the service post-1984 are slowly going to become all of our employees; and over the course of a very few years, if this were to languish, our entire workforce would be in this unidirectional problem. So I believe there is considerable urgency in those two senses to get this done. Mr. Cummings. Now, with regard to your hiring new people, do you believe or have evidence that this has been a factor in whether people come on with you? Mr. Kelley. I am told that it is, because people like to have the thought that they can transfer to other agencies and perhaps come back to the Board, and perhaps come to the Board briefly and then go back to their home agencies. So as you or perhaps the chairman observed, there is not a huge number of these individuals--I guess it was Ms. Norton--but even though they are not many, they are very important Government servants who are providing important service to our country, and I do not believe that they ought to be inhibited or disadvantaged in their ability to provide that service at the highest and best location that they are called to. But there is, under this present law, a very meaningful inhibition on the part of folks who are in this situation to move about and perhaps pursue their career objectives at the highest and best level. Mr. Cummings. Now, this is modeled after the Foreign Service law, is that right? It was an effort to correct the Foreign Service situation, is that correct? Mr. Kelley. I do not think anyone is clear as to how this happened, and our folks have tried to find some reference in the legislative history here. But somehow, when the new plan got set up in 1983, there was a provision made for the Foreign Service, which is exactly what we need--but only for the Foreign Service. Mr. Cummings. Mr. Flynn, do you know of any other agencies that this would apply to? This is it? In other words, agencies in a similar situation? Mr. Flynn. There are a number of other Federal retirement systems, Mr. Cummings, where this potentially could apply, but generally speaking they are small, specialized retirement plans for Federal judges, members of the Farm Credit System, things of that nature. I think that with the Foreign Service Retirement System and the Federal Reserve Board, we are probably looking at the two retirement systems where this would be most likely to occur. We would not expect to see it in others, but we certainly would be willing to look at the interest of others if that should materialize. Mr. Cummings. So nobody has presented a case to you? Mr. Flynn. No. Mr. Cummings. I am just wondering, we have a situation where we are trying to correct a problem. I think you said, Mr. Kelley, that it has been around for a while. Mr. Kelley. Yes, sir. Mr. Cummings. Since I am fairly new to the Congress, I am just curious. Has there been an objection to it? Or is just language in the legislative process? What has been the issue, do you know? Mr. Kelley. Well, I personally am new to this issue, also. It has fairly recently come to my attention. But I am told that we have been aware of it for some time, and it has been presented to the Congress before, but before H.R. 807 it has always been mixed up in other legislation and for one reason or another fell by the wayside in the process and just never got done. Mr. Cummings. Mr. Flynn. Mr. Flynn. Mr. Cummings, I would agree with Governor Kelley. This is a matter that we have known about. The numbers are small. There have been provisions under consideration in the past, and I think it has gotten ripe at this point. But I am not aware of any objections in the past. Mr. Cummings. OK. I thought maybe there was something that we were missing. When you get this kind of bipartisan spirit, you begin to wonder whether we are missing something. [Laughter.] Mr. Flynn, you noted that the GAO report is 3 years old? Mr. Flynn. Yes, sir, 1996. Mr. Cummings. Yes. Is that significant? I mean, should it be updated? Mr. Flynn. I do not think it is particularly significant. It is a broad overview of the Federal retirement systems that are available. The appendix to the report, obviously, is going to contain financial information that is that old or older, because it takes time to collect it. And with the exception of reflecting, for example, the performance of the equity markets over those past 3 years, I do not think that substantively there would be any particular reason to suggest that it is out of date and needs to be updated. Mr. Cummings. So I take it that if we do not act on this soon, this year or next year, it just creates more problems for more people? Mr. Flynn. Yes, sir. Mr. Cummings. All right. Thank you very much. Mr. Scarborough. Thank you, Mr. Cummings. Just a couple of quick followups. First of all, if I am not mistaken, in the 104th Congress we did pass this reform out of this subcommittee and committee and the House. It was attached to another bill, which was killed in the Senate. Imagine that. Second, just a quick followup, Mr. Flynn. I was curious, what about the intelligence retirement system? Do they have portability, that you know of? Mr. Flynn. They have portability. As I mentioned, in terms of the older systems, I think I would have to check on post- 1988 portability prospectively and perhaps give you an answer to that. Mr. Scarborough. If you could provide us with an answer to that, we can make that part of the record, without objection. Mr. Flynn. I'd be happy to. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7737.028 Mr. Scarborough. I would like to introduce and recognize the gentlelady from Maryland, Mrs. Morella. Mrs. Morella. Thank you, Mr. Chairman. I want to congratulate you and to congratulate us on the Civil Service Subcommittee on having you chair it. I look forward to working with you during this Congress. I am chairing another committee right now, but I wanted to come down for the markup on these two bills and the opportunity, having looked at your testimony, to perhaps pose one question that pertains to the second bill that we are going to mark up, which has to do with our Thrift Savings Plan enhancements, which deals with portability and deals with allowing people to join our Thrift Savings immediately. But picking up on the Federal Reserve, Mr. Kelley and Mr. Flynn, let us look at Thrift Savings. FERS employees contribute to their Thrift Savings Plan accounts, and you have mentioned that Federal Reserve employees can contribute up to 20 percent of pay to either pre-tax or post-tax investment options, up to the IRS cap? Mr. Flynn. Yes, ma'am. Mrs. Morella. FERS employees are capped at 10 percent contributions to their pre-tax TSP accounts, even if these limits leave them well below the IRS caps. For the past 4 years this subcommittee has been unable to advance a proposal--we have advanced it out of the subcommittee, out of the full committee, on the floor of the House--this proposal, allowing the employees to contribute to the IRS limit. The administration opposes the provision for budgetary reasons. I want to ask both of you, how does the Federal Reserve do for its employees something that we cannot enact for other Federal employees? Mr. Kelley. I would not want to try to answer that, but I would like to say that I think our employees consider their ability to contribute up to the maximum permissible limit under IRS regulations to be a very valuable benefit. While I do not have any statistics at my fingertips as to who does that, my impression is that a very substantial percentage of Federal Reserve employees are contributing up to the maximum. In fact, I think that our H.R. people have a considerable burden of helping people to figure out just how much they can in fact contribute without getting into trouble, because it is considered to be a very important opportunity. Mrs. Morella. Mr. Flynn, do you not see an inequity in this, sir? Mr. Flynn. Mrs. Morella, I will try to be as artful as I can in my answer. I seem to remember a similar question that you asked Director LaChance at a hearing very similar to this, not very long ago---- Mrs. Morella. Yes. Mr. Flynn [continuing]. Where she offered, I think, her view that there is ample evidence about the small savings rate that we see in the economy, and she pointed out how important it is to the President that there be savings for income security and retirement. In fact, there was a summit convened on that very topic last June. And in looking at those two factors, she indicated that she thought that anything that could be done that would encourage people to save for income security and retirement was a good thing, and I think that is a view that I would share as well. Mrs. Morella. I appreciate that very much, and I think the President and the Treasury Department are going to realize that these savings that he believes in, that we all believe in, since the United States has such a low savings rate, is one that certainly should be allowed for individuals to enhance their savings and their pension retirement funds by virtue of an equity. Mike Causey has written about it a great deal. I know of nobody who disagrees on both sides of the aisle, even with different philosophies of it. As a matter of fact, the President has this--what is it, the new ``USA 401(k)'' and yet our Federal employees cannot even give that amount. So I guess I am hearing from both of you that you do think it is a good idea and will continue to push that forward with the help of this subcommittee and the full committee and the Ways and Means Committee. I thank you. Thank you, Mr. Chairman, for allowing me to get that little lecture in. Mr. Scarborough. OK, thank you so much. We are going to go ahead and finish up the hearing and then go to the markup after the vote, so the Chair now recognizes the gentlelady from the District of Columbia, Ms. Norton. Ms. Norton. Thank you, Mr. Chairman. Mr. Kelley, I regret that my opening statement may have been unclear. I didn't realize, and should have, that the Board would have its own version of a Thrift Savings Plan. I should have realized that if the Federal Government had that, then certainly the Board of Governors would have had that for its own employees. I would like to know whether, under our bill, when an employee transfers, will the entire corpus--what the Government has contributed and what the employee has contributed--simply transfer over, so that perhaps no contribution will have to be made in order to come into our own Federal Government agency's Thrift Savings Plan? Mr. Kelley. Well, we have to be careful. We are talking about two different plans now. Basically, the portability that we have been discussing in H.R. 807 has to do with the defined benefit plan, the pension plan itself, and there are rather complex arrangements that have to be made technically to make sure that there is equity between plans when an employee goes from one plan to another. But that can be done, and it is fully taken care of in your bill. The other plans are defined contribution plans. The Thrift Savings Plan and our Thrift Plan are defined contribution plans, and there still is a problem of portability when one goes from a Thrift Savings Plan institution to us. Portability there is not perfected and is not at this time in your bill. Ms. Norton. So if the employee was in your Thrift Savings Plan, what happens to the contributions that the employee has made in your Thrift Savings Plan if the employee wants to now join the Thrift Savings Plan of a Federal agency? Mr. Kelley. Well, first of all, it is fully vested and is entirely theirs, so there is no way they are going to forfeit anything out of that plan. Ms. Norton. All right. So it really is two different plans? Mr. Kelley. That's right. And they have two different sets of effects. Ms. Norton. I see. But they can go into our Thrift Savings Plan---- Mr. Kelley. Yes. Now, I am frankly not clear about the portability out of our Thrift Plan into the Thrift Savings Plan. I would be very happy to generate an answer to that question and provide it to the committee if that would be helpful. Ms. Norton. Mr. Chairman, I would appreciate this information very much, because I am not sure what happens to the Government's contribution. Then there is the contribution that the employee has made, and now you have two Thrift Savings Plans, and I am not sure what the bottom line effect is, and I think that for employees for whom these plans are so valuable, that would have meaning. So I would appreciate receiving an answer. I don't have any problem with marking up the bill, but I would appreciate an answer. Mr. Kelley. We would be very happy to do that. Mr. Scarborough. If you could forward that and we will make it a part of the record, if there is no objection. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7737.029 Ms. Norton. Is what we are doing today retroactive, so that if somebody is retired, if 1 of these 50 folks is gone, that person can be made whole? Or is that person just a loser? Mr. Kelley. My understanding is at this point, if this bill is passed promptly, there will be no losers. But we run that risk if this runs on and on. Ms. Norton. All right. I want to make sure of that. I have in mind the employee who says, ``Well, I have to go; this is such a better opportunity at XYZ Agency,'' she goes, is lost, and may have retired from XYZ Agency. Now I just want to make sure that we do not end up with yet another bill needed for yet another set of losers. Mr. Kelley. Over my right shoulder, I am assured that you are correct on that. Ms. Norton. OK. The chairman has raised a very important point about what happened to the D.C. Retirement Fund. First I want to make it abundantly clear that it is the Congress that forced the District to turn over its funds and to spend out of its funds. That's the last thing that the District would have wanted to do. But what the Congress said was that this pension liability, which is 100 percent Federal liability, ``we will not take on. What we will do, and the only way we will take this on, is if you pay down--you, District of Columbia employees--what you have put into it. At that point we reduce our costs, and we are willing to take over what we should have had in the first place.'' So that was the first inequity. But the District of Columbia had absolutely no choice because if this fund were still outstanding in 2004, the District would go bust, if I can use a colloquial expression. That is to say, it would not be what we have just gone through, which is the kind of insolvency that Philadelphia and New York had. The city would blow up because a huge amount would fall due; the Federal Government pulls back and is not a part of the fund at all. So the District, in essence, was forced to liquidate what employees had already paid in. Second, the Federal Government should not have wiped out the fund, and I certainly agree with the chairman that that is the last thing we envisioned would happen. But someone told me after this happened that, ``Eleanor, didn't you recognize that the Federal Government never leaves any loose change hanging around?'' [Laughter.] What in effect has happened is that the obligations have now been consolidated, in effect, into the Federal retirement obligations, and under law there is no way to avoid that now unless the Federal Government were to pass additional legislation saying we no longer are obligated. I do want to say that I would have preferred to see the fund left intact, and for it to build on the equity already in the fund. It would have saved the Government money. We already had a system that was doing well. So I regret it, but I do think that we ought to understand why it happened that way. Because of the way scoring is done, the Federal Government--the administration--said no, the Congress certainly was not willing to come up with the money, and so essentially we were left with a take-it-or-leave-it proposition. We had to take it because we could not afford to be left there a few years from now, essentially with a city in smoke. I would like to ask a question--I know I am holding people up, but I want to ask a question about investments, though, because I do think that the question that the chairman has put on the table about investment in equities is one that has to be considered, especially since the President wants to invest Social Security funds. Those of you who have a vote may want to run over and vote and not have to be making a 50-year dash, so I will leave it to the chairman, because I think your time is running. Mr. Scarborough. Well, it is running. If you were to submit the written questions, we could leave the record open for 2 weeks and they could answer them. Ms. Norton. I would be pleased to do that. 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We are down to 5 minutes and would like to adjourn, and then go to markup. Any objections? Ms. Norton. No objection. Mr. Scarborough. Well, we would like to thank you all. Let me say very quickly that I concur with the gentlelady. She was put in an extremely difficult position in the 105th Congress on the so-called ``bail-out,'' so I certainly concur with everything you said regarding the D.C. situation. I want to thank both of our witnesses for coming and testifying before us today. It certainly was insightful, and we will leave the record open for 2 weeks and send any further questions we may have to you. Thank you, and this hearing is adjourned. [Whereupon, at 11:40 a.m., the subcommittee adjourned.]