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43–839 CC 1997

D.C. RETIREMENT SYSTEM—COPING WITH

UNFUNDED LIABILITIES

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

OF THE

COMMITTEE ON 

GOVERNMENT REFORM 

AND OVERSIGHT 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

APRIL 29, 1997

Serial No. 105–42

Printed for the use of the Committee on Government Reform and Oversight

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

DAN BURTON, Indiana, Chairman 

BENJAMIN A. GILMAN, New York 

J. DENNIS HASTERT, Illinois 

CONSTANCE A. MORELLA, Maryland 

CHRISTOPHER SHAYS, Connecticut 

STEVEN SCHIFF, New Mexico 

CHRISTOPHER COX, California 

ILEANA ROS-LEHTINEN, Florida 

JOHN M. MCHUGH, New York 

STEPHEN HORN, California 

JOHN L. MICA, Florida 

THOMAS M. DAVIS, Virginia 

DAVID M. MCINTOSH, Indiana 

MARK E. SOUDER, Indiana 

JOE SCARBOROUGH, Florida 

JOHN B. SHADEGG, Arizona 

STEVEN C. LATOURETTE, Ohio 

MARSHALL ‘‘MARK’’ SANFORD, South 

Carolina 

JOHN E. SUNUNU, New Hampshire 

PETE SESSIONS, Texas 

MICHAEL PAPPAS, New Jersey 

VINCE SNOWBARGER, Kansas 

BOB BARR, Georgia 

ROB PORTMAN, Ohio 

HENRY A. WAXMAN, California 

TOM LANTOS, California 

ROBERT E. WISE, JR., West Virginia 

MAJOR R. OWENS, New York 

EDOLPHUS TOWNS, New York 

PAUL E. KANJORSKI, Pennsylvania 

GARY A. CONDIT, California 

CAROLYN B. MALONEY, New York 

THOMAS M. BARRETT, Wisconsin 

ELEANOR HOLMES NORTON, Washington, 

DC 

CHAKA FATTAH, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland 

DENNIS J. KUCINICH, Ohio 

ROD R. BLAGOJEVICH, Illinois 

DANNY K. DAVIS, Illinois 

JOHN F. TIERNEY, Massachusetts 

JIM TURNER, Texas 

THOMAS H. ALLEN, Maine 

HAROLD E. FORD, JR., Tennessee 

———

BERNARD SANDERS, Vermont 

(Independent) 

KEVIN BINGER, Staff Director 

DANIEL R. MOLL, Deputy Staff Director 

JUDITH MCCOY, Chief Clerk 

PHIL SCHILIRO, Minority Staff Director 

SUBCOMMITTEE ON THE CIVIL SERVICE

JOHN L. MICA, Florida, Chairman 

MICHAEL PAPPAS, New Jersey 

CONSTANCE A. MORELLA, Maryland 

CHRISTOPHER COX, California 

PETE SESSIONS, Texas 

ELIJAH E. CUMMINGS, Maryland 

ELEANOR HOLMES NORTON, Washington, 

DC 

HAROLD E. FORD, JR., Tennessee 

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California 

GEORGE NESTERCZUK, Staff Director 

NED LYNCH, Professional Staff Member 

CAROLINE FIEL, Clerk 

CEDRIC HENDRICKS, Minority Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on April 29, 1997 .............................................................................. 1

Statement of: 

DeSeve, G. Edward, Comptroller, Office of Management and Budget; 

Anthony Williams, chief financial officer, District of Columbia government; and James Blum, Deputy Director, Congressional Budget Office . 14

Kane, Betty Ann, chairman, Legislative Committee and trustee, District 

of Columbia Retirement Board; Ron Robertson, chairman, Metropolitan 

Police Labor Committee, Fraternal Order of Police; Thomas N. Tippett, 

chairman, Pension Committee, Fire Fighters Association of the District 

of Columbia; and James Baxter, treasurer, Washington Teachers 

Union ............................................................................................................. 79

Letters, statements, etc., submitted for the record by: 

Baxter, James, treasurer, Washington Teachers Union, prepared statement of ........................................................................................................... 117

Blum, James, Deputy Director, Congressional Budget Office: 

Information concerning unfunded liability .............................................. 61

Prepared statement of ............................................................................... 34

DeSeve, G. Edward, Comptroller, Office of Management and Budget, 

prepared statement of ................................................................................... 17

Kane, Betty Ann, chairman, Legislative Committee and trustee, District 

of Columbia Retirement Board, prepared statement of ............................. 84

Mica, Hon. John L., a Representative in Congress from the State of 

Florida, prepared statement of .................................................................... 5

Norton, Hon. Eleanor Holmes, a Representative in Congress from the 

District of Columbia, prepared statement of .............................................. 11

Robertson, Ron, chairman, Metropolitan Police Labor Committee, Fraternal Order of Police, prepared statement of ............................................ 97

Tippett, Thomas N., chairman, Pension Committee, Fire Fighters Association of the District of Columbia, prepared statement of ....................... 103

Williams, Anthony, chief financial officer, District of Columbia government, prepared statement of ........................................................................ 28

(1)

D.C. RETIREMENT SYSTEM—COPING WITH 

UNFUNDED LIABILITIES 

TUESDAY, APRIl 29, 1997 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON THE CIVIL SERVICE, COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT, Washington, DC. 

The subcommittee met, pursuant to notice, at 2:10 p.m., in room 

2154, Rayburn House Office Building, Hon. John L. Mica (chairman of the subcommittee) presiding. 

Present: Representatives Mica, Morella, Cummings, Norton, and 

Ford. 

Staff present: George Nesterczuk, staff director; Caroline Fiel, 

clerk; Ned Lynch, professional staff member; and Cedric Hendricks, 

minority counsel. 

Mr. MICA. Good afternoon. I would like to call this meeting of the 

House Civil Service Subcommittee to order. 

Today the subcommittee will be holding a hearing on the D.C. retirement system. The title of it is, ‘‘Coping With Unfunded Liabilities.’’ This hearing is at the request of one of our Members, the 

Delegate from the District of Columbia, Ms. Norton, and also due 

to my interest in this topic and the administration’s proposal for 

making dramatic changes in the D.C. retirement system. 

I would also like to announce, for those who were interested in 

the markup that was to take place immediately following this hearing, that the markup will be postponed, and hopefully we will have 

an opportunity to announce that it will be held at some near future 

date, but it will not be this afternoon. 

I would like to start this afternoon’s hearing on the D.C. retirement pension changes with my opening statement, then yield to 

our members. 

Ladies and gentlemen, my colleagues, from the moment that I 

accepted responsibility as Chair of this subcommittee, I have always emphasized my concern and my commitment that we adequately fund retirement systems for our public employees, particularly our Federal employees. 

Today’s hearing will review the proposal by the administration to 

dramatically alter the District’s employee pension fund. The proposal that has been made has been reviewed by several of our oversight agencies, and today we will have an opportunity for the subcommittee to understand the consequences of alternatives currently 

being considered. 

For most of its employees, the District of Columbia provides a defined contribution retirement plan. With a defined contribution 

2

plan, Government provides funds for future pensions from current 

expenses. Therefore, it has no unfunded future obligation, and pensions earned by today’s employees are not vulnerable to future fiscal anxieties. More important, future taxpayers are protected from 

potential fiscal time bombs in their Governments’ accounts. 

Defined benefit retirement plans often promise more generous 

benefits but are rarely funded by dedicated revenues. Instead, future payments are promised from the ‘‘full faith and credit’’ of the 

Government that, in fact, owes the pensions. 

As the Congressional Budget Office described this process in a 

March 27 memorandum, it is the equivalent of saving for your children’s college education by sticking IOUs in a cookie jar. They used 

this analogy, and I will refer to it today. When the tuition comes 

due, somebody will have to redeem the IOUs. 

Again today, CBO illustrates the problem very well: nonmarketable Treasury securities that make up the assets of Federal pension funds are nothing more, in fact, than IOUs. In CBO’s words, 

and I quote, ‘‘Those Federal securities are merely the promise of 

the Federal Government to itself, the left pocket owes the right 

pocket, but the combined trouser assets are exactly zero.’’ As CBO 

describes the results of this fiscal charade, ‘‘From the perspective of the Federal Government as a whole, none of the $1.5 trillion in 

promised annuities is funded.’’ That’s not what I said; that’s what 

CBO said. ‘‘None of the $1.5 trillion in promised annuities is funded.’’

When Congress established home rule for the District, it selected 

a different option to fund the future benefits of its police, firefighters, and teachers. The District’s Retirement Board manages 

investments that earn revenues rather than IOUs. These accounts 

now hold about $4.2 billion in real assets to provide for future pensions. Even with that investment success, the District’s future obligations are still only 44 percent funded. 

For fiscal year 1998, the cost of redeeming the IOUs in the District’s ‘‘full faith and credit’’ cookie jar amounts to $307 million. 

The District, however, cannot easily raise taxes to fund this obligation. The District’s need to borrow restricts its ability to provide 

current services and increases its need to tax current residents. 

The District’s high tax rates tend to reduce its potential for attracting business, investments, and an expanded resident population. 

Clearly, the District needs relief from this vicious fiscal cycle. 

The administration and the District government set an arbitrary 

target for an annual retirement payment of $60 million. Over the 

next 10 years, they also plan to spend more than $3 billion of the 

District retirement fund’s assets to pay the benefits that the President has described as being assumed by the Federal Government. 

This plan, unfortunately, has two major flaws: First, the plan allows the Federal Government to raid the hard assets of the District 

retirement fund. This provides the appearance of establishing a 

balanced budget or working toward a balanced budget, while the 

administration continues to increase domestic spending within the 

5-year budget window that we’ve been talking about here. 

Rather than reduce spending to pay for the District’s recovery, 

the administration plans to raid the retirement fund of the District’s police, firefighters, and teachers. This potential fiscal fiasco 

3

will not erase these obligations. Instead, what will happen is, they 

will be transferred into the budgetary so-called ‘‘out years.’’ In the 

year 2010, the assets raided from the District retirement fund will 

have been depleted. Tomorrow’s taxpayers will be left holding the 

bag, a pretty sizable one, too. 

With their real funds expended, District employees will join our 

current Federal employees and retirees in an annual raid on the 

U.S. Treasury just to survive. Unfortunately, there will be nothing 

but IOUs in the Federal cookie jar. Where the District’s unfunded 

liability is a mere $4.8 billion—I say that ‘‘mere,’’ because the Federal retirement system is now $540 billion—the unfunded liability 

that we are going to combine this with, is over a half trillion dollars. 

Where the District each year must raise more than $300 million 

to fund its obligations, the Civil Service Retirement and Disability 

Fund needs to tap current taxpayers for about $30 billion to cover 

this year’s shortfall. In this year’s budget analysis provided by 

Chairman Kasich, I think we rank about third or fourth in obligations tapping the general treasury. I think first is Social Security 

and Medicare and Medicaid, and then this $30-billion shortfall to 

cover our Federal retirees’ benefits. 

Within 20 years, in 2016, the annual cost of paying for funds raided from the Federal cookie jar will exceed $100 billion. By 

2041, OPM has forecasted that the annual shortfall for Federal 

pensions will amount to $221 billion that year. 

With recurrent shortfalls facing future Congresses each year, 

pressures will inevitably increase to reduce the future benefits authorized by current law for present employees. Federal employees’ pensions, therefore, will become more vulnerable in the future, unless we devise measures to fund them adequately, and fund the 

pensions for which Congress has made promises to our Federal employees. 

The second major flaw in this proposal is that it would establish 

a precedent that would give deep concern to every Federal employee with a nickel in the Thrift Savings Plan. We saw last year, 

during the dispute over the extension of the debt ceiling, that the 

Treasury was willing to raid the G Fund to extend the Government’s borrowing ability. Now the administration is willing to raid 

the District’s retirement fund to meet short-term pension obligations. 

If not rejected, this rationale might prove a precedent for future 

raids on the Thrift Savings Plan’s stock or bond funds. We must 

establish firmly the principle that, when Federal retirement funds 

are set aside in trust, they are, in fact, off limits for any other purposes. 

It is my hope today that we can accomplish two objectives in this 

hearing: First, I want everyone involved to leave this room with a 

clear understanding that the proposal that the administration has 

put on the table is an unacceptable solution for the future of the 

District and the future of taxpayers. 

It’s a bad deal for the police. It’s a bad deal for the firefighters. 

It’s a bad deal for the teachers and other employees, because it exceeds the fiscal capacity of the governments making the deal. Most 

of all, it is a future albatross that will only compound challenges 

4

that future Congresses and the District of Columbia will face in attempting to redeem the IOUs in the empty Federal cookie jar. 

Finally, I want everyone to recognize that we have reached the ‘‘out years’’ of earlier reforms. We are here. We do not need to add 

to the explosive power of the fiscal time bomb that has already 

been created. We do need to work together to develop a solution 

that will protect the hard assets of the District’s retirement fund 

and begin to restore the retirement fund’s assets for future retirees 

and current employees. 

Those are my opening comments, and I yield now to the ranking 

member, the distinguished gentleman from Maryland, Mr. 

Cummings. 

[The prepared statement of Hon. John L. Mica follows:]

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7

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

Mr. Chairman, the issue of how best to resolve the problems 

caused by the District of Columbia’s unfunded pension liabilities 

for police, firefighters, teachers, and judges has been under the consideration of the District of Columbia Subcommittee for some time. 

I must say that I was surprised to see it come up on our agenda. 

I recognize, however, that your own interest in the Civil Service 

Retirement System’s unfunded liability is what draws you to an examination of the District’s situation. 

Having said that, Mr. Chairman, my focus today will likely be 

the same as yours, to determine whether or not there are lessons 

to be learned from the District’s experience that can guide the administration and perhaps the reform of our retirement system. 

I must say, at the outset, that I see more differences than similarities, which leaves me uncertain as to just what this exercise 

will accomplish. Nonetheless, I look forward to the testimony of 

each of the scheduled witnesses and to whatever recommendations 

they care to make concerning the Civil Service Retirement System. 

We currently have in place two retirement systems serving our 

workforce: the Civil Service Retirement System and the Federal 

Employees Retirement System. Both appear to be functioning just 

the way Congress intended. The unfunded liability that has been 

incurred was expected. Those who earn benefits can still reasonably expect to be paid them. 

But we will hear from the Congressional Budget Office today 

that current Federal fiscal policies are creating some risks that our 

future pension benefit will not be paid in full. I believe that our 

pensions can be secured without necessarily imposing further cuts 

on Federal and Postal employees and retirees. 

In contrast, the District’s present pension system for police, firefighters, teachers, and judges is not secure, but this is not the District’s fault. The system was designed not by the District but by the 

Congress, primarily to serve the Federal Government’s own economic self-interest. 

This system and a $2 billion unfunded liability were imposed on 

the District by the Congress in 1979. The District was not given 

the ability to control its growing costs, either by changing the funding formula or by reducing the generosity of benefits. This was 

surely a recipe for disaster. That is just what it has wrought. 

Today, the District’s initial unfunded pension liability has grown 

to nearly $5 billion due to the accrual of interest, which Federal 

law did not require to be paid. As a result, the District has made 

payments to the system’s retirement fund far in excess of what it 

should have. Now, nearly an insolvent District lacks the capacity 

to further carry or pay off this liability. It should no longer be 

made to carry the burden of a debt of this magnitude which is not 

its own. 

Our distinguished colleague, Congresswoman Norton, has introduced legislation addressing the problem of this unfunded pension 

liability during each of the past two Congresses. One of her bills 

received a hearing back in June 1994. While they have not received 

any further legislative action, these bills nonetheless have served 

to keep a sharp focus on the inequity of this situation. 

8

Her efforts, no doubt, paved the way for the Clinton administration to come forward in January of this year with its own proposal 

to relieve the District of this obligation as part of its National Capital Revitalization and Self-Government Improvement Plan. 

Mr. Chairman, I believe that what ought to be the subject of 

some immediate attention here on Capitol Hill is the relative merit 

of the Congresswoman’s plan, the President’s plan, or any other serious plan to address the District’s unfunded pension liability. That 

undertaking, however, should be handled by the District of Columbia Subcommittee, with those of our members having time and expertise to contribute being free to do so. 

Thank you very much. 

Mr. MICA. Thank you. 

I would like to recognize now the gentlelady from Maryland, Mrs. 

Morella. 

Mrs. MORELLA. Thanks, Mr. Chairman. 

Mr. Chairman, as a member of both this subcommittee and the 

Subcommittee on the District of Columbia, I am pleased to have 

this opportunity to explore ways in which to address the District 

of Columbia’s growing unfunded liability for the pension plans for 

police, firefighters, teachers, and judges. 

Congress first authorized funding for pension plans for police, 

firefighters, teachers, and judges during the early part of the century. At the time, the Federal Government instituted a pay-as-yougo method to fund D.C. pensions, failing to put aside enough money 

each year to make sure that funds would be available to meet future obligations. It is my understanding that, during these early 

years, the District made contributions to the Federal Government 

that went into the Federal Treasury and not into a separate fund. 

In 1979, when the Congress passed the Home Rule Act, the total unfunded liability was $2.6 billion. Under this home rule legislation, the Federal Government assumed responsibility for only $646 

million. The remainder of the unfunded liability, $2 billion, was 

transferred to the District of Columbia. Since home rule was established, the District has contributed far more than the normal costs 

of these plans, placing a tremendous burden on its operating budget. 

In 1995, the District spent $291 million for retirement for police, 

firefighters, and teachers. In Baltimore, the retirement cost for 

these same employees was $85 million, $206 million less than in 

the District of Columbia. This year the District will pay $321 million, and in 2007, when the District will assume full responsibility 

for this unfunded pension liability, the city will be required to pay 

$640 million. 

The unfunded pension liability of $2 billion in 1979 is now, in 

1997, estimated to be $4.8 billion, and it threatens to grow to $6 

billion by 2004. So unless we resolve this unfunded pension liability issue, the District will never achieve financial recovery and stability. 

I firmly believe that we owe a pension system that does offer security and stability to our police, firefighters, teachers, and judges. 

So, Mr. Chairman, I look forward to hearing from our expert witnesses today, so that we can look to this challenge and arrive at 

a resolution that will be appropriate. 

9

Thank you. 

Mr. MICA. I thank the gentlelady and now recognize the 

gentlelady from the District, who has great interest in this topic. 

We appreciate her leadership, and we are also trying to honor her 

request to look into this matter. 

Thank you. You are recognized. 

Ms. NORTON. Thank you very much, Mr. Chairman. 

May I thank you for your interest in the complicated District 

pension liability problem and for your generous courtesy in postponing this hearing when I had an unavoidable conflict. 

Few would disagree with the claim that the most important part 

of the President’s plan is the proposed pension relief. There are 

four reasons: First, the unfunded pension liability was a principal 

reason for the District’s insolvency. 

Second, this problem must be resolved before 2004, when the 

meager Federal contribution disappears and the District’s annual 

outlay escalates to an amount that, in and of itself, would destroy 

the city. 

Third, the unfunded pension liability is entirely congressionally 

accrued. 

Fourth, the Congressional Budget Office has made a set of findings concerning serious additional harm to the District, directly 

traceable to the liability: that the unfunded liability reduces the 

District’s bond rating, thus raising the city’s borrowing cost; lowers 

property values; and requires the city to pay a premium to hire and 

retain employees. 

At a time when there is rationing of resources and continuous 

cuts in vital services in the city, it is worth noting that the District 

has been overfunding these plans since they were turned over in 

1979. These plans for firefighters, police, teachers, and judges were 

handed over to the District with an unfunded liability totaling approximately $2 billion. Today, almost entirely as a function of interest on the congressional liability amount, that liability has 

grown to over $5 billion. 

Designing suitable pension relief that fits the District’s needs, as 

well as Federal budget constraints, is unusually difficult. The 

major reason for the difficulty is not the drawing of the new pension plan itself. The primary reason this task is so hard lies with 

the congressional commitment to deficit reduction. 

I do not envy Mr. Raines and Mr. DeSeve and other members of 

the administration as they tackle the thankless task of trying to 

eliminate billions of dollars of congressionally accumulated pension 

liability without adding to the deficit. Any awkwardness in the administration’s proposal is due primarily to this problem. 

Yet Chairman Mica has additional concerns. His concerns include what these pension programs would add to the Federal liability, although the District’s liability, in this case is and always has 

been Federal liability. The chairman is also attracted to the investment strategy used by State and local pension boards and would 

like to retain it. 

With difficult problems already on the table, however, the pension proposal is fraught with more hurdles than any other section 

of the bill. That is a dangerous posture for an indispensable provision. Yet I have no doubt that, if the deep problem-solving talent 

10

of OMB and the committee is applied to this provision, we will be 

able to handle the complexity. 

The administration has the special gratitude of the District for 

proposing to remove entirely this liability. I want to express my appreciation again to Chairman Mica for his attention to this issue. 

I welcome today’s witnesses and look forward to their testimony. 

Thank you again, Mr. Chairman. 

[The prepared statement of Hon. Eleanor Holmes Norton follows:]

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Mr. MICA. I thank you. 

I would now like to recognize our newest member of the panel, 

Mr. Ford. 

Mr. FORD. Thank you, Mr. Chairman. 

Let me thank Congresswoman Norton for her leadership on this 

issue, and the other committee members, and, of course, the panelists for being here today. 

I don’t really have a lengthy opening statement. It is really more 

of a comment and a question. I apologize, I have a group of students from my district here who have come up specifically to sing 

to their young Congressman on the other side of the Capitol steps, 

so I will have to leave early. I do hope you do excuse my having 

to leave early. 

Although the focus of the hearing is on retirement, I think the 

ramifications of this issue have much broader ramifications, and 

perhaps repercussions, for all of the District residents. In human 

terms, as you all know, and all of us on this committee know, we 

are talking about hard-working police persons, firefighters, judges, 

and our hard-working teachers. But the District’s ability to meet 

the most essential needs of its young people is also in jeopardy 

here, as well. 

All of us probably saw this morning’s paper, as it said 11 D.C. 

schools to be closed, 5 others spared. At least part of the reason 

these schools were forced to shut down is because the District does 

not have the financial resources necessary to keep them alive and 

well. 

Addressing the issue of unfunded liabilities will not solve all of 

the District’s financial woes, as I realize, but I cannot help but believe that, if the District had an additional $136 million in its 

budget, the amount of savings that would be generated by Congresswoman Norton’s budget in the first year, at least some of 

these schools would have been able to remain open. 

I guess what I would like the panel to address—and I look forward to reading or at least hearing some of the testimony—is that 

by confronting and resolving some of the issues related to unfunded 

liabilities, will this enable the District to better direct its limited 

resources toward some of the other pressing problems it faces, particularly schools and some of the public services? 

Again, I thank the panelists, and I thank Congresswoman Norton for her leadership, and our chairman, as well. 

Mr. MICA. Thank you, Mr. Ford. 

We have completed our opening statements, and I would like to 

welcome our panel this afternoon. We have three witnesses: The 

first witness is Ed DeSeve, who is the Comptroller of the Office of 

Management and Budget; we have Anthony Williams, chief financial officer of the District of Columbia government; and James 

Blum, who is Deputy Director of the Congressional Budget Office. 

Since this panel is investigation and oversight, and within the 

purview of Government Reform and Oversight, we do swear in our 

witnesses. 

Gentlemen, if you would stand and raise your right hands. 

[Witnesses sworn.] 

Mr. MICA. Thank you. 

14

I would like to welcome you. We will hear first from the Comptroller in the Office of Management and Budget, Mr. DeSeve. 

You are recognized, sir. 

If you would like to, as those of you who have been here before 

know, you can summarize. We like to have your statements limited 

to 5 minutes, and you are free to submit any additional testimony 

for the record. 

Thank you. 

STATEMENTS OF G. EDWARD DeSEVE, COMPTROLLER, OFFICE 

OF MANAGEMENT AND BUDGET; ANTHONY WILLIAMS, 

CHIEF FINANCIAL OFFICER, DISTRICT OF COLUMBIA GOVERNMENT; AND JAMES BLUM, DEPUTY DIRECTOR, CONGRESSIONAL BUDGET OFFICE 

Mr. DESEVE. Thank you very much, Mr. Chairman, members of 

the committee, for the chance to discuss the President’s plan to 

have the Federal Government assume the great majority of the estimated $8.5 billion of actuarial liability for the pension programs 

of the District’s teachers, firefighters, police, and judges. This proposal is a key element of the President’s plan to revitalize the District of Columbia and strengthen home rule. 

I would like to begin by summarizing the National Capital Revitalization and Self-Government Improvement Plan. I will then 

touch upon what the pension proposal is intended to do and what 

the District will have to do to make the proposal work. 

As Franklin D. Raines, the Director of the Office of Management 

and Budget, stated during his February 20th testimony before the 

District of Columbia Subcommittee, the current relationship between the District and the Federal Government is broken. Our Nation’s Capital faces not only structural financial problems, but even 

serious obstacles to providing the most basic services to its residents. 

The President has presented a plan to reorder that relationship, 

putting our capital city on firmer financial ground and improving 

home rule’s prospects for success. The plan is not a panacea. The 

District government and financial authority will have to continue 

to do the hard work necessary to create a city where the streets 

are safe, where the children enjoy the quality education they deserve, where every resident has a chance to make the most of his 

or her own life, and where the city government spends within its 

means. 

I want, parenthetically, to applaud the City Council today as 

they go through the very difficult budget negotiations to find the 

last $45 million in balance. It is a tough problem, and they are taking it on very, very responsibly, a year earlier than the Financial 

Responsibility Act would have required. 

Through the plan, the Federal Government will assume a significant and growing share of the District’s operating costs over the 

next 5 years, in the areas of Medicaid, prisons, and criminal justice. Beyond providing relief to the city’s operating budget, the Federal Government will also invest heavily in the Nation’s Capital 

over the next 5 years, in the areas of economic development, transportation, criminal justice improvement, and tax collection. 

15

Why should the Federal Government assume the District’s pension liability? In 1979, the District of Columbia Retirement Act required the District to assume liability for the pensions of teachers, 

police, firefighters, and judges. The act authorized a Federal payment to the District’s retirement system of $52 million a year for 

25 years, a stream of payment with a discounted present value of 

$646 million in 1979 dollars. 

However, the act also transferred a $2.65-billion unfunded liability to the District retirement system. This left the District with 

more than $2 billion in anticipated future payments that were unfunded. From 1979 to the present, contributions by the District 

government and employees to the retirement system, along with 

earnings, have more than covered the cost of benefits paid out annually. But these payments have not stopped the unfunded liability 

from growing. 

As of October 1, 1996, the District’s actuary certified that the present value of future benefits for the retirement plan is $10.5 billion. The accrued actuarial liability sat at about $8.5 billion. While 

accumulated assets of the retirement plan are valued at $3.7 billion, the net unfunded liability has grown since 1979 to about $4.8 

billion, net accrued unfunded liability. This obligation is the District’s largest liability. Meeting this liability will consume an increasing share of the city’s budget if the President’s pension proposal is not enacted. 

Beginning in fiscal year 1998, the Federal Government proposes 

to assume both financial and administrative responsibility for the 

major share of the benefits payable under the District’s retirement 

program for police and fire and teachers. Because the President’s 

plan will make the Federal Government responsible for financing 

but not administering the District’s courts, the Federal Government will also assume all liabilities and benefits associated with 

the plan for judges. 

Legislation will provide for transfer of assets and liabilities to the 

Federal Government. The Federal Government will be responsible 

for nearly all pension benefits accrued under the plan for all active 

and retired employees. Most of the assets of the retirement plan 

will be transferred to the Federal Government. The Federal Government will pledge its full faith and credit to meet its responsibilities to these beneficiaries. These assets will be used only to pay 

benefits to these beneficiaries. 

The precise parameters of the assumption of liability and distribution of assets is still being discussed with the District financial 

authority and the District’s pension board, based on figures generated by the District’s actuaries. 

The Federal Government will make full benefit payments to current retirees and beneficiaries, and it will pay the vast majority of 

benefits for current employees. Benefits payable to current employees will be ‘‘frozen,’’ based on service earned as of the date the legislation is introduced. The Federal Government will pay retirement, death, and some of their disability benefits to the extent they 

are earned based on frozen service. 

Active employees will be able to count on future service with the 

District toward vesting and eligibility for retirement benefits but 

not for the amount of the benefits, so that, as additional years of 

16

service are earned, those will be under a new plan. Active employees, however, will get the benefit of subsequent pay increases and 

the cost that the Federal Government will be bearing. 

The District government will agree to put in place a new retirement program for current active teachers, police, and firefighters 

for future benefits, as well as for employees hired after the date the 

current retirement programs are frozen. The District will also 

maintain responsibility for those employees, other than teachers, 

police, firefighters, and judges, hired after October 1, 1997. 

The market value of the accumulated pension assets, as of Octo- ber 1, 1996, was $3.75 billion. Most, if not all, of these assets will 

be transferred to the Federal Government. The Federal Government will appoint a third-party trustee to administer the plan and 

manage these assets, which will be liquidated as needed to make 

payments to beneficiaries. 

Therefore, there will be no increase in Federal outlays until after 

the existing assets are exhausted, which is not estimated to occur 

until well into the next decade. A trustee will act as a fiduciary, 

because the Federal Government typically does not hold private assets to fund pension obligations that are its direct responsibility. 

As with the other aspects of the President’s plan, Federal assistance will be conditioned on the District’s taking specific steps outlined in a Memorandum of Understanding between the District and 

the Federal Government. 

Our engagement with the District’s pension concern is nothing 

new. The administration has previously worked with D.C. stakeholders to consider various proposals, including the President’s fiscal year 1997 budget proposal to provide an additional $52 million 

toward its unfunded liability and growing this stream in future 

years. 

The administration has reviewed the proposal put forward by 

District Delegate Eleanor Holmes Norton. It has also assessed the 

recommendations of the D.C. Appleseed Foundation to have the 

Federal Government assume the assets and liabilities associated 

with the pension system. 

As with other elements of the President’s plan, we are working 

with the District government, the financial authority, and Congress 

to use common actuarial and budget numbers, based on an analysis 

by the District actuary, to finalize cost savings, liability, and cashflow associated with the pension proposal. We will be happy to 

share these final figures and resulting analysis with the committee, 

as we have done in the past, as they become available. 

That concludes my testimony, Mr. Chairman. Thank you very 

much. 

[The prepared statement of Mr. DeSeve follows:]

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Mr. MICA. Thank you. We will reserve questions until we finish 

all the panelists. 

I next recognize Mr. Anthony Williams, the chief financial officer 

of the District of Columbia. 

Welcome. You are recognized, sir. 

Mr. WILLIAMS. Mr. Chairman and members of the committee, 

thank you for the opportunity to testify on the President’s plan for 

addressing the District’s retirement dilemma, as part of its overall 

economic recovery. I applaud you, Mr. Chairman, for your interest 

in this matter, and, of course, Mrs. Norton, for her longstanding interest in addressing this important issue. 

I think all of the different plans before us and all the discussion 

about the District’s financial recovery have focused on three essential components: Obviously, one component, improving management and bringing cost efficiencies to the District; a second component, improving our economy and needed revenue; and a third component, bringing needed investment, and that needed investment 

in the form of the Federal Government stepping forward and playing its proper role in the District’s opportunity and destiny. 

I mention these three components because the President’s plan, 

we believe, in addressing the retirement problem, this unfunded liability, is essential for us proceeding through this recovery. Without this plan—I’ve likened it, to basically turning the lights off on 

the Titanic to achieve better energy efficiency, when we still know, 

without addressing this unfunded liability, we’re going to hit this 

iceberg. This is a major issue before us, and I applaud the President for his commitment to solving it. 

Just some of the impacts, Mr. Chairman, very, very briefly. I 

think Congresswoman Morella mentioned the impact on our credit 

rating, and this is, I think, a big factor. Over the years, if you talk 

to the rating agencies, you talk to the investment bankers, an overall cloud over our opportunities in the public financial markets has 

been this unfunded liability. 

We have, above and beyond that, the contributions we have made 

in excess of the full, normal costs that we are paying into this plan. 

All these contributions are made out of our cash resources available to us, and I can tell you that, as we operate day-by-day, this 

is a major burden. 

Finally, there is the aspect—the President’s plan addresses this 

in terms of investment for economic recovery and the Economic Development Corporation, a number of plans have addressed this in 

terms of tax incentives, all this to bring much needed investment 

into the District. I think there have been a number of studies. 

There has been a range of discussion about the reluctance of investors to come to the District when there is this overarching cloud 

over our ability to meet our obligations and to make needed investments in public safety, streets, and other improvements in the future, when we know that, in the year 2005, essentially, our obligations year by year are going to double. 

So, for all those reasons, I applaud the commitment of the President in shouldering the burden and addressing our unfunded pension liability. I, as others, would point out that the plan is not a 

perfect plan, but I think, for just those reasons—the plan bumps 

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eral Government wants to have—I think, for just these reasons, I 

have reason to applaud the ingenuity of the OMB and the President in crafting it in a very, very difficult operating environment. 

I guess what I’m saying, Mr. Chairman, is that an imperfect environment will often result in imperfect results. But however imperfect those results, I applaud those results and look forward to 

working with the OMB and the Congress as we fashion an ultimate 

plan for the District’s recovery. 

I thank you. 

[The prepared statement of Mr. Williams follows:]

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Mr. MICA. Thank you for your testimony. I’ll have some comments on the Titanic a little bit later. 

I, right now, recognize Mr. Blum, Deputy Director of the Congressional Budget Office. 

You are recognized, sir. 

Mr. BLUM. Thank you, Mr. Chairman and members of the subcommittee. 

I appreciate the opportunity to discuss the President’s proposal 

for the District of Columbia’s pension plan. My statement, which 

I will submit for the record, assesses the consequences of the administration’s approach for beneficiaries and taxpayers, compares 

the President’s proposal with alternative forms of assistance, and 

discusses some of the implications for the Federal pension system. 

Mr. MICA. Without objection, we are going to put the whole report into the record. Thank you. 

Mr. BLUM. Excellent. 

I think there are four major points that I would like to draw 

from that prepared statement this afternoon. The first is that the 

administration’s proposal takes advantage of the cash-based Federal budgetary accounting system to delay recognition of the Federal assumption of the District’s unfunded pension liabilities. 

Under cash-based accounting, the benefit payments to District 

annuitants would be financed by selling the pension plan’s assets, 

which would be accounted for as an offsetting receipt in the Federal budget. Thus, the administration’s proposal would have no effect on net Federal outlays or the deficit for at least 10 years. After 

the assets are exhausted, annual Federal outlays for District annuitants would initially amount to between $700 million and $800 

million. 

If the budget were on an accrual basis, conversely, the assumption of the unfunded liabilities would be recognized immediately as 

a Federal expense. Now, the same effect could be had in a cashbased budget by simply making a lump-sum payment to the District to cover the amount of the unfunded liabilities. Obviously, in 

a situation where we are trying to reduce the Federal budget, a 

payment of that size all a one time is a very large pill to swallow. 

The second point is, the administration’s proposal would probably 

enhance the longer term security of District plan benefits, but it 

would subject, as the chairman pointed out, the District annuitants 

to the same political risk faced by Federal employees under their 

own retirement system. Earned benefits under the District plan are 

currently at substantial risk, as we have heard, because of the unfunded liability and the inability of the District to finance that burden. 

While the long-term projected cash outlays for Federal retirement benefits are unlikely to impose a heavy burden on future taxpayers—projections in my statement show that the Federal outlays 

for retirement benefits would actually fall as a percentage of gross 

domestic product, the total size of the economy, after 2015. Nonetheless, when you look at the overall fiscal situation facing the Federal Government, our long-term projections saw Government 

spending increasing rather significantly after 2010, as a result of 

the retirement of the baby boom generation, and continued expansion in the use of federally financed health care expenditures. 

33

That is shown in the second table in my statement that projects 

out the long-term budgetary pressures that the Federal Government is facing, and they were explained in some detail in a report 

that we just issued last month, entitled ‘‘Long-Term Budgetary 

Pressures and Policy Options.’’ The projected fiscal stress confronting the Federal Government 

leaves retired Federal workers exposed to the political risk that 

their earned benefits would not be paid in full, in the face of unrelenting downward pressures on Federal spending that we think is 

going to happen, under current policies, in the long-term. 

The third point, an alternative approach to the administration’s 

proposal that would also recognize the Federal responsibility for 

the District’s unfunded pension liability but would retain the current pension system, would be to simply increase and extend the 

current Federal annual payment to the District pension plan, as 

recommended last year, for example, by Delegate Eleanor Holmes 

Norton. 

This alternative approach would avoid the cost of setting up a 

new retirement plan to fund future earned benefits for District employees, retain the independent retirement board and its sound 

funding policies, and also provide fiscal relief to the District. One 

disadvantage of amortizing the unfunded liability over the next 30 

years or so is that the future Federal payments would not be certain, as the Federal Government grapples with the unsustainability 

of its own fiscal problems. 

The fourth and final point, improving the Federal Government’s 

long-term fiscal condition would increase the security of the current 

system of Federal employee benefits. If we were able to solve, in 

the next several years, this long-term problem facing us, then I 

don’t think, Mr. Chairman, we would be concerned about the security of the Federal Employees Retirement System. 

But the pressures on the budget which emanate from the commitments to the elderly, through our Social Security system, and 

the Medicare system, and the Medicaid system, do impose very 

strong and forceful pressures on the Federal budget. If those problems or those pressures can be relieved, then I think the Federal 

Employees Retirement System would not be subject to the same political risk that it is currently. 

Fully funding current plans could contribute to this difficult process of improving the fiscal condition, but only—only—if it affected 

congressional behavior to act sooner rather than later, in terms of 

reducing spending or increasing taxes. 

Alternatively, the Congress could switch the Federal retirement 

system to a defined contribution basis. Such a change does entail 

some risk, in terms of the vulnerability of the funds for the beneficiaries, in terms of investment risk, but it certainly reduce the political risk that would be involved. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Blum follows:]

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Mr. MICA. I thank each of our panelists. 

Mr. Blum, is there a precedent for raiding trust funds in this 

fashion? 

Mr. BLUM. An analogy might be drawn—I don’t know if I would 

call this a precedent—but an analogy might be drawn to what happens with private sector defined benefit plans where companies terminate these plans. They go out of business. The Federal Government, in fact, has an insurance program. The Pension Benefit 

Guarantee Corporation, does provide insurance for those plans. 

And, in effect, what happens when that occurs is that the corporation takes over the assets of the terminated plans, and the 

Federal Government is committed to paying the benefits that have 

been earned under those plans, up to a limit, in terms of the 

amount of the benefits that can be paid. 

Actually, the way that this shows up in the Federal budget is 

quite similar to what the administration has proposed here for the 

District, in the sense that the assets in those privately terminated 

plans are drawn down as needed and to help finance the Federal 

benefit payments that go to the beneficiaries. The budgetary treatment turns out to be essentially the same, and I think one could 

say that there is a similar situation going on here with the administration’s proposal. 

Mr. MICA. Well, I think you also testified that, while there is 

some short-term gain in this plan—it does relieve the District, I 

think initially, of about a quarter of a billion, I guess, initial payment, and then that comes down—what is the pitfall in the longterm? Are we just adding to this already massive unfunded liability 

that the feds have in their own system? 

Mr. BLUM. Well, the Federal Government would be taking over 

the unfunded liability of $4.8 billion, as it stands now, and that 

would be added to, as you pointed out, our essentially unfunded liability of $1.5 trillion. 

Mr. MICA. Did you calculate what that would be, like when we run out of funds, the $4.8 current? 

Mr. BLUM. Well, we think that that would last, assuming the remaining—the assets would be drawn down only as needed each 

year, and therefore they would continue to have earnings. We think 

that this would last for about 10 years. 

Mr. MICA. What would the unfunded liability be in 10 years, the 

same? 

Mr. BLUM. No, I assume that would grow. 

Mr. MICA. To how much? 

Mr. BLUM. I haven’t done the calculation for that, but we could 

do that. 

[The information referred to follows:]

In the Administration’s proposal, the unfunded liability of $4.75 billion would 

grow by the assumed actuarial interest rate of 7.25 percent. After 10 years, it would 

total $9.6 billion.

Mr. MICA. So, as we are drawing down the asset, the unfunded 

liability is increasing, and in 10 years—if you could provide the 

subcommittee, I would like to know what kind of an obligation we 

are inheriting. 

Does the Federal Government have this inherent responsibility 

anyway, since the financial arrangement of the District is so closely 

62

intertwined with Federal finances? Would that be a fair assumption, or do we truly have an independent pension fund, as has been 

termed in some of these documents, and that’s presenting kind of 

a firewall, or is there just an obligation we’re going to have to meet 

anyway? 

Mr. BLUM. Well, I think, as Congresswoman Morella pointed out, 

and also Mrs. Norton, under home rule and with that District Retirement Act of 1979—up to then what we had was essentially a 

Federal retirement system for these District employees that was on 

a pay-as-you-go basis. There was no real funding of the plan. 

In 1979, in effect, that plan was then shifted to the District, to 

become the responsibility of the District, and the Federal Government opted only to pay for 25 percent of the unfunded liability that 

existed at that time. I think what the administration has recognized is that the Federal Government was responsible perhaps for 

all or almost all of that initial unfunded liability that was passed 

to the District. 

Mr. MICA. You heard the calculations, and I think we got that, 

those figures from OPM, as far as the out-of-pocket expenditures 

from the general treasury to pay current benefits, it grows pretty 

dramatically. In 10 years, it’s up close to $100 billion a year, I believe, somewhere in that range. 

So this unfunded liability, and then that general obligation 

would kick in—at some point, I guess after 10 years, somebody is 

paying the difference between the premiums coming in and the 

payments going out; is that correct? 

Mr. BLUM. That’s the nature of a pay-as-you-go financing system. 

Mr. MICA. Right. But the pay-as-you-go, the new payer will the 

Federal Government. How much will that add to the—I guess we will be up around $100 billion a year, and this will just be, what, 

another quarter of a billion? Is it $700 million? 

Mr. BLUM. Our calculation is, after the assets have been exhausted, the Federal annual payment will be somewhere between 

$700 million and $800 million a year. That, I suppose, could be considered a drop in the bucket compared with the actual. 

Mr. MICA. Let’s see. I’m 54. When can I start drawing? I want 

to calculate this so I get out just in time, when all this crashes. So 

it’s about three-quarters of a billion at that point. 

Mr. BLUM. That’s true. For example, in table 1 of my prepared 

statement. 

Mr. MICA. That’s equal to the entire subsidy I think we did last 

year, or fairly recently, isn’t it, to the District? What is the District’s biggest shortfall; $660 million? Oh, OK. Well, it’s right in 

that range. And in 10 years we would need that just to meet the 

shortfall for pension. 

Mr. BLUM. Well, I might comment on the use of the word ‘‘shortfall.’’

Mr. MICA. Money coming in versus money going out. 

Mr. BLUM. Well, that’s true, that difference. But that is the nature of the pay-as-you-go financing system for the Federal retirement system, which is a common way of financing retirement benefits for central governments worldwide. Essentially, it’s drawing 

upon the entire financial resources of the country, simply because 

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wide, as opposed to something like the District which can only tax 

its own citizens. 

Now, in the year 2005, according to the estimates in table 1, our 

projection is that the total Federal, civilian, and military retirement payments will amount to $100 billion. So adding $700 million 

or $800 million is adding less than 1 percent to the total that the 

Federal Government will be expending less than 10 years from 

now. 

Mr. MICA. I thank you. 

I yield to our ranking member now. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

Mr. Blum, back in June 1995, you testified before this subcommittee that the Civil Service Retirement fund does not face a 

financial crisis. Is that still your opinion? 

Mr. BLUM. Yes, it is, and it’s drawn from, essentially, the numbers that are presented in table 1 of my statement today. Two 

years ago, we made the same point, looking in terms of what the 

cost of these annual retirement benefits would be in constant dollars. We were saying that, after 2015, in constant dollar terms, 

those payments would actually diminish. 

What I’ve done today is give a different kind of measure. Here 

we’re looking at the projected cash outlays as a percentage of the 

total economy, the gross domestic product. It’s a typical way of 

measuring what the burden will be on taxpayers in the future. 

There it shows that the total civilian and military retirement benefits will remain constant at about nine-tenths of a percent of GDP 

through 2015, and then begin to decline. So, in that sense, the burden will be reduced over the longer term, on current taxpayers. 

Now, as my statement goes on to explain, looking at just the retirement plans does not give you a complete picture of what the fiscal situation will be for the Federal Government as a whole. That 

was provided in table 2 in my prepared statement and discussed 

in more detail in this report that we issued last month. 

Looking down the road, we can see that, while we’re in a relatively benign period, in terms of the Federal deficit coming 

down—last year it was only 1.4 percent of GDP—the long-term projections over the next 10 years, it doesn’t rise all that much under 

the current policies. 

But after the retirement of the baby boom generation, in the year 

2010, then the picture changes. We’re getting an aging population, 

and with the commitments that the Federal Government has made 

to pay Social Security benefits to retired people, to finance health 

care expenditures under Medicare and, to a growing extent, under 

Medicaid, it will add a considerable burden, considerable pressure 

to the overall fiscal picture for the Federal Government. 

Unless taxes were raised, the deficit would begin to mount rather 

seriously, and after a period of time, the debt that the Federal Government would have would have serious economic consequences. 

Mr. CUMMINGS. At that same hearing, you testified that, ‘‘The 

projected cash-flow benefits of the retirement fund appear to be 

manageable under the current pay-as-you-go policy.’’ I take it that 

your position is still accurate. 

Mr. BLUM. Yes, sir. 

64

Mr. CUMMINGS. Finally, you testified that, ‘‘The efforts to reduce 

the cost of the system should weigh the effects of such actions on 

hiring and retaining employees on the credibility of the government 

as an employer.’’ I take it that that is still your position, also. 

Mr. BLUM. That’s clearly the picture for Federal retirement benefits. It is part of the overall compensation package that the Federal 

Government offers to its employees. 

Mr. CUMMINGS. Mr. DeSeve, we all know that the unfunded liabilities of the District pension plans are a direct result of the Federal Government’s not having funded those plans before home rule, 

when it was responsible for establishing pension funding policies. The nearly $5 billion in unfunded liabilities that exist today were 

in no way caused by the government of the District of Columbia. 

That is why I think it only fair that the Federal Government step 

up to the financial responsibilities that were incurred on its watch, 

and I commend the administration for acknowledging this responsibility. 

Could you explain to us how much of the current unfunded pension liability the President’s plan would transfer to the Federal 

Government and how much would be left with the District? 

Mr. DESEVE. Yes, sir, I will. The only element to be left of the 

unfunded liability with the District is the disability pay portion of 

a retiree who becomes disabled. We will be taking everything else 

except that portion. We want to have the District continue to administer that benefit for its employees because we think its an important thing. 

Congress, in fact, has recognized and has capped the amount of 

disability that is available. We would like to see the Congress continue to have oversight and the District to continue to manage that 

aspect of its workforce. So everything else—and if I could give you 

an absolute number, I would—but everything else will be the Federal Government’s responsibility going forward, as far as the accrued unfunded liability is concerned. 

Mr. CUMMINGS. Now, the President’s plan appears to include 

very complicated accounting requirements for dividing, between the 

Federal and District governments, responsibilities for the cost of 

benefits to workers who retire, become disabled, or die after the 

Federal Government takes over the current plans. 

I would think that a clearer, simpler approach would be to do 

what we did in the mid-1980’s, when the Federal Government converted from the CSRS to the Federal Employees Retirement System, which was to close the CSRS to new entrants, but allow enrolled workers to remain in that plan throughout the remainder of 

their careers and retirement. 

Could you explain your plan and comment on the simpler approach that I just stated? 

Mr. DESEVE. Yes, sir, I will. We believe that the longevity of the 

employee going forward, that policeman, fireman, teacher, should 

be the responsibility of the District; that is, they should continue 

to pay for that individual’s accumulating years of service. That’s 

how we’ve made our division. 

You might argue that it’s an arbitrary division and the division 

that you had is a better way to do it. What we’re trying to say is, 

if we clean up the problems of the past for the District, that, going 

65

forward, the District should decide under what system their existing employees and their new employees would continue to accrue 

benefits. That’s how we divide the costs. 

We do want to try to find an administrative way so that an individual will get a single check. We believe that the individual getting a single check is certainly something that we and the District 

can figure out a way to do. 

Mr. CUMMINGS. Just one other question. Under the administration’s proposal, the District would be required to establish and administer a new plan for current and future teachers, police officer, 

and firefighters. Would the District immediately be faced with an 

unfunded liability for those plans, and how much would those 

plans cost the District each year? 

Mr. DESEVE. No, there would be no unfunded liability for those 

plans, because they are starting new, and they would have to be 

funded each year, incrementally, according to the precise cost. I 

don’t have the actuarial number for the cost of the new plan. In 

fact, the District has to decide what benefit levels that it wants 

within the new plan. 

We have based our assumptions on the continuation of the old 

plan. That’s a question that the District and its employees will 

have to negotiate. 

Mr. CUMMINGS. Mr. Williams. 

Mr. WILLIAMS. Yes, sir. Paying the full cost, as Mr. DeSeve is 

saying, I think we’re estimating an order of magnitude of around 

$55 million to $60 million per year. That’s a number I just got a 

few minutes ago. 

Mr. DESEVE. That would be a net cost, because we leave all employee contributions, which is about 7 percent of payroll, with the 

District. The Federal Government doesn’t take those. So there’s 

about $35 million a year, in addition to the District contribution, 

to make those payments. 

Mr. CUMMINGS. So, Mr. Williams, I take it that the Control 

Board feels comfortable with this plan, the President’s plan. 

I mean, if you can’t speak for them, I understand, but I’m just 

curious. 

Mr. WILLIAMS. I cannot speak for the Control Board, but I can 

observe. I have observed a consensus in the District, among all the 

decisionmakers, that certainly this component of the President’s 

plan is a worthy component that we all applaud and salute. 

Mr. CUMMINGS. Thank you very much. 

Mr. MICA. I thank the gentleman and yield now to the lady from 

Maryland, Mrs. Morella. 

Mrs. MORELLA. Thanks, Mr. Chairman. 

Thanks, gentlemen, for your statements on this very important 

issue. I was looking over the actual President’s bill that I think had 

been circulated among various agencies and departments for their 

responses, and I noticed that there’s a section that would establish 

a third-party trustee. As I understand it, it would be to manage the 

assets and make the payments, as necessary. 

These are functions that are currently performed by the Retirement Board. I thought the Retirement Board—and you know more 

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ing well, then why would we eliminate it? Would you just elucidate 

that whole concept of the third-party trustee? 

Mr. DESEVE. We would be happy to. The President’s plan is to 

take on the liabilities, the entire liability of the plan, with the reservation that I spoke of, of disability, and to take the assets and 

use the assets to directly pay beneficiaries over time, to liquidate 

the assets over time. 

The Secretary of the Treasury would have the responsibility for 

making payments, and we want to be very clear that that responsibility is one that rests with the Federal Government from the time 

at which the statute is passed. The trustee is an agent of the Secretary of the Treasury who acts on behalf of the beneficiaries. 

The Pension Board will still have remaining assets and remaining responsibilities for the individuals who are still employees of 

the District. They will be receiving, for example, the employee contributions every month. We believe it will be necessary to leave 

some assets behind to make sure that all of the liabilities of the 

District are covered. We’ve been talking to them about that. 

So they will still be in place, but we would like a clean separation between those liabilities and assets that we’re taking over, and 

the payment for those, and those where the Pension Board acts as 

a fiduciary for other District employees. That’s why we’ve set it up 

that way. 

Mrs. MORELLA. This is something that you approve of. What is 

it going to demonstrate? You’re trying to show a clarity of division? 

Mr. DESEVE. Yes, we are. We’re trying to say that it’s our liability, and we’re going to use the assets that come forth to make payments to the beneficiaries. 

Mrs. MORELLA. Does it enhance the trust that should always 

have been there, anyway? 

Mr. DESEVE. We certainly hope so. That line has never been 

drawn before. That line of the Federal Government assuming the 

liabilities and using the assets to pay beneficiaries has never been 

established before. 

Mrs. MORELLA. Very interesting. Didn’t the Council meet today? 

Mr. DESEVE. Yes, they did. I spent most of the morning with the 

Council, and we had a very good exchange of views on the memorandum of understanding. 

Mrs. MORELLA. I was just going to ask. Can you shed any light 

on whether they signed it? 

Mr. DESEVE. I can’t. And I don’t think that today is necessarily 

definitive. Today is a day on which they could act, but I believe 

that we made a lot of progress this morning in our conversations. 

They may, in fact, choose to act today. They may have more information that they need. 

It’s a fairly complicated document. We tried to make it simple, 

but like everything else in Government, somehow it grows on it. 

They had some very good questions that we’re getting them the answers to. 

Mrs. MORELLA. The other day there seemed to be the feeling that 

they might well be voting on it today, and I guess that’s what’s 

needed to kind of push this whole issue into more activity. 

67

I’m going to be going over to the floor, Mr. Chairman, and so I 

leave it back in your trusty hands and hope to return. Thank you 

very much. 

Mr. MICA. I thank the gentlelady. 

I wanted to state, too, that it looks like Ms. Norton will not be 

able to join us. She is introducing someone in the Senate, but if she 

doesn’t get back before I ask a few more questions, we will submit 

written questions to the panelists. We were trying to accommodate 

her, but this went a little bit faster than we thought. 

I heard you respond, Mr. Blum, to Mr. Cummings’ comment 

about your comments that were made in previous testimony, that 

there wasn’t any immediate financial problem to the retirement 

system. In the first part of your response, you did indicate that in 

the years when some of this obligation comes due, 2010, that we 

face some very serious potential problems with funding some of 

these obligations. 

Is that correct? Did I hear that correctly? 

Mr. BLUM. Yes, that’s correct, Mr. Chairman. 

Mr. MICA. So, in the short term, we’re fairly sound in meeting 

our obligations. In the long term is where we could expect some 

problems, probably about 2010 would be a particularly difficult 

time. 

Mr. BLUM. That’s when the difficulty begins to mount rather severely. 

Mr. MICA. I read the last page, in your conclusions it said, ‘‘Overall Federal fiscal policies are unsustainable over the long run. Federal pension benefits, which are backed solely by the ability of the 

Federal Government to finance payments when they come due in 

the future, are thus subject to some risk that they will not be paid 

in full.’’ Now, somebody has got to make a choice between making those 

payments in the form of benefits or raising taxes. The last estimate 

I saw showed that if we continue spending the way we have been 

in order to meet the benefits that we’re also paying out at a current 

rate our tax rate will be up in the 75- to 80-cent range when we 

get to 2010. There are going to be some tough choices then, unfortunately, it appears. 

Mr. BLUM. That’s one way of characterizing what this longer 

term fiscal problem is. There are others, which is what—the one 

that we would prefer is table 2 in my prepared statement which 

shows what that pressure looks like over time. 

Mr. MICA. I wanted to ask a question. We should all acknowledge 

that the issue isn’t whether or not we’re going to address the District’s unfunded liability. The question is how we meet that obligation and how we best protect any hard assets that we’ve put into 

these funds, and then how we get to a point where someone looks 

back and says, ‘‘Hey, they really goofed up in 1997. When they had 

a chance to do things right, they ignored it.’’ I’ve heard a lot of that 

in the history of this panel and this Congress. 

You’ve got, on page 15, table 3, a couple of choices there. Could 

you comment? If you were going to pick one of these, why would 

you pick it as a solution? The administration’s proposal you don’t 

carry out to where the impact really hits. You only go to 2002, I 

guess it is. I don’t want to get into that. If we were going to take 

68

something other than the administration’s proposal, which of these 

would you pick and why? 

Mr. BLUM. Well, I think the lump-sum payment and the 30-year 

amortization are essentially the same, in the sense of leaving the 

pension plan in the District’s hands, but recognizing the Federal 

responsibility for the unfunded liability and paying the District for 

that. 

That could be done either in a lump sum payment, all at once 

which, in fact, is the equivalent—if we were on an accrual budgeting system, when we’re taking over an unfunded liability of $4.8 

billion, how you would recognize that in your balance sheet would 

be an increase in your liabilities of that amount, and that would 

also show up in that year’s expense statement, as well. 

But you don’t have to pay it all at once. You could spread it over 

time. This third line in table 3 is just, simply, if you were to amortize this over a 30-year period, this would require a string of payments from the Federal Government. The Federal Government, as 

we know, has already been making payments for that share of the 

unfunded liability that it was willing to assume in 1979. The problem is that that string of payments will come to an end after 2004. 

The administration’s proposal last year is a variant of this same 

theme, which was, increase the Federal payment by another $52 

billion and let that grow over time. That has the advantage of leaving the pension plan in the District’s hands, leaving the Retirement 

Board to administer it. It leaves the chances that the Retirement 

Board will get greater than actuarially expected benefits by its investments in private securities, and so forth. 

This last option is just a different way of doing what the administration has, in fact, proposed, which is taking over all the liabilities as well as the assets, but instead of offsetting completely all 

of the annuity payments that will be due over the next 10 years 

or so, only draw down the assets to the extent that the assets represent the total actuarial liability, which is a little under 50 percent. So that ends up with the numbers that are presented in the 

fourth line. 

The problem with either lump-sum payment or any of these amortizations or even the pro rata Federalization is, it goes to the 

point that Mrs. Norton observed, that in a time when the budget 

negotiators are trying to reach agreement on balancing the budget, 

reducing the deficit, these all go in the opposite direction of increasing Federal spending. So that’s the attractiveness of the administration’s proposal, and I dare say that was the prime motivating factor for its submission. 

Mr. MICA. A couple of quick questions. I think Mr. Williams said 

they inherited a $2.6 billion unfunded liability. 

Mr. WILLIAMS. $2 billion, approximately. 

Mr. MICA. Is it $2 billion in, was that, 1979, 1980? So the unfunded liability is now $4.8 billion. Where did the other $2.8 billion 

come from? Was that just accumulated from that original amount? 

Mr. BLUM. Well, it’s from the failure to, essentially, pay the interest on that debt. 

Mr. MICA. So some of that is the District’s responsibility, or 

whose responsibility? 

69

Mr. BLUM. I think it’s arguable as to whose responsibility it was. 

I mean, one case that can be made is that the Federal Government 

had responsibility for all of the unfunded liability, because it was 

running these pension plans before home rule. It was making all 

the decisions on what the benefits would be. 

Mr. MICA. But $2.8 billion—was it 1980 when they converted? 

Mr. BLUM. Yes, as a result of the act of 1979. 

Mr. MICA. So there is some culpability on the District’s part or 

the Pension Board? No? 

Mr. BLUM. Well, there may be some. 

Mr. MICA. Some responsibility. 

Mr. BLUM. Some, but I think it’s arguable. 

Mr. MICA. Well, I just heard that it was the Federal Government’s fault that we got into this situation. Well, we didn’t do 

much better for the Federal Employees Retirement System, from 

CSRS to FERS, because we inherited quite a—well, I should take 

that back, because the unfunded liability is only $2 billion, isn’t it, 

in that? And $538 billion since 1985, so we have done better. Somebody goofed up on the District. 

Mr. BLUM. Well, we’ve done better. 

Mr. MICA. The District’s unfunded liability has grown to $2.8 bil- lion, while FERS grew, in a little bit different timeframe, but $2 

billion. 

Mr. BLUM. It’s really an entirely different situation. I mean, the 

Federal plan does recognize the accrued costs of the earned benefits 

as they are earned under FERS and under the military retirement 

system, since it was reformed. But these are recognized, essentially, as intragovernmental budgetary transactions. There is no 

funding in private assets, or private securities, or what not, as you 

observed in your opening statement, Mr. Chairman. Essentially, 

these are IOUs that are placed in the cookie jar. 

Mr. MICA. But somehow, in the District’s scheme, when they revised things, they did manage to get some hard assets which are 

up—well, you’re proposing to take $3.7 billion; is that right? 

Mr. DESEVE. That’s what the number was in October, yes. 

Mr. MICA. Except for some disability payments. So we’re going to 

draw those down and eliminate all but a half billion, or somewhere 

in that range, $1.2 billion. 

Mr. DESEVE. We will make payments to the beneficiaries out of that pool, except for probably about $1.2 billion, at this point is our 

best calculation, that will be left with the Pension Board to meet 

the District’s liabilities and provide financial relief for the District 

over time. 

Mr. MICA. I yield to the ranking member. 

Thank you. 

Mr. CUMMINGS. Mr. Blum, I take it, just from your statements, 

that, if we were able to fix the Social Security, Medicare, and Medicaid, we would not have a problem with this whole situation. 

Mr. BLUM. You would not have the same concern or the same 

pressure that would be brought to bear on these retirement benefits. The kind of pressure I’m talking about is the kind that you 

have been subjected to over the last couple of years in the way of 

proposals for deferring the cost-of-living adjustments, increasing 

employee contributions, other changes that might be made in the 

70

Federal Government’s defined benefit portion for both FERS and 

the CSRS. 

Mr. CUMMINGS. Mr. DeSeve, let me go back to something that 

I’m sure a number of the unions are concerned about and I’m just 

wondering about. How would your plan ensure that the future benefits of current workers would not be reduced, if the current plans 

in which they are enrolled are ended? I mean, how would that be 

assured, if at all? 

Mr. DESEVE. Yes. I think Mr. Blum has testified to it himself, 

that the assurance is the same assurance we give other Federal 

workers. It’s Mr. Mica’s point. They would have the same ‘‘full faith 

and credit’’ pledge of the United States that other workers in the 

Federal Government who have a defined benefit plan have. 

Mr. CUMMINGS. I yield to Ms. Norton. 

Ms. NORTON. Thank you very much, Mr. Chairman. I thank you 

for your indulgence. I have not mastered the art of cloning yet. 

Mr. MICA. Ms. Norton, you can have the balance of his time plus 

your time. 

Ms. NORTON. Plus my own? 

Mr. MICA. Yes. 

Ms. NORTON. Well, I’m sure that much of what I would have covered has already been covered. I just want to clarify why we’re in 

this spot. 

I have tried more than one approach in introducing bills to conquer the unfunded liability. An earlier approach I used, to get away 

from the complications of it, essentially required the Federal Government to pay 5 percent per year of the remaining amount, and 

the District was capped at an amount. 

My most recent bill settled on another approach altogether, and 

it came, in part, out of my own study of the GAO study of possible 

approaches. Essentially, it settled on a flat amount that the Government would pay, and for very good reason, if you’re looking to 

save the Government money over the long haul, and this is a longhaul proposition. 

So, essentially, what it did is to say, you’re going to pay what 

looks like a large amount, but it’s going to be smaller and smaller 

and smaller, because it’s going to be the same amount over 40 

years. So you come out ahead, because you’re paying the same 

amount. 

And behold, that’s essentially what the Federal Government is 

doing now. It’s paying $52 million every year and $52 million every 

year. The difference is, it’s an amount that doesn’t leave the District carrying the disproportionate share of the burden. 

Now, in a real sense, the administration is caught in the same 

problem I was caught in when I was doing my 5 percent bills. It 

looked good in the short term, but in the long term the Federal 

Government was going to end up paying more money. 

Now, the administration has not chosen a different, but at the 

same time similar, approach because it prefers that approach. Essentially, the approach the administration has chosen leans in the 

direction of saving the Government money now, when the pressure 

is on to save the Government money now. 

And I really don’t think the administration had any other choice, 

unless we can find some sensible choice around the problem. I 

71

think they did the very best they can, and we have really forced 

them to jump through all kinds of hoops. It’s a very complicated 

plan. 

I want to congratulate Mr. DeSeve, in particular, because when 

you consider how many land mines there were out, and every time 

you ran into one, you would have to figure your way out of that 

one, and then there was another one there. 

I really think this is a question for Mr. Blum. What do you think, 

given what I’m sure you know, about the approach that has been 

forced on the administration and the approach that saves the Government money over 40 years? Is there a way, consistent with deficit reduction, to solve this problem without engaging in a charade 

which costs the Government more money because of the way it has 

chosen to go at deficit reduction and the timeframe that it is using 

to go at that problem? 

I mean, is there a better way to do it, in your judgment, given 

all the constraints? Given all the constraints, is there a way out of 

this that you would suggest that the administration can take, recognizing, as I’m sure you do, why the administration has chosen 

the path it has chosen, which is ultimately going to cost the taxpayers more money? 

Mr. BLUM. Well, as I observed earlier, the administration did 

propose an alternative approach a year ago that was not unlike 

what you yourself had proposed. A year ago, the administration 

proposed to increase its annual payment to the District pension 

plan, now at $52 million, and that was going to grow over time. 

Your latest proposal was simply a variant of that, in the sense 

of amortizing the unfunded liability over a longer period of time, 

for a constant payment. That example is illustrated in table 3 of 

my prepared statement, of a 30-year amortization. The numbers 

aren’t magic. I mean, it could be any length period, but it was just 

to illustrate that there is this alternative approach, which you had 

recommended. 

The advantage of that approach is that it would retain the District’s pension system with the District. It would retain the Retirement Board and its sound investment policies, which have been 

earning more than 7 percent, the actuarial assumption, on its investments. And the District would not have to go through the process of creating a new pension plan. So, there are advantages with 

that approach. 

But as you are acutely aware, the disadvantage of it is that, on 

the Federal budget, it shows up as an increase in Federal expenditures. It also shows up as an increase in Federal expenditures in 

the so-called discretionary spending pool, which Congress has set 

limits on, and which budget planners like to write down very restrictive limits on in the future. So it runs up against that hurdle, 

which is a major problem. 

Now, as you have observed, the administration has gotten 

around that by simply adopting a process similar to what we do 

with terminated private pension plans under the responsibility of 

the Pension Benefit Guarantee Corporation, where the Federal 

Government takes over the assets from the terminated plans and 

uses those assets to help pay the promised benefits to the beneficiaries of those plans. 

72

The effect on the budget is zero in terms of the deficit. The actual 

outlay of the payments is offset by essentially selling off or liquidating the assets in the plan. So it avoids that problem for 10 

years, then it shows up in the Federal budget 10 years from now 

as a $700-million to $800-million increase in spending. 

Ms. NORTON. Well, I understand how it works, Mr. Blum. Look, 

the daily mantra, indeed sermon, on why we have to go at cutting 

this deficit in 5 years, goes as follows: It’s because we are bankrupting our children. Now, what we have here is an instance where 

we are forcing our children, according to who you talk to, to pay, 

I don’t know, twice as much, maybe three times as much, because 

of what I can only call a fiction which is 5 years, in which we say 

it’s got to look like it’s balanced. 

At some point, I guess, I’m trying to break through at the commonsense level and at the level that the Congress says deficit reduction is, in fact, concerned with, that we’re supposed to save 

money for our grandchildren. Well, we are guaranteeing that our 

grandchildren are going to pay more than we ourselves could pay. 

Let me just ask you straightaway: In light of the underlying rationale of deficit reduction, which is to save others from having to 

pay our debt, is there any kind of commonsense exception to the 

deficit reduction fiction that you know of or that you think might 

be recommended to take care of this perversion, frankly? 

Mr. MICA. I’m sorry. The gentlelady is out of order. She’s injecting common sense in this discussion. That’s totally out of place. 

[Laughter.] 

Ms. NORTON. Strike that from the record. 

It’s very hard to keep walking ahead against the very philosophy 

and the very rationale that the Congress is operating under. 

So I’m really asking, since we all understand what the problem 

is, since we understand why the administration has broken its neck 

and many pencils in order to get here, do you know of any device 

existing under law, or can you recommend one that we might use 

in order to solve this problem within the President’s plan and in 

keeping with deficit reduction, without increasing the deficit in a 

very serious fashion in the out years, that you, yourself, have said 

was about $700 million? 

Is there something you can recommend that would help us get 

around this hurdle, recognizing that this is not the District’s liability, that we’re talking about congressional liability? If it had done 

what this administration is trying to do now, 20 years ago, then 

this problem wouldn’t be here. So it’s here for this Congress because the Congress in 1979 didn’t do it, and now we are forcing 

ourselves into a crucible not of our own making. 

The question is, since we know this must be dealt with, since we 

know 2004 is coming, since we know the District blows up in that 

year, is there a way that we can—a commonsense way—excuse me, 

Mr. Chairman—that we can find our way around this dilemma? 

Given your own considerable knowledge and talent, and I’m sure 

your allegiance to saving the Government money in the long run, 

can you recommend either a waiver or some other way around a 

problem which is going to, one way or the other, cost the Federal 

Government more money? The only question is, how much, is it 

greater or is it less? 

73

Mr. BLUM. Well, I think you’ve put your finger on it, Ms. Norton. 

This is going to cost the Government money, either now or in the 

long run. The most straightforward way is to recognize that liability now and to pay for it now. It doesn’t necessarily have to be done 

all at once. It can be done, as you have suggested, over a period 

of time. 

In effect, what the administration’s proposal has done, though, is 

to deny recognizing or recording that cost in the budget in the 

short run, for short-term budgetary considerations. 

Ms. NORTON. Not at their preference. They didn’t start out trying 

to do that. They are just trying to conform to what the Congress 

is doing. 

Mr. BLUM. But the net result of that could well be to increase 

the burden on future taxpayers more than otherwise would be necessary. 

Ms. NORTON. Mr. Blum, can’t you just see it? At some point, let’s 

say it’s 2003, somebody is going to come up with a bill—if I’m here, 

it’s likely to be me—to say, at that point, let’s change what we did 

in 1997 so that the Government’s expense won’t be $700 million, 

but we would have made it in 1997, if we could have made it that. 

I mean, wouldn’t the responsible thing, for anybody sitting here, 

then, at least at that point, be to come forward to try to reduce the 

Government’s expense to the far smaller figure that is possible 

here, even now? 

Mr. BLUM. I think you give me more credit than I deserve. I cannot think of a solution along the lines that you’re seeking. 

Ms. NORTON. You can’t think of a way to get around the deficit 

reduction problem? 

Mr. BLUM. No. 

Ms. NORTON. On the other hand, you would agree, I take it, that 

after the strictures are over with, that the logical thing is to try 

to come forward to reduce the Government’s expenses from the $700 million to something closer to the amount in my bill. 

Mr. BLUM. Well, at that time, when we’ve exhausted all the assets, essentially the $700 million to $800 million is just the annual 

payment that’s due to the District annuitants at that time. 

Ms. NORTON. Well, they won’t all be exhausted in 5 years. There 

will be some of them left. 

Mr. BLUM. No, I’m talking after it is exhausted, so about 10 

years. 

Ms. NORTON. OK. 

Mr. BLUM. When that time comes, the $700 million to $800 million a year is simply the annual cash benefits that will be owed to 

the District annuitants, unless, for example, the Congress changes 

what those defined benefits will be, cuts back the amount of benefits. 

Now, there’s no property right in those benefits. The benefits are 

statutorily determined. 

Ms. NORTON. Are you suggesting that, at that point, the way in 

which to proceed would be to cut back the benefits rather than reduce the Government’s cost? 

Mr. BLUM. That’s the only way you can do it. If you don’t want 

to bear the cost of the $700 million to $800 million a year, that 

means cutting back the benefits. 

74

Ms. NORTON. Or, in fact, redesigning the plan so that it costs 

less, in a way not unlike the original bill I offered. I mean, as you 

say, you can do anything you want to do, you’re the Congress. 

Mr. BLUM. Yes. 

Ms. NORTON. At that point, there is an alternative to cutting 

back benefits. I mean, I’m sure that if retirees hear that what may happen at the point we get to $700 million—you couldn’t cut back 

benefits enough to deal with that kind of problem. 

Mr. BLUM. Exactly. 

Ms. NORTON. Mr. Blum, I wish you would think hard about this. 

I know you sit where you cannot advise us to get around deficit reduction, but you also sit where you might advise the Congress that 

it is countermanding its own stricture that we should not raise the 

costs for future generations. 

Could I ask about the disability figure? Mr. DeSeve, you have a 

concern that disability payments be left with the District. Would 

you explain that, please? 

Mr. DESEVE. Yes, Ms. Norton. When someone retires on disability, there actually are two actuarial calculations that cause 

them to get their retirement benefits: One is the normal pension 

they would have gotten at their normal retirement age; the second 

is the extra benefit that has to be paid for as a result of retiring 

early or having additional years of service, in a sense, imputed to 

you. 

We want the District to continue to manage its relationship with 

its workforce; that is, to continue, rather than having the Federal 

Government conduct health examinations for District employees 

and decide whether Mary or Harry happen to be disabled, to have 

the District continue to do that, and make decisions about the disability of their employees, subject to the congressional strictures 

that are currently in place, rather than having the Federal Government make that decision. 

In order to fund that, we will leave behind some assets, so the 

District’s liability in that regard is covered by the assets that are 

left behind. 

Ms. NORTON. How much would you leave behind? 

Mr. DESEVE. I want to ask that we get back to you with the precise answer to that. We use the calculations that Milliman & Robertson does, and I don’t have those with me today. I don’t have 

those numbers with me today. 

Ms. NORTON. Are you certain that that would cover? Suppose it 

didn’t cover the real cost and we were left where we are now, paying for unfunded liability? 

Mr. DESEVE. The best I can do is get all the parties to agree: the 

District, the Pension Board, the actuaries. We have our friends at 

the PBGC helping us. We will all sit down and agree and come up 

with a number, and that’s the amount that will be left behind. 

Ms. NORTON. Mr. Williams, do you have any idea? Could you tell 

me what disability, in some proportions, or with some figure, is 

costing the District now? 

Mr. WILLIAMS. I could get that figure for you, Ms. Norton. 

Ms. NORTON. It’s very important to get that figure. 

Mr. WILLIAMS. And I would echo what Mr. DeSeve has said. We 

would work closely with the OMB in agreeing on all the numbers, 

75

and look forward to agreeing on these actuarial numbers and the 

asset issues, as well. 

Ms. NORTON. We certainly need to have this be more than a 

guesstimate. And I don’t know what the District intends to do 

about disability, what plans you are making. In fact, I suppose I 

should ask you. Is the District considering any changes in its disability policies? 

Mr. WILLIAMS. I think one of the overarching issues, and we’ve 

talked about this with the District, is how we set up this new plan, 

what the policies are going to be in this new plan, related to a 

number of other human resources issues and how we deal with disability. I think the Council has talked about this. No conclusions 

have been reached, but this is an issue. 

Ms. NORTON. We have a disability problem still left over here 

from last year that wasn’t dealt with in the appropriation, which 

I hope we will deal with. 

One final question. Obviously, with changes like this, Mr. 

DeSeve, employees must wonder where they will end up. Does your 

plan ensure that the future benefits of current workers would not 

be reduced, if the current plans in which they were enrolled were 

ended? 

Mr. DESEVE. Yes. 

Ms. NORTON. Would you elaborate? 

Mr. DESEVE. Certainly. What the Federal Government is saying 

is, an individual who currently has X years of service—first of all, 

for the retirees, all of their benefits are guaranteed by the Federal 

Government because they are already on retirement. They get the 

entire amount. 

Ms. NORTON. That’s right. That’s why I said ‘‘current employees.’’ Mr. DESEVE. With the current employees, if you’re an individual 

who has a particular number of years of service, we agree to pay 

for the number of years of service times whatever your formula is— there are different formulas—whatever your formula is, and we 

will pay the increase, over time, of the pay. 

So if today you’re making $30,000 a year and you have 10 years 

of service, and in the future you’re making $40,000 a year, we will 

pay on the basis of your high years of service at 40 years. So you 

will get the increase in your pay. You will get the number of years 

of service you currently earned, paid for by the Federal Government. 

If you stay with the District another 10 years, the District will 

be responsible for those going forward years from today, put a new 

plan in place. We’ve always, in our calculation, used a mirror 

image plan, one that had identical terms and conditions. That’s up 

to the District. 

Ms. NORTON. Did you consider the FERS approach, where we 

ended our one plan and simply started another? And it was much 

simpler. It seemed to offer a simpler approach than what you’ve 

been forced to do. 

Mr. DESEVE. It’s simpler. The difference is that, in FERS, we 

weren’t really worried about who was sharing cost. What we’re saying is, the District, going forward, should bear the pension cost of 

its employees. We will take care of the past. We will take care of 

the sins of the past. And they should make a decision under home 

76

rule and a judgment as to how they want to handle those going forward costs. So FERS didn’t have a cost-sharing element to it. 

Ms. NORTON. So you really see this as a continuum. It’s just a 

different party who does the payout. 

Mr. DESEVE. That’s correct. And what I testified earlier is, we 

will figure out a way between us to solve a two-check problem. Is 

it going to be one check or two checks? We will solve that problem. 

Ms. NORTON. I’m sure employees wouldn’t mind if there were two 

checks, if somehow they added up to—if one and one added up to 

more than two. 

Thank you very much, Mr. Chairman. 

Mr. MICA. I thank the gentlelady. 

Just a couple of quick points. Maybe you’re familiar with the administration’s proposal for Federal employees, but it’s to increase 

employee contributions to the retirement system. Are you familiar 

with that? That came to us in the Congress. And they also proposed delaying COLAs for Federal retirees for 3 months. 

Has there been any proposal by the District to change any of the 

employee contribution, to have some additional revenue coming 

into this? I see in the audience an affirmative nod. Can anybody 

confirm that? Is there anything that makes a proposal similar to 

what we’re doing for Federal employees, to meet our shortfall or 

our obligation? 

Mr. WILLIAMS. I think the District has made some changes over 

the last couple of years to reduce its burden, in terms of retirement 

benefits. 

Mr. MICA. But the employees are still paying 7 percent. 

Mr. WILLIAMS. Right. 

Mr. MICA. There’s no proposal for increasing that? 

Mr. WILLIAMS. No, but I think there is, though, speaking next, 

a representative from the Retirement Board who can speak to that 

point. 

Mr. BLUM. Mr. Chairman, if I may, I would just point out that 

Ms. Norton’s bill last year proposed just that for the District plan. 

Mr. MICA. Right. 

Ms. NORTON. Would the gentleman yield for a second? 

Mr. MICA. Yes. 

Ms. NORTON. I’ll make a deal with you, Mr. Blum. I’ll bet the employees would accept my change, because that had been negotiated, 

if you will accept my bill and advise the chairman that it is the 

better approach. 

Mr. MICA. Looking awfully good. 

Mr. WILLIAMS. If I could say, Mr. Chairman, though, among all 

the things in the District, I think the way the District has handled 

its retirement responsibilities has been commendable, because, by 

our calculation, the District has put in $1.7 billion above and beyond paying the full cost, normal cost, you called it, of beneficiaries 

from the inception of the program in 1980 on. I think it’s been very, 

very responsible. 

Mr. MICA. Mr. Williams, I get to oversee some dozens of Federal 

pension plans and observe what’s going on in others. Sir, to have $4.2 billion in assets for the District of Columbia, someone should 

get—last week I gave a veteran a purple heart—we should have a 

special medal coined when your unfunded liabilities are $4.8 billion 

77

and you have $4.2 billion. If I had that in just the Federal retirement system, employees’ system, I’d be doing a dance with Ms. 

Norton down at one of these pubs downtown. 

Ms. NORTON. Is that an offer, Mr. Chairman? [Laughter.] 

Mr. MICA. If we could keep some of that cash. It just dismays me 

no end to see this one little bit of cash left and the one thing the 

District has done semi-right, and their employees have these assets, to have it drained off. And then, because of some CBO scoring 

thing, and because of the lack of some common sense to get out 

here, when we’re going to be hard-pressed to meet obligations and 

be in a more difficult situation, and then to have blown the money. 

I don’t mind participating in rearranging the deck chairs on the 

Titanic, but I don’t want to raid the passengers’ safety deposit 

boxes just before the ship goes down. So we’re looking for some alternative here to do this in as positive a fashion, retain and protect 

as much of the hard assets as we can. 

Now, it may also require some of the components that the 

gentlelady has proposed before. So we’re willing to work with you 

all to come out with some solution that does resolve this in a satisfactory manner and as painless as possible. 

Did you want me to yield? 

Ms. NORTON. Thank you very much, Mr. Chairman, because you 

made a point that I think is very important to followup on. 

First, let me say that I do support the administration’s proposal, 

and I support it because I believe I don’t have any choice. I think 

that they have done what they had to do. They said, ‘‘What are the 

rules of the game?’’ And instead of screaming and hollering that 

they want new rules and that it was, you know, congressional liability, so they deserve new rules, they have jumped through hoops 

to come up and play the rules of the game. And I admire you for 

doing it, even though I think it is very tortured, and I know what 

you must have gone through to do it. 

But I would like to ask all three of you, given your backgrounds 

in these affairs, perhaps not always in pensions, although Mr. 

DeSeve has a long pension background, but when the Congress 

gave the District this, it didn’t say just fund it, in essence, the Congress has made the District overfund this pension liability. That’s 

what the $1.7 billion, or whatever, that Mr. Williams was talking 

about is. 

I really have to ask you, in light of what you know about pension 

funds, and in light of what you know about the institution we’re 

talking about, the city, and may I also add, in light of what you 

know about people going into pension funds these days—the good 

Governor of New Jersey—where people are really saying, ‘‘Do we 

really want to lay away all that much cash, when we have pressing 

needs?’’

Just for my edification, recognizing that it will not affect directly 

the remedy to this bill, was it a wise decision to make the District 

not only fund but overfund, when one considers what it has done 

to the credit rating of the city, to the very stability of the city? Was 

this the best way to do it, or would it have been better to have had, 

even with the unfunded pension liability, to have had the District 

pay less over time and end up a stronger mechanism than it is? 

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You would still have had a lot of unfunded liability, but looking 

at it in a kind of costbenefit way, was it wise of Congress to, in 

fact, extract this much in unfunded pension liability from the District of Columbia? 

Mr. DESEVE. The executive branch is never allowed to criticize 

the wisdom of Congress, certainly in public, certainly in this committee. 

But I think, if we had had a system in which the same treatment 

had been given to these employees as was given to other Federal 

employees, if their pension fund had been, in essence, Federalized, 

with the continuing costs—Mr. Mica mentioned earlier the liabilities associated with that—so that it wasn’t a District burden, but 

it remained for these employees a Federal burden, it certainly 

would have imposed a significantly lesser cost on the District of Columbia. 

It’s always nice to have hindsight. It’s 2020 hindsight. But if they 

had been treated as other Federal employees. 

Ms. NORTON. Would the Federal Government have made itself 

overfund these? 

Mr. DESEVE. No, I’m agreeing with you that, in 1979, if these 

employees had been transferred to a Federal defined benefit plan, 

as some other employees, I understand, were, that would have a 

lesser cost implication for the District as they made payments over 

time. So it’s easy in hindsight to say it probably would have been 

better to have done it that way. 

Ms. NORTON. Mr. Williams. 

Mr. WILLIAMS. Ms. Norton, I would agree with Mr. DeSeve. One 

of the key principles in the President’s plan, that isn’t often talked 

about, is the alignment of authority and accountability in the plan. 

Let’s take expenditures. Don’t hold the District accountable for 

expenditures, if it doesn’t have the authority and resources, really, 

to manage them well. Don’t hold us accountable, for example, in 

managing of our budget, if we really don’t have ultimate authority 

to manage it well. Don’t hold us accountable for managing a good 

retirement plan and system, if the lines of accountability are 

murky and blurred. 

I think that’s what happened in 1979. That’s what I think, commendably, the President is hoping and attempting to correct in this 

plan. So I would definitely not have done it the way it was done 

in 1979. 

Ms. NORTON. But to the credit of the Congress, the Congress, in 

fact, tried to give a formal, balanced apportionment, as between the 

Federal Government, and it was President Jimmy Carter who vetoed that bill. What was left, though, was that the Congress required of the District of Columbia what it has never required of 

itself, in terms of funding these plans, far weaker mechanism that 

we are. 

In essence, look what has happened. Funding these plans 

wrecked the city without insuring the pensions. So we got the 

worst of both worlds. The liability puts the pensions in jeopardy, 

because if we don’t do something by 2004, everything is going to 

go down the tube. And in the process, Mr. Mica’s point about seeing this $4 billion, this amount of cash here, in the process, we put 

79

some money beyond our reach and wrecked the city, which is responsible for continuing to add to that fund. 

I hope we can correct this. I don’t think it is all hindsight. I 

think this was perfectly predictable. Once President Carter vetoed 

that bill, everybody knew how those amounts would go up each 

year until we got to the point where next year we’re over $300 million, and the Federal Government is still at $52 million. Everybody 

understood that. The District should have come forward sooner for 

a remedy, and the Federal Government should have recognized 

that the city itself was being sacrificed. 

Thank you very much, Mr. Chairman. 

Mr. MICA. Thank you. 

When they read the record of this hearing 10 years from now, we foresee it will be $700 million a year. I’m not sure if we’re making 

progress, Ms. Norton. 

I would like to thank our panelists for their testimony. We may 

have some additional questions, and we’re working with the D.C. 

Subcommittee to help resolve this issue. We appreciate your being 

with us today. Thank you. 

I would like to call our second panel this afternoon. We have 

Jeanna Cullins, executive director of the District of Columbia Retirement Board. We have Ron Robertson, chairman of the Metropolitan Police Labor Committee; Thomas N. Tippett, chairman of 

the Pension Committee of the Fire Fighters Association of the District of Columbia; and Mr. James Baxter, treasurer of the Washington Teachers Union. 

I’m sorry, we have a change. Betty Ann Kane, will be testifying 

instead of Jeanna Cullins for the District of Columbia Retirement 

Board. 

As I mentioned to the first panel, this is an oversight and investigation subcommittee. If you would stand, please, and be sworn in. 

[Witnesses sworn.] 

Mr. MICA. The witnesses responded in the affirmative. 

We would like to welcome you to our panel. Thank you for waiting patiently. As I mentioned to our first panel, if you have a 

lengthy statement or additional information you would like submitted for the record, we would be glad to do that by unanimous 

consent. 

We will recognize first Betty Ann Kane. 

You are recognized. 

STATEMENTS OF BETTY ANN KANE, CHAIRMAN, LEGISLATIVE 

COMMITTEE AND TRUSTEE, DISTRICT OF COLUMBIA RETIREMENT BOARD; RON ROBERTSON, CHAIRMAN, METROPOLITAN POLICE LABOR COMMITTEE, FRATERNAL ORDER 

OF POLICE; THOMAS N. TIPPETT, CHAIRMAN, PENSION COMMITTEE, FIRE FIGHTERS ASSOCIATION OF THE DISTRICT OF 

COLUMBIA; AND JAMES BAXTER, TREASURER, WASHINGTON 

TEACHERS UNION 

Ms. KANE. Thank you very much, Mr. Chairman, and committee. 

I am the chairman of the Legislative Committee for the D.C. Retirement Board, a trustee of the Retirement Board, a 12-year 

former member of the Council of the District of Columbia, where 

I chaired the Council’s Government Operations Committee, with 

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oversight for the Retirement Board, among other things, and also 

served 4 years on the Board of Education. I had responsibility and 

concern for teachers’ pensions there. 

I do have a written statement I will put in the record and briefly 

summarize. 

Mr. MICA. Without objection, your full statement will be made 

part of the record. 

Ms. KANE. Thank you, Mr. Chairman. 

As you know, the Retirement Board, just by way of background, 

was established by Congress in 1979. The legislation establishing 

it gave us exclusive authority and discretion to manage the pension 

funds for the District’s police officers, firefighters, teachers, and 

judges. 

The Retirement Act passed by Congress, to which we’ve had 

many references here today, sets up the board’s structure, authority, and legal responsibilities. There has been some change in the 

structure due to Council legislation, in terms of adding some additional representatives, but, basically, it has remained the same. 

Mr. Chairman, it is very important for us to clarify, at the outset, that as fiduciaries of the funds, the board members are statutorily and equitably bound to act solely and exclusively in the best 

interest of the beneficiaries and the participants in the fund. So, 

accordingly, the comments and the views expressed in my statement, on behalf of the Retirement Board before this committee, are 

tempered and reflective of this overriding obligation of the trustees. 

As was said, we invest the funds. We do not make benefit determinations or calculations. We do not maintain benefit records. We 

do not process payments to the beneficiaries, at least under the 

current setup. These noninvestment administrative duties are 

shared among several agencies of the District of Columbia government, including personnel, pay, and retirement, et cetera. 

Our management of the funds, as has been referred to here 

today, has been reviewed, scrutinized, and analyzed by many proponents and critics alike, including Congress, CBO, the D.C. City 

Council. Most all of these, including Ms. Norton’s task force that 

was set up and issued its report in April 1994, have basically concluded that the funds are well managed. 

The Bear Stearns report, which the Congress required in the 

1995 Appropriations Act be undertaken, was submitted. Their report was submitted in May 1995 to Congress. They concluded that 

the board’s operations were well run. Its investment performance 

was in the top quartile of public pension funds for the period examined. Our costs were found to fall within a reasonable level. Our 

asset allocation and procedures were determined to be ‘‘well documented, thorough, and effectuated by the board in a prudent and 

deliberate manner.’’

And the most recent report was a March 1997 report from the 

Congressional Budget Office, which again analyzed our policies and 

performance, and concluded that the funds were professionally 

managed, that they meet fiduciary standards, and that our performance has been consistent with other large public employee 

funds. 

I was a member of the City Council in 1979, a new member, 

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bility for the pension funds to the District. We have come a long 

way since 1979. We are very proud of the accomplishments of the 

board and its staff. As has been mentioned, we now have $4.2 billion in assets. We are 44 percent funded. 

We started, essentially, from zero. There were some small 

amounts of money in the teachers’ pension fund. They had them in Treasury bonds, making about 3 percent. There was, I think, $100 

million or $150 million. Our funding level has increased almost 20 

percent since 1991. In 1991, we were 25 percent funded, had gone 

from 1979 to 1991, from zero to 25, and from 1991 to date, have 

gone to 44 percent funded. 

At the conclusion of calendar year 1996, we have exceeded our 

performance objectives, which is a 7 percent rate of return on all 

investments, 14.1 percent. Not only did the board outperform the 

actuarial assumption rate of 7.5 percent, we outperformed our target total benchmark, which was 12.6 percent. I might add that we 

have exceeded our target, exceeded that actuarial assumption in 11 

of the last 14 years, and as a result of that performance, have $1.1 

billion in net assets to the fund. 

Mr. Chairman, as a practical matter, a retirement program is 

part of an employee’s compensation. It is designed to attract and 

retain the employee. The employer who, in the public sector, is the 

taxpayer, the District taxpayer, receives the benefit of the employee’s service when they are active, not when they are retired. 

We believe that the liabilities of and contributions to a retirement program, therefore, should be related to the period in which 

the benefits are earned rather than the period in which the benefits are paid. During the period before enactment of the D.C. Retirement Reform Act of 1979, of course, this principle of funding 

was not followed by the Federal Government. 

Let me summarize. The act which created the board 17 years ago 

specifically acknowledged that the police and firefighters’, teachers’ and judges’ retirement funds were not being maintained on an actuarially sound basis. It’s in the report; it’s in the findings. Congress determined at that time that the net pay-as-you-go method 

was unsound and that the fund should be maintained on an actuarially sound basis. Therefore, the trust was created for the three 

funds, requiring that the assets be invested to provide for the retirement security of these employees. 

I might mention, because we had some questions previously 

about new systems created by the District. The D.C. Council, in the 

fall of 1996, took exactly the same action that the Congress had 

taken in 1979. It has created, Mr. Chairman, a new fund for new 

hires. All police, all firefighters, all teachers who have been hired 

on and after October 1, 1996, the beginning of the current fiscal 

year, are in a third tier, a new fund, a new program. 

I know Mr. Tippett, in his testimony, will talk more about the 

details of that fund. That is a defined benefit fund, but it is starting from ground zero, starting from scratch, and it will be fully 

funded from day one. 

The Council looked, and worked with us and our actuaries, at 

that versus a defined contribution plan, and determined that actually, in the long run, it was more economical for the District, particularly dealing with public safety employees, as well as better for 

82

the beneficiaries, to do a defined benefit plan. If you started from 

zero, started from day one, and funded it, it would work. So that’s 

been taken care of for everybody from October 1, 1996, on. 

As I said, an unfunded liability in an employee retirement system presents many problems. The beneficiaries have less security. 

An employee, a retiree really only feels assured that they are going 

to receive their benefit if there is money already set aside to pay 

that benefit. 

Second, the burden with an unfunded liability is shifted to future 

generations of taxpayers. Because contribution have not been paid 

in the past, future taxpayers will have to make up the difference. 

And, most important, investment earnings potential is lost because 

there is no money in the fund. A cash infusion of $2.6 billion in 1979 would have solved the entire problem. Today, it would require $4.8 billion. Under the President’s plan, which I want to finally address in the summary of our 

testimony, the absence of a funding mechanism is estimated to cost 

over $30 billion in future taxpayer dollars. 

With regard to the President’s plan, let me say that the board 

of trustees of the retirement system applauds the President for his 

vision and for his administration in recognizing that the unfunded 

liability is a Federal creation and is, therefore, a Federal responsibility. We favor the Federal Government’s assumption of that liability. 

However, unfortunately, we still don’t have specific details of the 

President’s plan, and we are not able to totally evaluate and comment on its limitations, but we know that it has inherent, very significant limitations. I don’t need to describe this but to say that the 

President’s plan would have the retirement funds revert back to 

the very funding method that Congress found in 1979 was unsound. 

The President’s plan does not propose to fund the unfunded liability. Rather, it proposes to terminate the current retirement system, take all or at least the majority—and we go back and forth 

in hearing whether it’s some, all, most—of the current trust assets, 

and transfer them to a third-party trustee appointed by the Federal Government. 

Those assets would be then used to pay the beneficiaries until 

the assets are depleted, which we estimate would be in about 10 

years, the Federal Government would be responsible for annually 

allocating future benefits payments. Our actuarial firm, Milliman 

& Robertson, estimates that the Federal annual payments, once 

the assets have been depleted, will average over $700 million a 

year for over at least 20 years. 

So the President’s plan would take the funds from 44 percent 

funding, which they currently are, back to zero percent funded 

within about 10 years. Those payments would be scheduled, that 

is, the Federal payment, then, of $700 million would be scheduled 

to begin at about the same time as the first wave of baby boomers 

would begin to move into retirement, forcing Congress to address 

the Social Security crisis at the same time. 

We find the uncertainty surrounding the retirement security of 

the beneficiaries and the participants in the D.C. retirement system, under this scenario, very, very troubling. As fiduciaries of the 

83

funds, it is the board’s view that it is in the best interest of the 

beneficiaries and the participants to fund the unfunded liability 

and not defer action for another 10 years, for another Congress 

that may or may not be supportive of the major annual capital outlay called for under this plan. 

These employees will still be District employees; they will not be 

Federal employees. We do question—we have seen the payment proposed going from $52 million to $104 million last year. That was 

not approved by Congress. So we do have a doubt and a concern, 

as fiduciaries, that if there is not a willingness to go from $52 million to $104 million, where will there be some guarantee there 

would be a willingness to from zero to $800 million? 

Alternatives: Congressman Norton offered an excellent piece of 

legislation during the last Congress which would have provided an 

equitable method of amortizing over a number of years the unfunded liability. In our view, this kind of approach that directly addressing the unfunded liability issue, provides greater security for 

the beneficiaries and the participants than a plan that leaves the 

unfunded liability unsolved. 

We find no comfort in the argument that Social Security, Civil 

Service, and military personnel benefits are handled in the pay-asyou-go manner and that, therefore, it is acceptable to place the District’s police officers, firefighters, teachers, and judges in the same 

tenuous position. We must endeavor to safeguard their retirement 

security, not to weaken it. 

Mr. Chairman, let me reiterate that we have to have more detail 

to carefully consider and comment on the President’s plan. The 

board needs to know precisely what our beneficiaries and participants would be receiving, what they are giving up, before we could 

support the proposal. We have to have these details demonstrated 

to protect the retirement security of our beneficiaries and participants. 

Thank you, Mr. Chairman, for giving us the opportunity to share 

the board’s views and observations. That concludes my statement. 

I would be happy to answer any questions. 

[The prepared statement of Ms. Kane follows:]

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Mr. MICA. I thank you, Ms. Kane, for your testimony. We will 

defer questions till we have finished all the panelists. 

I recognize now Ron Robertson, chairman of the Metropolitan Police Labor Committee, and offer my condolences on the tragic death 

of another officer this past weekend. 

Welcome. You are recognized, sir. 

Mr. ROBERTSON. Thank you, Mr. Chairman, Congresswoman 

Norton. 

Thank you for the opportunity to testify before you regarding 

President Clinton’s proposal to relieve the District government of 

the unfunded pension liability attached to the retirement programs 

for its police officers, firefighters, and teachers. 

The pension plan enjoyed by police officers and others covered 

under the program is the result of congressional action. I and my 

fellow officers who are already retired or still working came to 

work for the District of Columbia under an agreement which included these benefits as part of our employment contract. 

The plans recognize the special nature of law enforcement. It is 

an undeniable fact of our professional lives that we place ourselves 

in harm’s way while serving this community each and every day. 

Unfortunately, not a year goes by that my fellow officers are not 

assaulted. Scores of us are injured and hospitalized every year. 

We are on the front lines of a never-ending war on crime every 

day. We face a deadly enemy who wears no uniform and nearly always strikes without warning. No other Government employee 

faces such unending danger. Even our military enjoys years of 

peaceful duty between wars. 

A memorial for fallen law enforcement officers stands blocks from 

here. It contains more than 12,000 names, and more are being 

added as this hearing is progressing. I have attended too many funerals for those among the ranks of the Metropolitan Police Department who have their lives savagely taken. 

I am proud to be a police officer. I know that we save lives every 

day. We serve and protect without consideration of time or place. 

Where we see criminal activity, it is our unrelenting duty to act. 

We arrest those who prey on our honest citizens and work very 

hard to remove them from the streets. The dangers and difficulties 

we face come with the oath and duties of our office. 

The retirement plan which I and others qualify for is underfunded and the subject of this committee’s hearing today. The retirement plan reflects one quantitative recognition of the special 

hazards and duties I have just described. It is a promise made by 

the District of Columbia and the Congress to those of us who have 

served and continue to serve this community. 

Our side of this promise is to perform our duty and to be prepared to make the ultimate sacrifice while doing it. We are keeping 

our side of the contract. I urge you to move to ensure that the benefits promised become the benefits delivered. President’s plan provides for full protection of the benefits contained in the program as 

it currently exists. The Fraternal Order of Police wholeheartedly 

endorses that preservation of existing benefits without reduction. 

Our members’ duties under the employment contract containing 

the retirement benefits have not been diminished. In fact, they 

have been expanding and made more dangerous than ever before. 

96

I urge this Congress to affirm the President’s commitment to those 

of us behind the badge here. It is the right thing to do. 

While I support the preservation of our existing benefits and 

their assumption by the Federal Government, as of the date of introduction of this plan, I do question the wisdom of the funding 

method chosen to secure them. I am no actuary or public accountant, but what I have read from those who are qualified to make 

financial assessments leads me to believe that the proposal to 

spend down the money currently contained in the retirement plan 

is not a good one. 

According to the projections completed by Milliman & Robertson, 

Inc., for the D.C. Retirement Board in January, the President’s 

plan would cost American taxpayers more than $24 billion by the 

time the last expected survivors or participants are deceased. But 

if a decision was made to more fully fund the retirement plan by 

obligating the Federal Government to a flat rate of $295 million 

annually over the next 40 years, the cost would be cut in half, to 

about $12 billion. 

The Fraternal Order of Police urges you to adopt this type of 

funding strategy. I understand that the Congress and the administration are under significant pressure to reduce the Federal spending in order to balance the budget, but I am deeply concerned that 

a decision to avoid immediate expense will result in a future obligation which may not be honored because it will come due at the 

same moment in time when Social Security and other entitlements 

are making tremendous demands on the treasury. 

I hope that people of honor will keep the promise made to me 

and other Metropolitan Police officers, but I am very concerned 

about the temptation of putting off until tomorrow what should be 

resolved today, especially when tomorrow’s price tag is twice what 

timely action today would cost. 

I conclude by urging you to take the difficult immediate steps 

necessary to protect those who serve and protect you. Please pass 

legislation which will begin funding our retirement plan at a level 

which will provide for all of its current and future annuitants on 

an actuarially sound basis. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Robertson follows:]

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Mr. MICA. Thank you for your testimony. 

I will turn now to Mr. Thomas Tippett, chairman of the Pension 

Committee of the Fire Fighters Association of the District. 

Welcome, and you are recognized, sir. 

Mr. TIPPETT. Thank you, Mr. Chairman. 

I also have a statement I would like to submit—it’s rather 

lengthy—and then try to summarize. 

Mr. MICA. Without objection, that will be made part of the 

record. Thank you. 

Mr. TIPPETT. Thank you, Mr. Chairman, members of the committee and staff. 

I am Thomas Tippett, chairman of the Pension Committee of the 

D.C. Fire Fighters Association. I am a 29-year veteran of the D.C. 

Fire Department and have served as president of the Fire Fighters 

Association for 12 years. Presently, I am serving as the active firefighter representative on the D.C. Retirement Board. 

In my capacity as president of the Fire Fighters over the years, 

I have served on numerous pension task forces, work groups, mayoral pension transition teams, and have testified before the House 

and Senate committees many times, the subject matter always 

being the same as it is today: How do we address the unfunded 

pension liability? 

Mr. Chairman, we do believe that the administration’s plan is a 

bad deal for the firefighters, but I believe also that it is vital, as 

we discuss the proposed legislation dealing with the unfunded liability, that we don’t forget or overlook the past legislative history 

that has brought us to this point. 

I have laid out a history of that in my testimony, but specifically, 

in 1976, legislation was passed to address the unfunded liability, 

in the Congress, and OMB voiced strong opposition to the bill. In 

1978, Representative Mazzoli introduced the same bill, and it was 

amended in subcommittee and further during conference. It was 

passed by the House and Senate and sent to the White House, and 

President Carter vetoed that bill. At the time, the budget director 

was Bert Lance, and a staffer working at OMB was Franklin 

Raines, ironically. 

In 1979, President Carter signed our current legislation, 96–122, 

the D.C. Pension Reform Act, but it was not at the time, and we 

all knew at the time, enough to fund the pension system. So we 

knew, and I plead guilty. Having been involved back then in the 

pension legislation, we knew at that time that there was a shortfall. And I don’t want to see that happen again, Mr. Chairman. I 

think it needs to be addressed and addressed in its entirety this 

time, not put off for another 5, 6, 10 years, where it surfaces again. 

At that time, there were major changes made to the pension system for police officers and firefighters. All those hired after 1980 

are under an entirely different system. The age requirement was 

added, 50 years of age; 25 years of service was required to retire. 

The annuity was then changed to be based on your high three instead of your salary at your date of retirement. 

We eliminated a major provision for disability retirement, called 

the ‘‘aggravation claus.’’ Disability retirement for those after 1980 

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strictive earnings placed on disability retirees. One COLA is now 

in effect for those retirees hired after 1980. 

The D.C. Retirement Board was established under that legislative act. And we have had a new system that has been put in place 

for employees hired after October 1996. So we actually have a 

three-tiered system for police officers and firefighters in the District today. Under that new system, employees pay 8 percent of salary, as opposed to the 7 percent for pre-1986 employees. And those 

employees, post-1996 employees, have their COLAs capped at 3 

percent. 

So, again, there have been two instances where there have been 

major reductions in benefits for public safety employees, since 1978 

when this issue really surfaced and was addressed by the Congress. 

Now, the D.C. Fire Fighters Association has supported, in testimony before the Congress, the elimination of the twice a year 

COLA replaced by a single COLA. We have supported the elimination of the equalization clause, which gives members who retired 

prior to 1980 the same salary increases as active members. This 

would be replaced by providing retirees with a single COLA, and 

this would serve to stabilize the actuaries’ assumption and prohibit 

the Mayor from adding to future liabilities. We have also supported 

the increase in all employee contributions from 7 percent to 8 percent. 

The plan that is being discussed today, Mr. Chairman, was an 

outline to us until a meeting April 9 at the White House, at which 

time the staff of OMB gave a more descriptive analysis of what the 

President’s plan would entail and how it would impact on current 

employees and current retirees. 

In our opinion, the Clinton administration committed a great injustice to the active and retired members of the public safety family, particularly our elderly retired members and their widows, by 

prematurely announcing a plan that had the potential to adversely 

impact their monthly annuity but offered no specifics. 

Again, it wasn’t until the April 9 meeting that the White House 

acknowledged in a handout that, for employees already retired as 

of the freeze date, the Federal Government would be responsible 

for paying all future retirement benefits, and that these benefits 

would remain unchanged under the proposal. 

They also stated that they would assume responsibility for the 

District’s existing pension plans for law enforcement officer, firefighters, teachers, and judges. Mr. Chairman, the key word in the 

press release is ‘‘assume.’’ We believe that the word should be 

‘‘fund,’’ that they should fund the existing plans. 

It appears that the folks at 1600 Pennsylvania Avenue don’t get 

it. They still haven’t learned from past mistakes. Had the Carter 

administration properly addressed the unfunded liability, as Congress wanted them to do, we wouldn’t be having this hearing today. 

Instead, they are requesting you to approve the transfer of the 

board’s assets, now approximately $4 billion, to a third-party trustee who will use the assets to pay benefits to the beneficiaries until 

the assets are gone. We believe this is sheer folly. 

I support your statement of February 15, when you said, ‘‘At a 

time when we need to be looking for ways to infuse real cash into 

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our pension system, Social Security, as well as Civil Service, the 

D.C. proposal appears headed in the wrong direction.’’

It appears that the administration is proposing to raid the current assets to pay for short-term annuity obligations. The firefighters respectfully suggest that the third-party trustee be mandated to invest the approximately $4 billion in assets for maximum 

return, and that a payment formula be designed by the Congress 

that would finally recognize the Federal obligation, as well as the 

city’s responsibility to the police officers and firefighters hired prior 

to home rule. 

Mr. Chairman, one other point that is very disturbing is the impact that this proposal is having on the current workforce. There 

is a great fear out here among the senior staff of the Police and 

Fire Departments that there will be a major change in their level 

of benefits once the District has to come up with a plan that will 

be implemented after the so-called ‘‘freeze date,’’ a date that has 

changed three different times. 

Because of that fear, because of that concern, there are over 200 

firefighters, top-level, senior people, and I believe well over 600 police officers, who are anxiously awaiting September 30 of this year, 

as sort of a date certain to retire by. I think it would be certainly 

devastating to public safety in the city if that large a number of 

police officers and firefighters were to retire because of the fear of 

the unknown; they cannot be given any certainty as to their level 

of benefits. 

Unfortunately, there is no one here from the city today to address that issue. All the President’s plan calls for is the city to, 

within 12 months, come up with a new plan for current and future 

employees. Well, we are current employees, going back to 1968 in 

my case. And I know there are many, many similarly situated in 

the Fire Department who are looking at this unknown and making 

a determination that they very well may have to retire before the 

implementation of this plan, if, in fact, it does become legislation. 

So I think it is certainly a concern that needs to be brought to 

the attention of the committee. I think it is an impact that no one 

thought of, quite frankly, at the White House and OMB, and that’s 

another example of what has been disturbing about this whole 

process, is that it seems like it was an outline thrown out there 

and filling in the details later. 

The actuaries have done an analysis of the plan, and it appears 

that it will cost the Federal taxpayers upwards of $24 billion to go 

with the administration’s plan, as opposed to roughly $12 billion 

under Ms. Norton’s plan. And we find it very, very difficult to embrace that kind of a concept, to delay the payment of the bill and 

increase it in the out years, and, in effect, cost the Federal taxpayers double what is necessary. 

So we would hope that you would look at the comments that 

have been made here today toward looking at addressing the unfunded liability, because it certainly is a serious problem facing the 

District, and it is an issue that is now affecting the employees, not

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only the retired employees, but the current active. It could have, 

unless addressed properly, I believe, a devastating impact on public 

safety here in the District. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Tippett follows:]

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Mr. MICA. Thank you for your testimony. 

I will now recognize Mr. James Baxter, who is the treasurer of 

the Washington Teachers Union. 

Welcome, sir. You are recognized. 

Mr. BAXTER. Thank you, Mr. Chairman and members of the committee. 

My name is James Baxter, and I am the treasurer and the chair 

of the Pension Committee for the Washington Teachers Union. I 

am pleased to be here today on behalf of the WTU and the president, Barbara Bullock. 

The Washington Teachers Union appreciates the invitation to address President Clinton’s Capital Revitalization and Self-Government Improvement Plan; specifically, that portion of the plan that 

relates to the pension systems which provide retirement benefits 

for teachers, judges, police, and firefighters. 

We are especially pleased that the President has proposed this 

bold venture, and we sincerely hope that the Congress will, at the 

very least, adopt his recommendations as a beginning step in the 

resolution of a very serious problem. 

Clearly and simply, the current situation regarding these pension 

plans cannot be allowed to continue. These pension plans established by Congress—the police and fire in 1916; the teachers in 

1920; and the judges in 1970—were victimized by the Congress’

failure to fully fund. 

When the District achieved home rule in 1975, as we have heard 

in former testimony, these plans were turned over to the District 

along with $2 billion in unfunded pension liability. By 1980, that 

unfunded pension liability had grown to $2.8 billion. 

When the Congress passed the Retirement Reform Act of 1979, 

two things happened: One, a plan was put into effect that began 

the Federal Government’s attempt to deal with the debt it had 

passed on to the District; and two, it created a complex formula by 

which the District would make annual pension payments into the 

plans. 

The District held up its end, contributing through September 

1996, $1.9 billion in excess of the actual retirement costs for the 

period, but still less than the actuarially determined cost to fully 

fund the system. The Federal revenue stream continues to the tune 

of $52 million per year. Yet, what has happened? What has happened is that the unfunded liability, the debt, has grown from $2.8 

billion in 1980 to $4.4 billion in 1996. It is estimated to reach in 

excess of $6 billion by 2004. 

What is clear is that the District has done the very best it could, 

even to the point of making its contributions in excess of these 

costs. What is also clear is that the Federal Government’s failure 

to fund what it promised has saddled the District with a debt it 

can never overcome and caused our members to question whether 

or not there will be a pension system when they reach retirement 

age. 

It is against this factual background that we are pleased to receive the President’s plan and recommend its acceptance to you. At 

this point, we are attempting to inform ourselves about the various 

options which have been suggested to implement this plan. 

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We are not prepared today to recommend one over the other. 

However, we can pledge to you and to this committee our intent 

to work closely with you, with our friends on the City Council, and 

with all other parties to find and support the plan that best meets 

the needs of our members and serves the public interest. 

I said at the beginning that I hoped you would view the President’s plan as the beginning step in the resolution of this issue of 

pensions. As helpful as the President’s plan may be, we are concerned that it may not go far enough. Here is why. 

On February 25, 1997, the D.C. City Council received testimony 

on the President’s plan. In addition to OMB director, Franklin 

Raines, many others offered comment on the plan. One of those 

groups was the prestigious and respected Greater Washington Society of CPAs. Their chairman, Bert Edwards, put forth a sound 

analysis of the plan. One aspect of his analysis is of concern. 

I quote from his testimony: ‘‘The President’s plan unequivocally 

recognizes the funding in the Retirement Reform Act of 1979 was 

simply too little. Pursuant to the above studies and others, the plan 

accepts responsibility for much of the unfunded liability. However, 

based on the Greater Washington Society of CPAs’ current understanding, the plan may leave the District with an unfunded liability estimated at $1.2 billion.’’ Mr. Edwards goes on to point out that the Retirement Board’s actuary, Milliman & Robertson, Inc., believes that the projected $4.3 

billion unfunded liability, at September 30, 1998, is actually only 

about 78 percent of what they believe the real unfunded liability 

may be. They project an actual unfunded liability of $5.5 billion. 

What that says to us is that, even should the Congress pass the 

President’s plan as is, we feel the District will be left with an un- funded liability estimated at $1.2 billion. Were that to be the case, 

the District and our members would find ourselves right back in 

the situation we faced at the beginning of this crisis. We cannot be 

expected to create and maintain a fiscally sound system, a fully 

funded pension plan, if we face the prospect of another billion-dollar-plus unfunded liability. 

Therefore, Mr. Chairman, while we continue to explore the options as to how the President’s plan may be implemented, I do 

make the strongest of recommendations. I strongly urge you to 

agree that this reassumption by the Federal Government can only 

cure the existing pension crisis by including the entire unfunded liability. 

To pass any plan which would result in another unfunded liability would be to fail in the resolution of the original problems created by the Congress in 1975. I urge you to commit now to full resolution and not to defer until later problems we can anticipate 

today. 

In that regard, I would like to state that Congresswoman Norton’s proposal has strong financial attributes that must be considered as we forge forward with an interest in trying to reconcile the 

differences in the pension plan, in particular, the notion of having 

costs which would be amortized and that would, for two major reasons, have dual benefits. 

One is current funding and an increased amount of the liability, 

over a 40-year period, and, of course, if it were in a shorter period, 

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that’s all the better to those persons that are now annuitants or 

annuitants to be, that face the anxiety of not knowing the outcome; 

and two, the reduction of future payments to the Federal Government, which would be, from that aspect, somewhat self-serving. 

And as was spoken earlier, the costs would be potentially twice— or at least less by two times the amount that it would be without 

such a proposal. 

Thank you for the opportunity to address the committee. The 

Washington Teachers Union looks forward to working closely with 

you in the resolution of this difficult issue. 

Thank you. 

[The prepared statement of Mr. Baxter follows:]

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Mr. MICA. Thank you for your testimony. 

Ms. Kane, it sounds like you put half your lifetime into trying 

to get this pension fund in order. Wouldn’t it break your heart to 

regress to 1979, as far as spending out any of the assets? 

Ms. KANE. Very definitely, sir. We agree that, with the finding 

of Congress in 1979 that having an unfunded pension system is unsound, and that it’s not sound Government practice, and it’s not 

good for the beneficiaries and the participants. 

Mr. MICA. The problem we face is trying to come up with the difference to meet some of the annual operating shortfalls for the District, and this obligation to meet benefit requirements is just—I 

mean, it’s doing the same thing at the Federal level. What did we put in, a shortfall of $30 billion? $30 billion, which is now getting 

up there. 

Let’s see. I was encouraged to hear Mr. Tippett say that their 

employee group had offered some concessions to try to put things 

in financial order. And I think you clarified the point that the new 

hires are now paying 8 percent, and they have a cap of 3 percent 

for their COLAs, and that was proposed, also, for all of the old employees. 

Is that correct? Did you say that you also had offered that? 

Mr. TIPPETT. For the older employees, what we proposed was a 

single COLA. 

Mr. MICA. Right. 

Mr. TIPPETT. Currently, they are entitled to a twice a year 

COLA. 

Mr. MICA. And going from 7 to 8. 

Mr. TIPPETT. Seven to eight. And also elimination of what’s 

called the ‘‘equalization clause,’’ which gives some actuaries grief in 

that it allows the Mayor to have control over a large number of retired employees by tying their annuity to active employees’ salary 

increases. So by eliminating the equalization clause, you would put 

everyone under a single COLA, and it would be much easier to cost 

out. 

Mr. MICA. If we did that—maybe Ms. Kane or Ms. Norton or you, 

Mr. Tippett, have run the figures on that—what kind of funds does 

that inject? 

Ms. KANE. Mr. Chairman, going from the twice a year to a once 

a year, we did have the figures run last year. Eliminating the twice 

a year COLA would have decreased the unfunded actuarial liability, as of October 1, 1995—of course, it has increased a little since 

then—from $5.15 billion to $5.09 billion. That’s a $60-million difference. 

Mr. MICA. Is that annualized? 

Ms. KANE. No, that’s absolute. 

Mr. MICA. Absolute. 

Ms. KANE. That’s absolute. The annualized difference would have 

been about $2 million a year. 

Mr. MICA. That’s all? 

Ms. KANE. The difference, yes. It is perhaps one of those issues 

that is more a lightning rod than an actual dollar cost. 

But, as Mr. Tippett said, the Council has taken the action for all 

the new hires. The Council has taken the action for anyone who 

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one hired prior to 1980, to change that, because the home rule 

charter, also passed by Congress, prohibited the Council, and continues to prohibit the D.C. Council, from changing the benefits, including retirement benefits, for anyone who was hired prior to December 31, 1979. 

So, in order to make a change in that area, the Council had 

asked the Congress to do it, tied to the passage of legislation similar to Ms. Norton’s, which would be part of the solution to the 

whole problem. 

Mr. MICA. And what would the 7 to 8 do, if included in legislation, on those that are not now covered but could be covered? 

Ms. KANE. The dollar amount—I don’t know if we have what the 

change would be, going from 7 percent to 8 percent for current employees who are not in the new hires program. I do know, when 

the Council ran the numbers, that the difference between 7 percent 

and 8 percent, and being able to fund the new hires program, did 

make a difference. 

Mr. MICA. You might be getting a whisper in your ear. 

Ms. KANE. The difference, I’m told, is about $5 million a year, to 

go from 7 percent to 8 percent. 

Mr. MICA. That’s only 7. Anything else that could be done? 

Mr. TIPPETT. Well, Mr. Chairman, the equalization. 

Mr. MICA. Equalization, what’s that worth? 

Mr. TIPPETT. That I don’t know, but I think there is certainly a 

dollar figure to be attached to it. What it is we can provide for the 

committee, but we haven’t run that number. 

Mr. MICA. Well, I believe the Federal Government probably has 

some liability here. I don’t know if it’s $4.8 billion. But, to me, it 

would be a travesty for any of the employee groups to participate 

and see the $4.2 billion drawn down. I mean, that, to me—you all 

ought to be out in the streets yelling and screaming. 

I just can’t believe it’s even under consideration. Now, I know the 

constraints that put it under consideration, but that’s not a justification. I’d encourage you—and, I mean, endorsing the plan and 

the merit to the plan, and all this, and now Mr. Baxter tells me 

his calculation is that they are off $1.2 billion. I hadn’t heard that 

figure before, $1.2 billion. 

So not only are they going to spend what took 17 years to get 

some cash in, they are going to end up giving you twice the obligation, $24 billion, even if we took the Norton plan, and you end up 

with more unfunded liability than they are projecting. It’s just a 

horrible situation. 

I will pledge to work with any of the groups, with the board, with 

Ms. Norton. This is sort of like the last stand. We’re out there, and 

they have killed off all the rest of the Indians, and this is Custer, 

the last stand. But, in the private sector, I could never accept anything like this, and it would be a travesty to accept it for public 

employees, be they District of Columbia employees or Federal employees. 

For the most part, we have already done it for the Federal employees, but letting things progress further would be a horrible 

mistake. So we will work with you. 

I’ve learned a lot from the hearing. It’s been helpful. We will 

work with Mr. Davis. 

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Ms. Norton, I yield now to you. 

Ms. NORTON. Thank you, Mr. Chairman. 

First, I want to, Ms. Kane, congratulate the board on the performance of the assets. There has been, over time, considerable improvement in the performance, and you are at the top, another indication that the District is more than doing its part, and the board 

is more than doing its part. 

I think I should add, for the record, that Frank Raines was very 

helpful to the board and to me when there were very harmful articles run by the Washington Post about the board. And I immediately asked Frank Raines, who was then at Fannie Mae, if he 

would help me, at no cost to the District, to make recommendations 

to the board, and he did. 

We did not find that the fund was poorly managed at all. What 

we did find is that there were things that the board could do here 

and there that would improve the performance, and the board was 

already beginning to do many of those things. Now the board has 

put into effect fully, so far as I understand, all of Mr. Raines’ recommendations. 

Mr. Tippett, my good friend, I thought I heard in your testimony 

some guilt by association. Since Frank Raines was there when 

Jimmy Carter vetoed the bill, Frank Raines vetoed the bill. I would 

bet the other way around. Frank Raines had been a Washingtonian 

who had worked with the District and probably knows more about 

District finances than any human being, and I bet—I’ve never 

asked him—that he recommended the opposite and lost to the 

President, particularly given where he has stood, generally, on our 

issues. 

I do want to say that you are taking the position that I believe 

is the only position that fiduciaries can take, and I respect the position you are taking. At the same time, I also want to say that Mr. 

Raines and the administration have not set out to make a ‘‘raid’’ on the assets. They didn’t say, ‘‘Here’s some money. Let’s go get it.’’ They were absolutely forced into this position by this Congress, and 

nobody should forget that. 

They have got to pay for this entire bill, and they saw the assets 

there, and they recognized that there was no way to get there from 

here while leaving those assets there, unless the Congress was 

going to step up to the mat and do something different. Now, you 

haven’t heard the chairman today indicate that he’s prepared to do 

that, even though he commiserates with you about the raiding of 

your assets. 

Ladies and gentlemen, this is a puzzle. This is like a crossword 

puzzle, and I invite your participation in the puzzle. Is there a way 

that anyone, including your experts, can think of to help us get 

through this puzzle: deficit reduction, on the one hand, but funding 

this proposal on the other. I mean, that’s why I say things like, in 

2002, if I’m here, I would revisit this. I recognize that, if this plan 

went through, part of the assets would be gone. 

One of the reasons I would revisit it is not just to save the Government money, but you just watch out, the same Congress that 

put you in this bind now will try to get that out of, I bet, will try 

to get that out of benefit reductions, except you can’t get here from 

there either. By benefit reductions, you can’t get from where we 

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will be in 2002 with $700 million by taking it from the workers. 

Nothing would be left. So either we’re in an impossible position 

now, or we’re in an impossible position then. 

The retirees have my respect, because, as Mr. Tippett indicated, 

when we were in a bind here trying to come up with a plan somewhat like mine, and we said, well, everybody is going to have to 

make a little bit of a sacrifice in order to get there, well, the retirees stepped right up, and the employees stepped up, did their part. 

The District took that and ran with it, and now we’re still left with 

unfunded liability. 

I have only one question. By the way, in this puzzle, put these 

two things. The administration was not only trying to deal with the 

pension plan, which, in my estimation, is No. 1; No. 2 is Medicaid. 

Either one of them, left unsolved, takes us over the side, or leaves 

us in the water, whatever is your metaphor. So they had to find 

a way to deal with pensions and Medicaid. 

They take back the Federal payment, we get much more in the 

long run, but they still couldn’t do it by taking back the Federal 

payment. After putting the Federal payment on the table to help 

pay for the bill, they went through hundreds of accounts—hundreds—taking a little bit here and there until they had paid for 

this plan in the first 5 years. It is a puzzle, and I invite all the 

best thinking of your experts. 

I am concerned with something. Ms. Kane, it’s in your testimony. 

In the prepared testimony, you say that the cost of administering 

the retirement fund now is about $16 million a year and that it 

would go to $22 million a year with a third-party trustee. I wonder 

if you could elaborate on how you get to that expanded or increased 

cost. 

Ms. KANE. That is the number that’s in the President’s budget 

submission. We don’t know how they got to that, but that is in the 

pending appropriation. 

Ms. NORTON. I see. That’s where you got it from. 

Ms. KANE. We underspend the $16 million, most of which goes 

for management fees now. The fund is aggressively managed. The 

actual operations of the board, the staff, and all this, is a very, very 

small expense, but most of it goes for management fees. A lot of 

our assets are aggressively—actively managed, I should say, so 

there are fees associated with that. 

We understand that Treasury management or even a trustee 

might be more passive, so we would assume the cost for custodial 

fees would go down. But that is a question. We don’t know where 

that number came from. 

Ms. NORTON. I wonder if they have startup for a third-party 

trustee to get going, or what. I will ask. 

Ms. KANE. We don’t know. If the funds are transferred, there will 

have to be a lot of thought. There will be costs associated with the 

liquidation of assets. When you are selling them and you are not 

buying them, there are always transaction costs there, if that’s 

where it comes from. We are invested for the long term, and so 

there will be additional costs, also losses, if the assets are sold in 

the short term. 

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Ms. NORTON. Mr. Baxter’s testimony, and I take it the rest of you 

agree, as well, that the District would be left with unfunded liability, under the President’s plan, of $1.2 billion. 

How do you arrive at that figure? What’s the basis for that figure? 

Mr. BAXTER. This is information that was provided by the Washington Society of CPAs. 

Ms. NORTON. Does the board have any information comparable? 

Oh, I’m sorry, Mr. Baxter. 

Mr. BAXTER. I was going to say, initially, at least in some of the 

meetings—the most recent meeting, I did not redact any information from the most recent one that we had. Mr. Tippett did speak 

to that, and things were fairly indecisive at the conclusion of that. 

But, from the onset, at first blush of the proposal, there was not, 

at least on the table at the time, vocalized an intent to take all the 

unfunded liability. Maybe my colleagues here will concur with me. 

And the thought is that there would have been a $1-plus billion unfunded liability that would remain with the District, that being 

only one derivation, in kind, of the plan. 

Now, there have been other alternatives that have been presented since then that speak to all of the unfunded liability being 

taken by the Federal Government, as well as what was talked 

about earlier in regard to some of the assets remaining with the 

District. 

Ms. NORTON. So assets and liability remain. I mean, I know 

there’s talk about assets remaining, but your testimony says unfunded liability remaining. That’s what I’m trying to clarify. 

Mr. TIPPETT. Madam Chair, Mr. DeSeve indicated at the last 

meeting that they intended to leave approximately $1.2 billion with 

the District, to take care of future liabilities associated with disability retirements and any other transactions that may occur, 

leaving the District with no unfunded liability. At least that’s the 

impression that was left with us when we left that day. However, 

it’s a very fluid plan, I should say. 

Mr. BAXTER. Mr. Tippett speaks to the most recent meeting. 

Ms. KANE. We have not seen the legislation. Nobody has seen it. 

Ms. NORTON. We haven’t either. 

Ms. KANE. So it has been unclear, and there have been various 

interpretations and various representations. At the time that Bert 

Edwards testified, the information available was that the Federal 

Government would take all liabilities up to what’s called the 

‘‘freeze date,’’ whether that’s October 1, 1997—that’s a movable 

date, too—or whether it’s June 30, or whatever, that they would 

take all the liabilities up to that point, and they would take 100 

percent of the assets. 

If that had happened, and if that does, indeed, turn out to be the 

case—and it does not appear, at the moment, it may be the case—

the District would be left with the liability for anything earned by 

current employees from that date forward, until the day they retire, for those new benefits. Someone who is on board, a firefighter 

who has been on board for 12 years, they might then be 33 years 

old, because you start as a firefighter at age 21. They would have 

20-some-odd more years to work for the District. 

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The Federal Government would take responsibility and liability 

for everything they earned up to that age 33, and the effect that 

any future earnings would have on those benefits, but we understand they are still not planning to take any liability or any responsibility for anything that that firefighter earned from age 33 

forward until retirement, except insofar as it affected, through seniority, et cetera, the value of current benefits. 

So the question is, how is the District going to pay for those? Because the amount of money that the firefighter would contribute 

and what it might earn would not add up to what it would be 

worth. 

Ms. NORTON. But they were leaving assets. 

Ms. KANE. Well, this afternoon I heard Mr. DeSeve say most, if 

not all, of the assets would go to the Federal Government, which 

is different than saying some would. We don’t know. But if they are 

to accept liability for the benefits earned up to a freeze date—and 

let’s assume that’s October 1, 1997—and leave with the District liability for what’s earned then forward, and disability, approximately $1.2 billion would be the cost of that. And it either has to 

be funded or it’s unfunded. 

Ms. NORTON. My impression is that the administration, working 

with all of these strictures, its approach has continued to be a work 

in progress. 

Ms. KANE. Yes. My understanding is that the latest version of 

the memorandum of understanding, which the Council, at least as 

of 1:30, had not voted on, and I do not believe was actually planning to vote on it today, did call for most of the assets to go to the 

Federal Government, but not all of them. But there was no dollar 

amount. 

Ms. NORTON. Mr. DeSeve informed me, before the hearing, that 

he had had a very productive meeting with the Council, and they 

might even get to the point where they could vote on it today. I 

think they are ironing out some of their differences. 

Mr. Chairman, I appreciate the way in which you have highlighted the difficulties of this plan, and I very much respect the 

considerable expertise of this committee, and would welcome the 

help of this committee in helping the District and this member to 

solve this puzzle. 

Thank you very much. 

Mr. MICA. I thank the gentlelady, and certainly will work with 

you, the District Committee, and others. 

We thank you for your testimony, and I guess I don’t have to encourage you to stay active on the issue. I hope that we can find a 

satisfactory resolution, and I know, if we all work together, we can 

do a good job for those folks out there who put their lives on the 

line daily to serve the District. We thank you again for your testimony and your participation today. 

There being no further business to come before the subcommittee, this meeting is adjourned. 

[Whereupon, at 5:10 p.m., the subcommittee was adjourned.] 

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