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OPERATIONAL EXPERIENCE UNDER

THE 2001 RAILROAD RETIREMENT

REFORM LAW

(109–71)

HEARING

BEFORE THE

SUBCOMMITTEE ON

RAILROADS

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 10, 2006

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

CHARLES W. DENT, Pennsylvania

TED POE, Texas

DAVID G. REICHERT, Washington

CONNIE MACK, Florida

JOHN R. ‘RANDY’ KUHL, JR., New York

LUIS G. FORTUN ̃ O, Puerto Rico

LYNN A. WESTMORELAND, Georgia

CHARLES W. BOUSTANY, JR., Louisiana

JEAN SCHMIDT, Ohio

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

(II)
SUBCOMMITTEE ON RAILROADS

STEVEN C. LATOURETTE, Ohio, Chairman

THOMAS E. PETRI, Wisconsin

SHERWOOD L. BOEHLERT, New York

JOHN L. MICA, Florida

SPENCER BACHUS, Alabama

JERRY MORAN, Kansas

GARY G. MILLER, California

ROB SIMMONS, Connecticut

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

JON PORTER, Nevada

TOM OSBORNE, Nebraska

MICHAEL E. SODREL, Indiana

LYNN A. WESTMORELND, Georgia, ViceChair

DON YOUNG, Alaska

(ex officio)

CORRINE BROWN, Florida

NICK J. RAHALL II, West Virginia

JERROLD NADLER, New York

BOB FILNER, California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

LEONARD L. BOSWELL, Iowa

JULIA CARSON, Indiana

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

EDDIE BERNICE JOHNSON, Texas

JAMES L. OBERSTAR, Minnesota

JOHN BARROW, Georgia

(ex officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Hamberger, Edward, President, Association of American Railroads .................. 9

Hixon, James A., Trustee, National Railroad Retirement Investment Trust ..... 9

Parker, Joel, Trustee, National Railroad Retirement Investment Trust ............ 9

Scardelletti, Robert, President, Transportation Communications International

Union ..................................................................................................................... 9

Schwartz, Hon. Michael S., Chairman, Railroad Retirement Board, accompanied by V.M. Speakman, Labor Member, Railroad Retirement Board,

Jerome Kever, Management Member, Railroad Retirement Board, Steven

Bartholow, General Counsel, Railroad Retirement Board, Kenneth Boehne,

Chief Financial Officer, Railroad Retirement Board, and Frank Buzzi, Chief

Actuary, Railroad Retirement Board .................................................................. 3

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Brown, Hon. Corrine, of Florida ............................................................................. 22

Costello, Hon. Jerry F., of Illinois .......................................................................... 25

Cummings, Hon. Elijah E., of Maryland ............................................................... 27

Johnson, Hon. Eddie Bernice, of Texas .................................................................. 45

Oberstar, James L. of Minnesota ........................................................................... 49

Young, Hon. Don, of Alaska .................................................................................... 66

PREPARED STATEMENTS SUBMITTED BY WITNESSES

Hamberger, Edward ................................................................................................ 32

Hixon, James A ........................................................................................................ 42

Parker, Joel .............................................................................................................. 52

Scardelletti, Robert .................................................................................................. 56

Schwartz, Hon. Michael S ....................................................................................... 58

SUBMISSION FOR THE RECORD

Schwartz, Hon. Michael S., Chairman, Railroad Retirement Board, accompanied by V.M. Speakman, Labor Member, Railroad Retirement Board,

Jerome Kever, Management Member, Railroad Retirement Board, letter

concerning the Widow(er)s’ Intitial Minimum Benefit Amount (WIMA),

June 9, 2006 ......................................................................................................... 63

(1)

OPERATIONAL EXPERIENCE UNDER THE 2001

RAILROAD RETIREMENT REFORM LAW

Wednesday, May 10, 2006,

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON RAILROADS, COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, WASHINGTON, D.C.

The subcommittee met, pursuant to call, at 2:00 p.m., in room

2167, Rayburn House Office Building, the Hon. Steven C.

LaTourette [Chairman of the subcommittee] presiding.

Mr. LATOURETTE. The Subcommittee will come to order. Good

afternoon, I want to welcome you all to this afternoon’s hearing

about the Operational Experience Under the 2001 Railroad Retirement Reform Law.

In 1998, this Subcommittee, under chairman Jack Quinn, held a

hearing about the need to reform our Nation’s railroad retirement

system. At that time, the system was headed for a crisis. Due to

the severe downsizing of the industry, fewer and fewer employees

were paying into the railroad retirement system. Meanwhile, the

number of retirees and surviving spouses continued to increase.

Fortunately, after years of effort by rail labor, management and

members on both sides of this Committee, the Railroad Retirement

and Survivors’ Improvement Act of 2001 was signed into law. Enactment of this legislation was a great victory for railroad workers

and their families as well as the railroads themselves. The 2001

legislation reduced the retirement age from 62 to 60, provided enhanced Tier II benefits for retirees and their surviving spouses, and

reduced taxes on current railroad employees. This was achieved by

allowing the National Railroad Retirement Investment Trust to invest in a diversified portfolio rather than exclusively in low yield

Government securities. In what is truly a pleasant surprise, the investment trust has performed far better than anyone expected back

in 2001. The portfolio has grown remarkably, and payroll taxes

have actually declined.

Today, I am looking forward to hearing more about the success

of the National Railroad Retirement Investment Trust as well as

any continuing issues faced by the Railroad Retirement Board, rail

labor, and management.

Before yielding to my distinguished Ranking Member Ms. Brown,

I want to ask unanimous consent to allow 30 days for members to

revise and extend their remarks and to permit the submission of

additional statements and materials by members and also witnesses. Without objection, so ordered.
2

It is now my pleasure to yield to Corrine Brown of Florida, our

distinguished Ranking Member, for any observations she would

choose to make.

Ms. BROWN. Thank you, Mr. Chairman, for hosting this meeting.

It is nice to have a hearing where all of the witnesses have good

news for us. Thank you.

I believe that the Railroad Retirement and Survivors’ Improvement Act of 2001 was a resounding success. It improved benefits

to men and women who work on our Nation’s railroads and the

634,000 retirees and survivors of Retired Railroad Workers. It significantly reduced Tier II taxes for railroad and for railroad workers for the first time in 2005 from 4.9 percent to 4.4 percent.

The Act also created the National Railroad Retirement Investment Trust which has been a tremendous success. The net value

of the trust management assets have soared up to $28.9 billion as

of March, 2006, representing an increase of over $10 billion, that

is with a B, above the net book value of assets transferred to the

trust for investment in 2001.

In other words, the 2001 Railroad Retirement Reform Law was

a win/win situation for everyone: for the railroad, for the railroad

workers, for the railroad retirees and survivors, and for former and

current members of this Subcommittee who worked so hard to create this program.

I welcome the witnesses here today and look forward to hearing

more about the implementation of the 2001 Reform Act. Thank

you, Mr. Chairman.

Mr. LATOURETTE. I thank the gentlelady very much.

Mr. Boswell, any remarks you would like to make?

Mr. BOSWELL. No, thank you, Mr. Chairman.

Mr. LATOURETTE. OK.

With that, it is my pleasure to welcome the first panel today. The

first panel, despite its appearance, actually contains one witness

and a lot of friends. So we are pleased to have today with us the

Honorable Michael Schwartz who is the Chairman of the Railroad

Retirement Board. He is accompanied today by Mr. V.M.

Speakman who is the Labor Member for the Railroad Retirement

Board, Mr. Jerome Kever who is a Management Member of the

Railroad Retirement Board, Steven Bartholow who is the General

Counsel for the Railroad Retirement Board, Mr. Kenneth Boehne

who is the Chief Financial Officer for the Railroad Retirement

Board, and Mr. Frank Buzzi who is the Chief Actuary for the Railroad Retirement Board.

Chairman Schwartz, we thank you for coming. We thank you for

bringing all your friends with you today. We look very much forward to your testimony.
3

TESTIMONY OF HON. MICHAEL S. SCHWARTZ, CHAIRMAN,

RAILROAD RETIREMENT BOARD, ACCOMPANIED BY: V.M.

SPEAKMAN, LABOR MEMBER, RAILROAD RETIREMENT

BOARD; JEROME KEVER, MANAGEMENT MEMBER, RAILROAD RETIREMENT BOARD; STEVEN BARTHOLOW, GENERAL COUNSEL, RAILROAD RETIREMENT BOARD; KENNETH

BOEHNE, CHIEF FINANCIAL OFFICER, RAILROAD RETIREMENT BOARD; FRANK BUZZI, CHIEF ACTUARY, RAILROAD

RETIREMENT BOARD

Mr. SCHWARTZ. Thank you. Good afternoon, Chairman

LaTourette, Ranking Member Brown, and distinguished members

of the Committee. I am Michael Schwartz, and I am the Chairman

of the Railroad Retirement Board. It is indeed a pleasure to appear

before you today to testify on behalf of the Railroad Retirement

Board concerning our experience under the Railroad Retirement

and Survivors’ Improvement Act. I request that my statement be

inserted in the record.

As you know, the Railroad Retirement and Survivors’ Improvement Act of 2001 originated in this Committee, and it made a number of changes in railroad retirement benefits and in the financing

of the railroad retirement program. The Railroad Retirement and

Survivors’ Improvement Act of 2001 was a product of an agreement

between rail labor and rail management.

On the benefit side, the 2001 Act reduced the minimum retirement age for full benefits for employees with 30 years of service

from age 62 to age 60. Another change was the elimination of the

so-called railroad retirement maximum, which had imposed a cap

on the combined benefits of an employee and the employee’s

spouse. The Act added a new minimum initial benefit amount for

widow and widowers, so that the amount of the benefit payable

when a widow’s or widower’s annuity is awarded is equal to what

the employee received prior to his or her death. Another change on

the benefit side was a reduction in the number of years needed to

be eligible for Tier II railroad retirement benefits. Tier II benefits

are now available to employees who have five years of railroad

service after 1995. These changes are all fully operational.

In addition to the benefit changes I just mentioned, the Railroad

Retirement and Survivors’ Improvement Act made significant and

far reaching changes in the financing of railroad retirement benefits. The Act called for the creation of a new entity, the National

Railroad Retirement Investment Trust, to handle investment of

railroad retirement funds. The Trust is not a Federal Agency or instrumentality; it is separate and apart from the Railroad Retirement Board.

Prior to the 2001 legislation, railroad retirement funds were invested only in Government securities or certain Governmentbacked securities. The 2001 law changed this by authorizing the

Trust to invest railroad retirement funds in a wide array of investments including stocks and bonds as well as Government securities.

In addition to the investment changes, the Railroad Retirement

and Survivors’ Improvement Act of 2001 substituted for the flat tax

rates in prior law, a new tax ratchet mechanism for setting the

Tier II tax rate for employees and employers. Under the tax ratch-
4

et, Tier II tax rates for employers and employees can increase or

decrease depending on the account benefits ratio. The account benefits ratio is determined by comparing the market value of railroad

retirement assets to benefit payments. Thus, the tax rate is adjustable to meet financing needs of the railroad retirement system.

Almost immediately after President Bush signed the Railroad

Retirement and Survivors’ Improvement Act into law, steps were

initiated to form the National Railroad Retirement Investment

Trust. The Trust is comprised of seven trustees. Three trustees represent the interest of rail management; three represent the interest

of rail employees; the seventh is an independent member of the

Board of Trustees and is selected by a majority of the other six

trustees. Trustees representing railroad employees and railroad

management were appointed and first met on February 1st, 2002.

The original trustees, as well as the trustees who have been appointed after the Trust was formed, all have had strong backgrounds in investment and pension plan management as required

by the statute.

The first transfer for the investment occurred in September,

2002. For several months thereafter, additional transfers of significant amounts were made until a total of $21.3 billion had been

transferred to the Trust. Initially, the Trust limited its investments

to index funds, but as the Trust’s staff has grown, the Trust has

moved funds into a combination of index funds and actively managed investments handled by an increasing number of investment

managers. Today the Board of Trustees and the Trust’s professional staff are responsible for the investment of $28.9 billion.

Although the Railroad Retirement and Survivors’ Improvement

Act makes it clear the Railroad Retirement Board and the National

Railroad Retirement Investment Trust are separate entities, the responsibilities of the two organizations are such that the Board and

the Trust must work together in order to serve the needs of the

plan participants and stakeholders. Today, I am pleased to report

that the Board and the Trust have worked closely from the inception of the Trust and that we are accomplishing our respective responsibilities under the Act.

The three members of the Railroad Retirement Board meet at

least twice a year with the Trust, and the Railroad Retirement

Board’s General Counsel meets on a frequent basis with the Counsel to the Trust and the Trust Chief Investment Officer to discuss

issues of mutual concern.

The Railroad Retirement Board, the Trust, the Office of Management and Budget, and the Department of the Treasury are all parties to a Memorandum of Understanding under which the Board

receives monthly reports from the Trust showing the market valuation of the Trust portfolio. Moreover, the Trust provides the Board

with copies of its annual management report to Congress showing

details of the Trust’s operations for the previous fiscal year. The

Railroad Retirement Board receives quarterly updates of the annual report from the Trust. Information about the Trust, including

an annual management report and quarterly updates, is posted to

the Railroad Retirement Board’s web site and is available for public review.
5

Since the inception of the Trust, the market value of the Trust’s

portfolio has increased significantly. As I noted earlier, the Railroad Retirement Tax Act was amended by the 2001 law to provide

a tax ratchet mechanism for setting Tier II tax rates for employers

and employees. Before the tax ratchet became effective in 2004, the

2001 Act had already reduced the Tier II tax rate on employers

from 16.1 percent in 2001 to 15.6 percent and 14.2 percent in 2002

and 2003, respectively.

When the tax ratchet took effect in 2004, the employer tax rate

was further reduced to 13.1 percent, and in 2005, both the employer and the employee Tier II tax rates were reduced. In 2005,

the employer tax rate declined to 12.6 percent and the employee

tax rate declined from 4.9 to 4.4 percent. Tax rates for 2006 are

the same as 2005. These reductions in the Tier II tax rates for both

employers and employees were almost entirely the result of good

investment performance over the past few years.

In closing, I am pleased to say that, in view of the Railroad Retirement Board, the Railroad Retirement and Survivors’ Improvement Act has been very successful and that the goals sought by the

legislation are being achieved. We would be happy to answer any

questions at this time.

Mr. LATOURETTE. Well, Chairman Schwartz, thank you very

much. As Ms. Brown said, it is rare that we have a hearing where

it is all good news all the time. Certainly, your testimony and your

report today is good news.

Just a housekeeping matter, we have a Majority Leader here.

His name is Boehner. I think, Mr. Boehne, I said your name was

Boehne, and I have been told that it is Boehne. And so, I apologize

for that. I just took the R off of Boehner and made you Mr. Boehne.

But, just so the record is clear, welcome.

Again, Chairman Schwartz, thank you for your testimony and

bringing everybody with you today.

I want to begin where you ended, I guess, and that is the tax

rate and commend you and the Board for continuing to reduce the

tax rate on both the employer and the employee. As you sort of pull

out your crystal ball, do you see that as being a trend that you can

continue, thanks to the good management skills that you are exercising over this Trust?

Mr. SCHWARTZ. Yes, and that is the way the ratchet system was

set up. As long as the investments continue to be strong, we will

be able to lower the rate.

Mr. LATOURETTE. Great. There was a big discussion and a little

dust up here last year and the year before over social security, and

everybody becomes concerned about the impact of the pending retirement of the baby boomers on our middle class entitlement programs.

Mr. SCHWARTZ. Sure.

Mr. LATOURETTE. I am just wondering if, after the 2001 legislation, have you and your actuaries have taken a look at what the

retirement of the baby boomer generation does to what you are currently doing?

Mr. SCHWARTZ. Yes, we have a 75 year projection. That is all we

get, just 75 years out. We see no cash flow problems in the next
6

75 years because of these good investments and because of the employment.

Mr. LATOURETTE. That is unbelievable.

Earlier this year, this Committee, I think with the support of the

Board or at least the Board was supportive, reported H.R. 5074

which was legislation that went back and took a look at the 2001

Act and put the Treasury back in charge of the payment of Tier

II benefits. That was, at the time, I think it was one of those that

everybody thought it would be a good idea and was going to save

money, I think. I don’t have my notes in front of me from that

hearing, but it seemed to me that it was costing $13 million more

than we anticipated it costing.

I assume that the Board continues to be supportive of the legislation, one; and two, at this moment in time, are there any other

items like that, that you think the Board needs to bring before this

Committee for fine tuning the 2001 legislation?

Mr. SCHWARTZ. First of all, we would like to thank the Committee for doing that and thank you for your help. There is nothing

at this time, other than that, that we need.

Mr. LATOURETTE. That is excellent. That makes our work a lot

easier.

[Laughter.]

Mr. LATOURETTE. I think my last question to you is, in your latest management report to Congress, could you outline sort of the

major issues that you brought up in that report? Again, I heard

you just say that you look out over 75 years. Is your prognosis for

this year to be a good year, and if not, do you have any significant

issues or concerns that you think are on the horizon in the short

term?

Mr. SCHWARTZ. Well, it is kind of interesting that in March of

2002, the employment in the railroad industry was 229,000 people.

The actives are now 237,000 people. There has been hiring. We

think we do anticipate through the years for there to be somewhat

of a decline, but I can tell you that our actuary is telling me that

he is looking at those numbers, and he may be even adjusting

those hiring numbers a little bit to maybe show a little less of a

decline in hiring than there has been projected in the future.

So I would say that, as long as the hiring stays around where

it is or drops just a little bit each year, as long as our investments

continue to bring in a good return like they are, we don’t see any

problem with the fund for the next 75 years.

Mr. LATOURETTE. Again, I apologize; I should know this, the mix.

When you took the 2001 Act and went away from solely low yield

Federal securities, what is the current mix of your portfolio?

Mr. SCHWARTZ. I think we would need the Trust to testify on

that exactly at this point. When the Trust first went into it, of

course, they had U.S. equities, non-U.S. equities, fixed, private, and

I think the current mix, I would prefer them to testify on that.

Mr. LATOURETTE. OK, well, I thank you very much. Again, I

thank you and the Board and everybody associated with the Board

for this good news. I think if all of the pieces of legislation that we

have passed around here bore the same good fruits that you have

put into effect, it would be a much happier place.

Mr. SCHWARTZ. Great, thank you.
7

Mr. LATOURETTE. Thank you very much.

Ms. Brown?

Ms. BROWN. Thank you.

Many members on this Subcommittee have heard from widows

in their Congressional District about a serious problem with how

their railroad retirement pensions interact with their social security benefits. From what I understand, these widows are not getting cost of living increases in their railroad retirement pensions,

even though the cost of living continues to escalate each year. Why

is this and what can be done to resolve this situation?

Mr. SCHWARTZ. Frank, do you want to talk on that?

Ms. BROWN. Anyone else can feel like they can participate.

Mr. BUZZI. The minimum widow’s benefit establishes an initial

benefit level, and that level is fixed and does not have cost of living

increases. However, the benefit under the old law is still calculated

as it was previously. Then the widow receives the larger of those

two. So, in effect, for several years, the widow will receive no cost

of living increase, and thereafter, as the benefit under the old law

exceeds the guarantee, she will, he or she will.

Ms. BROWN. OK, now do that again because I didn’t quite get it.

Mr. BUZZI. The widow’s benefit is comprised of a Tier I and Tier

II portion. The Tier I portion is equal to 100 percent of the employee’s Tier I. The Tier II portion is 50 percent of the employee’s Tier

II. However, the guaranteed amount is 100 percent of the employee’s Tier II. The 100 percent of Tier I plus 100 percent of Tier II

is the guarantee amount that the widow is guaranteed to receive.

The old law benefit was 100 percent of Tier I plus 50 percent of

Tier II. The old law amounts received cost of living increases. The

guarantee amount does not. So the widow receives the larger of the

two, the initially calculated guaranteed amount based on 100 percent of Tier II or the old law amount, whichever is greater. So, in

effect, the widow will receive no cost of living increases for several

years under total annuity. But thereafter, as the old law amount

exceeds the guarantee amount, the widow will receive cost of living

increases.

Ms. BROWN. OK, but the widow is getting more under this.

Mr. SCHWARTZ. Yes.

Mr. BUZZI. Yes, absolutely.

Ms. BROWN. Just one other follow-up: What recourse does a retiree have if the Railroad Retirement Board staff misinforms him

or her about the qualification requirement to obtain full pension

and survivor benefits, and it is a mistake on the part of the staffer?

I hope that was in writing because, basically, if it is not you have

just one person’s word over another.

Mr. BARTHOLOW. Unfortunately, mistakes are made but not all

that often by our people. We have a very, very good work force. As

you can see, most of us have been around a while, and we know

the program. There are mistakes occasionally made, however. We

do, obviously, look into situations, but if there is a mistake that is

made and bad information is given, unfortunately, we can’t change

the law. The law does, in fact, control the amount of the benefit,

and that is the amount payable.

As I said, it is unfortunate, but those things do happen, and they

happen not only in our program but they happen in other pro-
8

grams. That is the law that is applicable under all Government

pension programs.

Ms. BROWN. OK, well, thank you, Mr. Chairman.

Mr. LATOURETTE. I thank the gentlelady very much. I just have

one more question, and then if the gentlelady has another question,

I will yield back to her.

Something I forgot to ask earlier, as members of Congress, as

Federal employees, we have something called the thrift savings

plan that we can participate in. Given the great record that you

have accumulated since the passage of the 2001 Act, is it possible

for an employee to take advantage of this great performance by

contributing more than the minimum amount at this moment in

time to receive additional benefits at the end?

Mr. SCHWARTZ. They are set. It is set in statute that is what it

would be. It would be the Tier II would be 4.4 percent for an employee.

Mr. LATOURETTE. So they don’t. If an employee said, you know

what, boy, I would really like to put in some more dough, he does

not at this moment in time have the opportunity to do that.

Mr. SCHWARTZ. Right, that is correct.

Mr. LATOURETTE. Let me ask you this. Do you think that it is

a good idea if we looked at that since you are doing such a bangup job, if we made that an option for railroad employees in the future?

Mr. SCHWARTZ. Well, the way I look at it is if this Committee

wants to look at something, we certainly would take a look at that

as well.

Mr. LATOURETTE. Good, thank you. Do you have any more questions?

Well, Chairman Schwartz, I want to thank you and your fellow

Board members and everyone else associated from the Board for

not only coming and sharing your story and testimony today but

also letting us share in your success. Thank you very much.

Mr. SCHWARTZ. Thank you.

Mr. LATOURETTE. Thank you.

It is now our pleasure to welcome our second panel this afternoon. We are going to be joined by Mr. James Hixon who is a trustee with the National Retirement Investment Trust, Mr. Joel

Parker, another trustee with the National Railroad Retirement Investment Trust, Mr. Robert Scardelletti who is the President of the

Transportation Communications International Union, and for a return engagement, Mr. Edward Hamberger who is the President of

the Association of American Railroads.

I want to thank all of you for coming today, and we look forward

to hearing from you.

Mr. Hixon, you are first.
9

TESTIMONY OF JAMES A. HIXON, TRUSTEE, NATIONAL RAILROAD RETIREMENT INVESTMENT TRUST; JOEL PARKER,

TRUSTEE, NATIONAL RAILROAD RETIREMENT INVESTMENT

TRUST; ROBERT SCARDELLETTI, PRESIDENT, TRANSPORTATION COMMUNICATIONS INTERNATIONAL UNION; EDWARD HAMBERGER, PRESIDENT, ASSOCIATION OF AMERICAN RAILROADS

Mr. HIXON. Mr. Chairman and members of the Subcommittee,

my name is Jim Hixon. I am the Executive Vice President Law and

Corporate Relations of the Norfolk Southern Corporation as well as

a member of the Board of Trustees of the National Railroad Retirement Investment Trust. I am pleased to be here today and would

like to thank the Subcommittee for giving me this opportunity to

testify about the Trust’s operational experience since its inception

a few years ago.

In December of 2001, years of collaboration between rail management, rail labor, and Congress resulted in the enactment of legislation forming the National Railroad Retirement Investment Trust,

and on the day it was officially established, the $20 billion Trust

fund became one of the largest pension investment trusts in the

United States.

This very successful collaboration has continued as we have

worked to build this statutory concept into an actual institution,

and the need for collaborative effort has been magnified because of

the Trust’s very unique status as a public-private partnership. As

a result, transforming the Trust into an entity that could effectively and efficiently manage and invest railroad retirement assets

for the benefit of beneficiaries has presented many challenges in

the Trust’s formative years.

In the 41 days between enactment and the Trust’s establishment

date of February 1st, 2002, a labor-management implementation

task force worked almost around the clock to create this new entity. The group included representatives of all major railroads and

several railway labor unions and called on the expertise of a variety of senior executives from industry to provide advice on legal,

investment, treasury functions, insurance, and human resources

issues.

The task force also met and coordinated closely with representatives of the Railroad Retirement Board on various start-up issues

and ultimately provided recommendations regarding the outline of

a basic organizational structure to be considered by the new Board

of Trustees when it first convened.

The National Railroad Retirement Investment Trust Board of

Trustees met for the first time on February 1st, 2002, with participation of three appointees selected by rail management and three

appointees selected by rail labor. Many of the initial challenges

were organizational, including acceptance by the trustees of their

positions and notification to the Railroad Retirement Board, selection of a chair, adoption of bylaws, retention of counsel, and the acquisition of insurance and bonding coverages.

During the initial months, the Board approved and adopted internal policies on administrative issues including a conflicts of interest policy and a disclosure of investment information policy. The

Board also was successful, after conducting two nationwide
10

searches, in selecting a statutorily mandated independent trustee

and hiring its first full time employee, the Chief Investment Officer.

With these key individuals in place and the broad outline of an

entity beginning to take shape, the Board began the process of developing an investment structure to enable the receipt and management of railroad retirement assets for investment. In doing so,

the Board turned its attention to fundamental investment issues

including the development of investment guidelines. As part of this

process, the trustees and industry experts met with senior investment professionals from some of the country’s largest corporate

pension plans and Taft Hartley plans to explore a variety of investment and organizational issues.

Among the advice received from these plans was the importance

of hiring a dedicated staff, including specialized directors and advisors in various asset classes that would have the primary responsibility for making investment recommendations to the Board of

Trustees rather than having the Board rely on outside investment

advisors for such recommendations. My fellow trustee, Joel Parker

will discuss these and other investment related issues in greater

detail.

Early on, the Board of Trustees evaluated proposals from all of

the major accounting firms and selected Deloitte and Touche as its

independent auditor.

We also formed an Audit Committee to aid in the development

of internal accounting procedures and administrative controls. The

committee has continually reviewed key aspects of the Trust’s auditing, financial reporting, internal accounting, and internal controls processes as it has grown, and through its relationship with

the Trust staff and the Trust custodial bank and independent auditor, the committee has developed effective controls and reporting

processes. As part of its ongoing review of new statutory and regulatory developments in the areas of internal accounting and controls contained in the Sarbanes Oxley Act and pronouncements by

various regulatory agencies, the Audit Committee has also implemented various best practices recommendations appropriate for application to the Trust.

Development of the Trust has also required a great deal of coordination with Federal Government Agencies, and the Trust has

maintained regular communications with the Railroad Retirement

Board and the Department of the Treasury. As a result of discussions with these agencies, the Trust became a party to a four way

Memorandum of Understanding which outlines the budgetary,

transfer, accounting, and financial reporting responsibilities with

respect to assets held by the Trust and assets held within the

Treasury for the Trust.

Monthly Trust information reports submitted pursuant to the

MOU, together with quarterly reports transmitted to the Congressional committees of jurisdiction and the annual management report that the Trust is required to submit to Congress and the Executive Branch have provided the means to communicate the status

of Trust activities to interested parties.

We have worked closely with the Railroad Retirement Board to

develop a strong partnership while maintaining the investment
11

independence mandated by Congress. We recognize that the Congressional rationale for this separation was rooted in the fact that,

although the Trust is responsible for the management and investment of Federal Government assets, there was a concern about the

implications of the Federal Government itself investing in and

thereby influencing the financial markets. Thus, while the Trust

was established by Federal statute and the reporting requirements

and fiduciary standards applicable to it are set forth in the statute,

Congress made clear that the Trust is not a department, agency or

instrumentality of the Government of the United States.

This unique status, as a non-Governmental entity that is responsible for the management and investment of Government assets,

has presented some challenges in the Trust’s first four plus years.

Among those challenges has been coordinating the audit of the

Trust’s year-end financial statement with that of the Railroad Retirement Board so the Trust’s audited statement can be included in

the RRB’s own financial statement and Statement of Social Insurance for eventual inclusion in the Financial Report of the United

States Government.

The Trust’s unique status has also been recognized by the Internal Revenue Service, which has modified our IRS reporting requirements in light of the statutorily mandated annual management report. On a related matter, the Trust is preparing to submit a ruling

request to the Service to clarify the application of other tax rules

to the Trust.

In addition, we have worked with Congress to secure various

technical corrections to address issues not anticipated in the original legislation.

Challenges like these are inevitable, given the quasi-governmental nature of the Trust. However, they have been and will continue to be successfully resolved because of the continued cooperative relationship that exists between the Trust, the RRB, and other

Government Agencies.

Mr. Chairman, there are a number of ways to measure success,

and in my opinion, the National Railroad Retirement Investment

Trust has been a categorical success by any of these. A little over

four years ago, six trustees were seeking a seventh trustee and the

Trust’s first employee. Just last month, the Trust’s newly hired

Chief Accounting Officer brought to 12 the number of full time professionals employed by the Trust. Trustees have transitioned on

and off of the Board, but the spirit of cooperation that brought

about railroad retirement reform is just as strong today as it was

four years ago.

On behalf of my fellow trustees, I again thank you for the opportunity to appear before you today and would be happy to respond

to any questions you may have.

Mr. LATOURETTE. Mr. Hixon, thank you very much.

Mr. Parker, welcome, we look forward to hearing from you.

Mr. PARKER. Thank you. Good afternoon, Mr. Chairman and

members of the Subcommittee. My name is Joel Parker. I am Special Assistant to the President and International Vice President of

the Transportation Communications International Union, as well

as an original member of the Board of Trustees of the National

Railroad Retirement Investment Trust.
12

I appreciate the opportunity to discuss with you the progress of

the Trust. I will focus on the Trust’s investment strategy and performance—good news.

The Railroad Retirement and Survivors’ Improvement Act of 2001 has provided for the transfer of approximately $21 billion in

railroad retirement system funds to the Trust for investment in a

diversified portfolio similar to other large U.S. pension plans.

As a first priority, the Trust conducted a detailed asset-liability

study of the railroad retirement system to assess the Trust’s projected funding obligations and alternative approaches to asset allocation. Based on the asset-liability study, the Trust developed, and

in August of 2002, adopted a set of investment guidelines. We recognized that it would not be possible to immediately diversify the

Trust’s assets into the full array of asset classes set forth in the

guidelines. As a result, we adopted an initial strategy of placing

the assets in indexed accounts in three broad classes: domestic equities, international equities, and fixed income.

To answer the Chairman’s question to the previous panel, the

asset allocation, which we adopted then and still have today, was

45 percent in domestic equities of which 5 percent could go to private equity, 20 percent in international equities, and 35 percent in

fixed income.

Indexation allowed us to diversify the Trust’s investment exposure quickly and cost effectively as we received railroad retirement

system funds. With these arrangements in place at the end of Fiscal Year 2002, our first fiscal year, the process of moving railroad

retirement system assets to the Trust and investing them could

begin. Working with the Railroad Retirement Board and the Treasury Department, we developed a schedule for transferring railroad

retirement system assets held by the Treasury over a period of approximately six months beginning late in Fiscal Year 2002. When

the final scheduled transfer took place in mid-March of 2003, the

Trust had received a total of $19.3 billion of railroad retirement

system assets.

During 2003, the Trust undertook a major planning process to

develop a plan to move the investment portfolio beyond indexed

only investments. In the course of this process, the Trust reviewed

a variety of investment strategies and methodologies to determine

how active management could add value to expected returns at reasonable levels of risk, and I emphasize the latter, the reasonable

levels of risk.

The product of this effort was an investment plan. The investment plan includes a target for the level of the Trust’s diversification within each asset class between indexed and actively managed

assets based on an assessment of the potential for active management to add value to expected returns at reasonable levels of risk.

Investment performance for the Trust’s major asset classes was

positive for Fiscal Year 2003, our first full year of investment activity. The Trust achieved overall performance returns of 19.9 percent

compared to the target index return of 18.8 percent. In Fiscal Year

2003, the full year performance return resulted in an increase of

$2.7 billion in the Trust-managed portfolio.

In U.S. equity, the Trust’s goals are a portfolio that combines indexation and active management in order to achieve performance
13

in excess of the market at reasonable levels of risk. Execution of

the U.S. equity portion of our investment plan focused primarily on

large cap enhanced indexation strategies whose performance tracks

relatively closely with that of their benchmark index while adding

modest value. In Fiscal Year 2004, the Trust hired active managers

both in domestic large cap strategies and in large cap value strategies.

For fixed income assets, the Trust hired three enhanced index

bond managers. As in equity, these managers take small and carefully calculated deviations from the index portfolios, aiming to add

modest performance over the index without incurring significant

risk.

In addition, under the investment guidelines and our investment

plan, 5 percent of the overall Trust portfolio, which is funded from

the 45 percent U.S. equity allocation, was designated for private

equity investments. In Fiscal Year 2004, the first private equity

commitments were made.

Also during Fiscal year 2004, we performed another multiphased asset allocation study to reexamine assumptions about return and risk in different asset classes in order to see whether the

Trust asset allocation policy should be updated to improve returns

and portfolio diversification. As a result of this study, the trustees

authorized the investment staff to examine strategies in three new

asset classes: real estate, commodities, and hedge funds. Work continues in these areas, but no funds have yet been allocated to these

asset classes.

For the 12 months of Fiscal Year 2004, the investment return on

all Trust-managed assets was 13.3 percent. This compared favorably with the Trust’s composite benchmark which returned 12.7

percent. At the end of Fiscal Year 2004, assets overseen by NRRIT

totaled $25 billion, and the total value of railroad retirement system assets, including those held in the RRB accounts at the Treasury, was $26.4 billion.

During Fiscal Year 2005, continued diversification away from indexation in most major asset classes resulted in retaining 21 new

managers during the fiscal year. At year end, and that is the last

fiscal year, at the end of the last fiscal year, 34 percent of the Trust

investments were actively managed by more than 40 investment

managers.

With respect to U.S. equities, the Trust focused primarily on active large cap strategies, adding managers in several segments of

that asset class. During that year, we continued to manage our

non-U.S. equity investments through investments in index funds,

but during this period, we adopted the non-U.S. equity portion of

our investment plan and we took steps to begin adding enhanced

index strategy. We also continued moving beyond indexation in

fixed income assets during Fiscal Year 2005, and in private equity,

the trustees approved investments in nine additional private equity

limited partnerships.

For Fiscal Year 2005, the investment return on Trust-managed

assets was 14.0 percent. This compared favorably with the composite benchmark which returned 13 percent. At fiscal year end, the

net asset value of assets overseen by the Trust totaled $27.7 bil-
14

lion, and the total value of railroad retirement system assets, including those held at the Treasury, totaled $29 billion.

In conclusion, from its inception in February, 2002, to September 30th, 2005, the Trust received $21.3 billion from the Treasury, and

we have transferred $2.7 billion back to the Treasury. The net book

value of funds received from the Treasury since inception, therefore, is $18.6 billion. Those assets were invested in a diversified

multi-asset class portfolio in accordance with our investment policy.

This diversification of assets has allowed the Trust’s assets to grow

significantly beyond their original book value. As of September

30th, 2005, the net asset value of the Trust-managed assets totaled

$27.7 billion, representing an increase of $9.1 billion above the net

book value of assets transferred to the Trust for investment.

At the end of the most recent quarter, March 31st, 2006, the net asset value of assets overseen by the Trust totaled $28.9 billion.

The total value of railroad retirement system assets stood at $30.3

billion, about $10 billion more than the total value of assets held

by the system at the time the Trust began. This $10 billion increase is net of an additional $3.2 billion transferred from the

Trust to the Treasury for benefit payments during this period.

Mr. Chairman, we believe the Trust has provided the kind of

value to the railroad retirement system and its beneficiaries that

was envisioned by the authors of the legislation that created this

new and unique structure. We appreciate that the early years have

been good ones for the financial markets and the Trust. We also

recognize that markets have their cycles. Our goal has been to establish a solid professional organization, to develop a prudent investment plan that provides for a broad diversification of assets,

and to take steps to judicially implement this plan. We believe this

three-pronged approach will serve us well in strong markets and

also help to maintain stability in more challenging times.

Thank you very much.

Mr. LATOURETTE. I thank you, Mr. Parker, very much.

Mr. Scardelletti, welcome to you, and we look forward to hearing

from you.

Mr. SCARDELLETTI. Thank you, Mr. Chairman.

Mr. Chairman and Ranking Member, my name is Robert

Scardelletti. I am the International President of the Transportation

Communications International Union. I deeply appreciate the opportunity to appear before you today to discuss the National Railroad Retirement Investment Trust on behalf of rail labor.

Mr. Chairman, I was part of the rail labor team that worked

with rail management to develop the initial outlines of the proposal

for improving the railroad retirement system that ultimately became the Railroad Retirement and Survivors’ Improvement Act of

2001. While the measure was under consideration by Congress, I

had the privilege of working with members of this Committee as

you improved and perfected the proposal that rail labor and management brought to you. The record shows that these collaborations

between labor and management and between the combined forces

of labor, management, and forward-looking members of this Committee have borne fruit.

First, the Act provided better railroad retirement benefits for rail

workers, their dependents, and survivors. Surviving spouses of de-
15

ceased retirees now inherit the full Tier II annuity of the retiree

rather than no more than 50 percent of the annuity which was previously allowed under law. The age at which a worker with 30

years of service may retire was reduced from 62 to 60. And the

vesting period for Tier I and Tier II benefits was cut in half from

10 to 5 years.

Second, the financial security of the railroad retirement system

has been strengthened. The total assets of the system now stand

at $30.3 billion, about $10 billion more than when the Trust first

began its investment activities in the Fall of 2002, which is a 50

percent increase.

Third, the cost of the system to employers and employees has declined. For calendar year 2006, the Tier II rate on employees is 4.4

percent, down from 4.9 percent prior to the Act, and the employer

tax has dropped from 16.1 percent to 12.6.

The structure of the Trust has worked well. The balance of three

labor and three management members of the Board of Trustees

along with one independent trustee, has produced a cooperative

team-oriented approach to meeting a common goal: protecting and

growing the assets held by the Trust for the benefit of current and

future railroad retirees and their dependents, spouses, and survivors. I am not aware of a single instance to date in which Trust

decisions have been discussed or decided based on a labor or a

management affiliation.

The success to date of the Trust is testimony not only to the

trustees and staff who are directly responsible for its operation but

also to the leadership of this Committee and the Congress in passing the legislation in 2001. In addition, the cooperation and assistance of the Railroad Retirement Board has been vital to the startup and smooth functioning of the Trust. Likewise, the Treasury Department has played a key role in developing new policies and procedures to facilitate the work of this unique organization and its

special mission.

One issue of concern to active workers and retirees, especially in

light of the favorable position of the Trust Fund, is that future appropriations for the Railroad Retirement Board may not be adequate to maintain the level of service the railroad community expects and deserves. We would ask for your assistance in monitoring

this situation.

Mr. Chairman, we in the rail labor movement keep a close eye

on the activities of the Trust. After all, our members have much

to gain or lose from its success or failure. And so far, we are very

satisfied with what we see.

I appreciate the opportunity to speak to you on this important

subject and would be pleased to answer any questions. Thank you.

Mr. LATOURETTE. Thank you, Mr. Scardelletti.

Mr. Hamberger, thank you for coming. We look forward to hearing from you.

Mr. HAMBERGER. Mr. Chairman, thank you, Congresswoman,

Brown, thank you for the opportunity to be here. I am last in the

line here, so I will make five quick points.

Point number one, thank you for your wisdom and leadership on

this Committee, this Subcommittee, and Congress in general for

enacting the Railroad Retirement and Survivors’ Improvement Act
16

of 2001. Now, you probably expected me to say that, but those are

not empty words. I have a personal memory of a hearing scheduled

September 17th, 1998, a mere two months after I got this job and

the first time I was testifying before this Subcommittee. You can

imagine how pleased I was that the first hearing was on the interaction of Tier I and Tier II, and widows’ and survivors’ benefits,

and the supplemental annuity tax and how it interacted with the

social security tax.

Notwithstanding my apprehension, the hearing was a major success, and my counterpart at that time, Clarence Monin, I believe

with the BLE, and I, under the urging of this Subcommittee,

agreed that management and labor should sit down and see whether they could come up with an agreed upon approach.

Just to give it further proof, a contemporaneous written statement, we put out a press release dated September 28th, in which

the AAR thanked and applauded the Subcommittee for providing

the catalyst for talks on railroad retirement reform. We hope to

schedule meetings with rail labor in the very near future. We did

schedule those meetings, and because of that hearing in September, 1998, we are able to hold this today, almost eight years later.

If this could be submitted for the record, I would appreciate it.

Second point, it shows how well management and labor can work

together and when we do, how successful we can be. The personal

respect I have for Mr. Scardelletti, Mr. Parker, and others in rail

labor that was developed over this long fight still survives today,

and I look at them as partners in many ways.

Number three, clearly, the legislation has worked. You have

heard about how well it has worked.

Let me focus point number four on how well it has worked for

the railroads. Over the course of the last four years, rail taxes on

management have gone down by a total of $1.5 billion. We talked

about this at the last hearing two weeks ago. What happened to

that money? Well, we increased our spending on capital and maintenance over those same four years by $5.8 billion; we hired 10,000

new employees since 2003; and we have dealt with a fuel situation

where in 2001, the average price of diesel fuel was 85 cents a gallon, and as of March 31, 2006, it has more than doubled to $1.89.

So we have taken that money and turned it back into the industry,

and we continue to do that.

As I testified two weeks ago, $8.3 billion is going to be spent on

capital expenditures in 2006 alone, and just this week, two of our

members, Burlington Northern Santa Fe and Union Pacific announced an additional $100 million to be spent over the next several years to triple track more than 40 miles of right of way into

the Southern Powder River Basin. When we have the opportunity

to invest, we take that opportunity.

Number five, I will end as I began, thanking you for your leadership, this time for reporting out H.R. 5074 which would continue

to have the Treasury be the dispersing agent for the railroad retirement checks. As you know, that is important for at least two reasons. One, it is much cheaper; I believe it is about $2 a check versus 18 cents a check, the cheaper coming out of the Department

of the Treasury. And second, it means that we do not have to turn
17

over massive amounts of personal information to an outside private

vendor.

So thank you for your work on railroad retirement reform and

thank you for your work on H.R. 5074.

Mr. LATOURETTE. Mr. Hamberger, thank you. I notice a theme

between your testimony last time and this time. You always seem

to have five points, and that makes it easier for those of us up here

to follow.

Thank you all for testifying today. I appreciate it very much.

Mr. Hixon, just by way of education, I would be interested in

knowing how the fund works and who selects the products in the

portfolio? Whether it is the Board, or it is the fund managers, and

I assume it is not the individual employee, but who makes the selection as to what stocks are in the portfolio of the Trust?

Mr. HIXON. The selection of what is in the portfolio is made by

the investment manager that the Trust has retained to make those

decisions. We have a very stringent process where the employees

of the Trust review various candidates for an investment opportunity they have. It is a very qualitative and quantitative process,

a lot of due diligence. It takes about six months to make a choice.

But once the staff recommends the investment manager to the

Board, the Board must approve the investment manager, then that

investment manager is the one that actually makes the investment

decisions within the portfolio.

Mr. LATOURETTE. How is that reviewed by the trustees? Does the

fund manager then come and say, here is what we have done, and

what do you all think, or no?

Mr. HIXON. The trust staff actually has several visits a year with

the investment managers, onsite visits, to review their performance. They have monthly reviews on their performance as well.

They have investment guidelines they have to comply with. Then

each year, the trustees actually get an in-depth annual review on

their performance. Like the U.S. equity side, we get an annual review on what has happened with the investment managers on the

U.S. equity side, a detailed review, and each month we get a review of the performance of each of our investment managers.

Mr. LATOURETTE. Can you describe for us what safeguards are

in place to prevent things like conflicts of interest, insider trading,

things like that on behalf of the fund managers?

Mr. HIXON. We have our custodian bank. Northern Trust has our

investment guidelines, and they monitor the investments made by

the investment managers. For example, we have set up a rule that

the investment managers could not invest in railroad stocks, and

after the way stocks of our industry have performed over the last

couple years, several of them have bemoaned the fact that we restrict them from investing in railroads.

But nevertheless, the custodian then reviews each of their investments to make sure they meet the criteria that we have set for

that investment manager. In the event they have invested in any

railroad or invested outside of what they were allowed to invest in,

then we make them give up that investment.

Mr. LATOURETTE. Also in your testimony, you mentioned that,

given I guess we can call it the quasi-governmental nature of the

Trust, some issues have been created with the IRS and other Agen-
18

cies. Have those issues been resolved, or do you think that you are

going to be coming to the Committee in the future for additional

technical corrections?

Mr. HIXON. I think a lot of those issues have been resolved. I

think it was the nature of the start-up, where a lot of people didn’t

know what we were doing or how we were set up. I think over the

last couple of years, we have been able to get that settled, and I

think at this point we don’t anticipate coming to the Committee

with any other corrections, but as always if we see a need, we will

come to you.

Mr. LATOURETTE. Thank you.

Mr. Parker, I just want to elaborate on part of your testimony.

You mentioned in 2004 that three enhanced index bond managers

were hired as well as managers for large cap strategies and domestic capitalization strategies. You also indicated that you are expanding the use of the fund manager for major asset classes. At

this point, are most of the Trust assets managed primarily by outside managers, or do you still have a real strong in-house management as well?

Mr. PARKER. We don’t have any in-house management. The staff

selects managers. All the assets are externally managed. Maybe

the confusion was that we indexed at first wholly, and we are

gradually moving toward an active strategy depending on asset

class. The amount of active management will vary across different

asset classes based on the asset allocation plan.

Mr. LATOURETTE. When the Trust makes or retains a new outside manager, who makes that selection, and can you just briefly

describe for us how the selection process works?

Mr. PARKER. I think Jim, Mr. Hixon, went through it fairly well.

We have a very rigorous review process conducted by our in-house

staff. We don’t have any external staff. We have external managers, but our staff is totally in-house. We have an open door policy

that any manager can approach the staff. You don’t have to jump

through hoops.

They will have a meeting, and then they will conduct a review

that generally takes up to six months. That includes a winnowing

process where the manager has to fit within our overall asset allocation strategy. So, if a manager approached us who was in a sector that we were not ready or prepared to go into, let us say large

cap growth to just use an example, we wouldn’t pursue that manager at that time, but we would put them on the shelf and look at

them when we were ready because a diversification plan is very

methodical. Our goal is to diversify, diversify, diversify, but very

carefully, very prudently, very conservatively.

The ultimate recommendation of the manager, to get back to

your question, is made by the staff. They have to come to us, to

the trustees, with their final recommendation. They present to us

a very in-depth recommendation, a relative analysis of the manager versus all the other managers they looked at, a due diligence

book that generally is a volume this thick, very thick, with all the

interviews and analyses they have made of that particular manager.

As Mr. Hixon said, that doesn’t end it. There is a continual monitoring process of all the managers by the in-house staff.
19

Mr. LATOURETTE. Then in my last question for you, Mr. Parker,

I just want to focus on the 5 percent private equity. Does that

mean that the Trust is investing in IPOs?

Mr. PARKER. We are investing in limited partnerships, I want to

say exclusively at this point. Well, with private equity, some of the

private equities, the investment manager with a general partner

who is doing the investments may be investing in IPOS and

buyouts and things like that.

Mr.HIXON. What we do is we look at the performance of their

funds, and they take our contribution to those funds. Then they allocate them as they see fit, and we monitor their performance.

Some of them may be doing it, but it is not something we get involved in. We are not involved in those decisions.

Mr. LATOURETTE. So, just to be clear, you make the investments

with the limited partnership. The limited partnership, as part of

their work, may invest in an IPO, but you don’t say we are going

to invest in an IPO.

Mr. PARKER. That is correct.

Mr. LATOURETTE. OK, so there is a step in between.

Mr. Hamberger, I just want to ask you one question. There was

some talk recently about Amtrak perhaps suggesting that they

wanted to remove their employees from the railroad retirement

system and place them into social security. I would just like to solicit your thoughts on whether that is a good idea or a bad idea.

Mr. HAMBERGER. Bad idea.

Mr. LATOURETTE. Right. Am I correct, to Mr. Parker and Mr.

Hixon, it has been a while since I have seen the figures, but that

Amtrak employee contributions and Amtrak contributions to the

Trust are about 10 percent of receipts? Is that fair?

Mr. HIXON. I think that is fair. It may be slightly less now but

about that.

Mr. LATOURETTE. About 10 percent, OK.

Mr. Scardelletti, I asked Chairman Schwartz this question. We

had sort of crunch, a financial crunch in 1983, I think after the

passage of the bill, and in 2001 we saw additional retirements. Can

you, from your standpoint, sort of give us the forecast based upon

where you think employment is going and whether or not we are

going to see an additional strain on the railroad retirement system

as a result of the retirement of the baby boomers?

Mr. SCARDELLETTI. Well, I think, as the Board testified, the actuaries have gone through those numbers quite extensively, and all

indications are the fund can handle all the people that are intending to retire without any problem. As far as the railroads hiring,

of course, that is under their control, but as Mr. Hamberger just

said, they have hired 10,000 and they are talking about hiring a

number of other people. So I think the fund is in excellent shape

to handle the situation.

Mr. LATOURETTE. We had a hearing a couple of weeks ago that

Mr. Hamberger alluded to on rail capacity. Clearly, what came out

of that hearing, at least in my mind, is that there are choke points

and part of the choke points, some of it is infrastructure and some

of it is train crews, quite frankly. Just for my own edification, if

a railroad employee is retired, does he or she have the ability to

come back and help alleviate some of that difficulty if all parties
20

are willing, or does that screw up their ability to continue to receive retirement benefits?

Mr. SCARDELLETTI. No. Once you retire, you have to resign from

the railroad when you retire, and once you get your pension, you

are not allowed to work for your former employer.

Mr. LATOURETTE. OK, thank you very much.

Ms. Brown?

Ms. BROWN. Mr. Hamberger, you stated that the Act partially encouraged the retirement of a number of railroad workers, so that

the industry had a significant increase in its hiring requirements.

How many workers has the railroad industry hired since enactment of the Act, and how many would you say are the results of

the Act directly?

Mr. HAMBERGER. I really can’t say how many are a result of the

Act directly, but in my written testimony, we do have a chart that

shows the number, if I can just refer you to that. I believe it was

at 163,000 it looks like in 2001. We are now up to about 165,000.

It fell from 2001 to 2003, hitting about 153,000. So about 10,000

retirees over that two year period, and then between 2003 and

2005, rehiring those 10,000 plus about another 2,000.

Ms. BROWN. Mr. Scardelletti, I know that you are concerned for

ensuring future appropriations for the Railroad Retirement Board,

and I will be happy to send a letter with the Chairman to the Committee. Have you heard of any problems your members are experiencing with the retirement program, or is everything going real

well, as you said, from the beginning?

Mr. SCARDELLETTI. Right now, I think it is going well, but the

Railroad Retirement Board is considering cutting the number of

field offices which then will be a problem. That is what we are talking about, and we think money should be allocated for that, to keep

those offices there, so people have ready access like they have had

forever. We would be very happy to provide the Committee with details on this. Rail labor would be happy to do that. I am sure our

people have already discussed it, though, individually, but we will

provide something in writing that goes right to the crux of what

we are saying.

Ms. BROWN. That is pretty much it. You know everything is

going very well, it seems, excellent performance and relationships

with other pension plans. I guess just keep up the good work.

Any other comments that you want to make to the Committee,

Mr. Hixon?

Mr. HIXON. No, but thank you for all your assistance.

Ms. BROWN. We don’t usually have a Committee meeting this

pleasant.

Mr. LATOURETTE. Well, I thank the gentlelady very much, and

I hope this is the first of many such happy meetings.

I want to thank all of you for your testimony today. I think that,

as we said with the first panel, a growth of 50 percent, taking assets and increasing it by $10 billion in a short period of time is remarkable. Our counsel, Mr. Scammel, in commenting on your report at the close of 2005, said that if everything was as clear as

that, the Federal Government would be running a lot better. So

you certainly deserve congratulations on the good work that you

are doing. I think maybe after the hearing, Ms. Brown and I would
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like to talk to you about managing our retirement portfolios as

well.

Again, thank you all for this excellent report. Thank you for coming today, and you go with our thanks.

[Whereupon, at 3:15 p.m., the subcommittee was adjourned.]
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