<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:]
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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:]
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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:]
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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:]
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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.
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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:]
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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.
[Questions and answers referred to follow:]
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Mr. Scarborough. 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.]