U.S. GOVERNMENT PRINTING OFFICE

57–737 CC WASHINGTON : 1999

H.R. 807, FEDERAL RESERVE BOARD RETIREMENT

PORTABILITY ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON

H.R. 807

TO AMEND TITLE 5, UNITED STATES CODE, TO PROVIDE PORTABILITY

OF SERVICE CREDIT FOR PERSONS WHO LEAVE EMPLOYMENT WITH

THE FEDERAL RESERVE BOARD TO TAKE POSITIONS WITH OTHER

GOVERNMENT AGENCIES

FEBRUARY 25, 1999

Serial No. 106–19

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

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

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

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

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

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

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE CIVIL SERVICE

JOE SCARBOROUGH, Florida, Chairman

ASA HUTCHINSON, Arkansas

CONSTANCE A. MORELLA, Maryland

JOHN L. MICA, Florida

DAN MILLER, Florida

ELIJAH E. CUMMINGS, Maryland

ELEANOR HOLMES NORTON, Washington,

DC

THOMAS H. ALLEN, Maine

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

GEORGE NESTERCZUK, Staff Director

GARRY EWING, Counsel

JOHN CARDARELLI, Clerk

TANIA SHAND, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on February 25, 1999 ....................................................................... 1

Text of H.R. 807 ....................................................................................................... 6

Statement of:

Kelley, Edward W., Jr., Governor, Federal Reserve System; and William

E. Flynn, III, Associate Director, Retirement and Insurance Services,

Office of Personnel Management ................................................................. 13

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

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 9

Flynn, William E., III, Associate Director, Retirement and Insurance

Services, Office of Personnel Management:

Information concerning portability .......................................................... 47

Prepared statement of ............................................................................... 31

Kelley, Edward W., Jr., Governor, Federal Reserve System:

Information concernign Thrift Savings Plans ......................................... 51

Prepared statement of ............................................................................... 16

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

of Columbia, followup questions and responses ......................................... 54

Scarborough, Hon. Joe, a Representative in Congress from the State

of Florida, prepared statement of ................................................................ 3

(1)

H.R. 807, FEDERAL RESERVE BOARD

RETIREMENT PORTABILITY ACT

THURSDAY, FEBRUARY 25, 1999

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

The subcommittee met, pursuant to notice, at 10:37 a.m., in room

2247, Rayburn House Office Building, Hon. Joe Scarborough (chairman of the subcommittee) presiding.

Present: Representatives Scarborough, Morella, Cummings, and

Norton.

Staff present: George Nesterczuk, staff director; Gary Ewing,

counsel; John Cardarelli, clerk; Ned Lynch, senior research director; Jeff Shea, professional staff member; Tania Shand, minority

professional staff member; and Jean Gosa, minority staff assistant.

Mr. SCARBOROUGH. Good morning. Let me begin by welcoming

my colleagues to the first hearing of the Civil Service Subcommittee for the 106th Congress. Continuing their service on the

subcommittee for the majority is the former chairman, Mr. Mica,

and Mrs. Morella. The new members for the majority are Mr.

Hutchinson, the gentleman from Arkansas, and Mr. Miller, my

friend from the great State of Florida. For the minority, the ranking member is Mr. Cummings, who is continuing his service, as is

the gentlelady, Ms. Norton. Mr. Allen of Maine is a new member

on the minority side. I would like to welcome all the Members and

look forward to a productive working relationship with my colleagues on the subcommittee.

Our jurisdiction is rather broad, covering pay and benefits for

Federal workforce employees, and includes the rules for hiring, rewarding, and disciplining the employees. For those times when disputes arise or disciplinary actions are taken, a fairly elaborate appeals system has been established. This will also be falling in our

jurisdiction.

As we deal with these matters, I want to assure everyone of my

commitment to the principle that excellence in the workplace

should be rewarded consistent with the contribution to public service. We do have a responsibility, as stewards of the public interest,

to ensure that our investment in human capital provides effective

service for the American people so that their hard-earned tax dollars are spent wisely.

We have already begun our work with the markup of H.R. 416,

the Retirement Corrections bill, on February 3rd. I expect that bill

will be taken to the floor of the House in the next few days. Next

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month we will hold hearings on extending long-term care insurance

benefits to Federal employees, and examine some additional employee benefit issues.

Today we are going to review the operation of two different pension systems within the Federal benefits structure. The examples

before us compare a well-funded system, supported by long-term investments, with a system that has—for nearly 80 years—existed on

a ‘‘pay-as-you-go’’ basis, with no substantial investment directed to

the payment of future benefits.

Under current law, employees of the Federal Reserve System,

which is a well-funded system, who might desire to continue their

Federal service with other agencies, face portability problems.

These barriers limit their ability to gain credit under the Federal

Employment Retirement System for their service with the Federal

Reserve Board. After this hearing we will mark up legislation that

will finally remove this impediment to greater mobility in Federal

agencies.

Because nearly 80 percent of the Fed’s pension program is invested in a diversified portfolio of equities, it is thriving. Over the

past 10 years it has averaged nearly a 16 percent annual return

on investment, and the Fed has no unfunded liability. Instead, it

has assets with an estimated value of more than $7 billion that enable it to provide a better benefit than FERS.

In contrast, the Civil Service Retirement and Disability Fund has reported unfunded liabilities exceeding $512 billion. While the market has thrived, the system has experienced declining interest rates

on its holdings of Treasury securities. Even worse, because taxpayers must redeem both the principal and any interest attributed

to these Treasury securities, each year Federal employees and annuitants face the specter of COLA delays, increased retirement deductions from their pay, or possible changes in the terms of their

benefits—all traceable to the need to appropriate money to pay the

accrued benefits.

These pressures are not accidental. They are a direct result of a

design flaw that relies on future tax receipts to pay for growing retirement liabilities. The Federal Reserve’s management of its retirement system demonstrates that it is possible to fund full benefits for employees without imposing a growing burden on future

taxpayers.

[The prepared statement of Hon. Joe Scarborough follows:]

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Mr. SCARBOROUGH. I look forward to our witnesses’ discussions

on the differences between these systems, and I certainly hope that

we can gain some useful insights on managing the Civil Service Retirement System more effectively and wisely.

Now I would like to turn it over to my ranking member and

friend, Mr. Cummings, for any comments he may have.

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

I want to congratulate you on your appointment, and I certainly

look forward to working with you and all the other subcommittee

members. I am glad that we are starting off this session with an

issue that has bipartisan support.

Under current law, if an employee of the Federal Reserve Board

leaves to work for another Federal agency, the employee is required to join FERS, the Federal Employees Retirement System.

Under the current FERS statute, time spent working at the Board

after 1988 does not count as ‘‘creditable service’’ toward a FERS

annuity. Though they have not had a break in Federal service, affected employees will receive smaller pensions upon retirement.

This outcome resulted from an oversight that occurred when the

FERS statute was written in the late 1980’s. It affects Federal Reserve Board employees hired after 1983 who have worked at the

Board after 1988. In human terms, the problem affects about 50

employees who have already left the Board for other agencies, and

potentially affects about 1,000 people—about 60 percent of the

Board’s current workforce—should they move to other agencies and

then retire under FERS. Over time, unless the problem is fixed, an

even larger proportion of the Board’s workforce will potentially be

adversely affected.

It is worth noting that employees who come to work at the Board

from other Federal agencies do not have a comparable problem, because the Board’s retirement plan gives all Board employees full

credit toward retirement for all their Government service.

H.R. 807 solves this problem of unequal treatment. It makes

post-1988 Board service ‘‘creditable service’’ under FERS. As a result, affected employees will get the pensions they have earned, the

pensions they should get—pensions that reflect all their Federal

service. The employees, however, will have to give up any Board

pension they would otherwise get and make a contribution to FERS

to ‘‘buy’’ credit for the Board time. This quid pro quo is fair, prevents ‘‘double dipping,’’ and ensures that those who benefit will be

treated the same as other Federal employees under FERS.

The bill is similar to language in current law that addresses the

same problem for Foreign Service employees. I understand that

this legislation has been discussed with staff at OPM, who agree

that there is a problem, that the problem should be fixed, and that

this legislation does so appropriately.

[The text of H.R. 807 follows:]

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106TH CONGRESS

1ST SESSION

H. R. 807

To amend title 5, United States Code, to provide portability of service credit for persons who leave employment with the Federal Reserve Board to take positions with

other Government agencies.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 23, 1999

MR. SCARBOROUGH (for himself, Ms. NORTON, Mr. CUMMINGS, Mrs. Morella, Mr.

HOYER, Mr. DAVIS of Virginia, Mr. MORAN of Virginia, Mr. WAXMAN, and Mr.

MICA) introduced the following bill; which was referred to the Committee on Government Reform

A BILL

To amend title 5, United States Code, to provide portability of service credit for persons who leave employment with the Federal Reserve Board to take positions with

other Government agencies.

Be it enacted by the Senate and House of Representatives of the United States

of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Federal Reserve Board Retirement Portability

Act’’.

SEC. 2. PORTABILITY OF SERVICE CREDIT.

(a) CREDITABLE SERVICE.— (1) IN GENERAL.—Section 8411(b) of title 5, United States Code, is

amended—

(A) by striking ‘‘and’’ at the end of paragraph (3);

(B) in paragraph (4)— (i) by striking ‘‘of the preceding provisions’’ and inserting ‘‘other

paragraph’’; and

(ii) by striking the period at the end and inserting ‘‘; and’’; and

(C) by adding at the end the following: ‘‘(5) a period of service (other than any service under any other paragraph

of this subsection, any military service, and any service performed in the employ of a Federal Reserve Bank) that was creditable under the Bank Plan (as

defined in subsection (i)), if the employee waives credit for such service under

the Bank Plan and makes a payment to the Fund equal to the amount that

would have been deducted from pay under section 8422(a) had the employee

been subject to this chapter during such period of service (together with interest

on such amount computed under paragraphs (2) and (3) of section 8334(e)).

Paragraph (5) shall not apply in the case of any employee as to whom subsection

(g) (or, to the extent subchapter III of chapter 83 is involved, section 8332(n)) otherwise applies.’’. (2) BANK PLAN DEFINED.—Section 8411 of title 5, United States Code, is

amended by adding at the end the following:

‘‘(i) For purposes of subsection (b)(5), the term ‘Bank Plan’ means the benefit

structure in which employees of the Board of Governors of the Federal Reserve System appointed on or after January 1, 1984, participate, which benefit structure is

a component of the Retirement Plan for Employees of the Federal Reserve System,

established under section 10 of the Federal Reserve Act (and any redesignated or

successor version of such benefit structure, if so identified in writing by the Board

of Governors of the Federal Reserve System for purposes of this chapter).’’.

(b) EXCLUSION FROM CHAPTER 84.—

(1) IN GENERAL.—Paragraph (2) of section 8402(b) of title 5, United States

Code, is amended by striking the matter before subparagraph (B) and inserting

the following:

‘‘(2)(A) any employee or Member who has separated from the service after—

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‘‘(i) having been subject to— ‘‘(I) subchapter III of chapter 83 of this title;

‘‘(II) subchapter I of chapter 8 of title I of the Foreign Service

Act of 1980; or ‘‘(III) the benefit structure for employees of the Board of Governors of the Federal Reserve System appointed before January 1,

1984, that is a component of the Retirement Plan for Employees

of the Federal Reserve System, established under section 10 of the

Federal Reserve Act; and

‘‘(ii) having completed— ‘‘(I) at least 5 years of civilian service creditable under subchapter III of chapter 83 of this title; ‘‘(II) at least 5 years of civilian service creditable under subchapter I of chapter 8 of title I of the Foreign Service Act of 1980;

or ‘‘(III) at least 5 years of civilian service (other than any service

performed in the employ of a Federal Reserve Bank) creditable

under the benefit structure for employees of the Board of Governors of the Federal Reserve System appointed before January 1,

1984, that is a component of the Retirement Plan for Employees

of the Federal Reserve System, established under section 10 of the

Federal Reserve Act,

determined without regard to any deposit or redeposit requirement

under either such subchapter or benefit structure, or any requirement

that the individual become subject to either such subchapter or benefit

structure after performing the service involved; or’’. (2) EXCEPTION.—Subsection (d) of section 8402 of title 5, United States

Code, is amended to read as follows:

‘‘(d) Paragraph (2) of subchapter (b) shall not apply to an individual who— ‘‘(1) becomes subject to— ‘‘(A) subchapter II of chapter 8 of title I of the Foreign Service Act of

1980 (relating to the Foreign Service Pension System) pursuant to an election; or ‘‘(B) the benefit structure in which employees of the Board of Governors

of the Federal Reserve system appointed on or after January 1, 1984, participate, which benefit structure is a component of the Retirement Plan for

Employees of the Federal Reserve System, established under section 10 of

the Federal Reserve Act (and any redesignated or successor version of such

benefit structure, if so identified in writing by the Board of Governors of

the Federal Reserve System for purposes of this chapter); and

‘‘(2) subsequently enters a position in which, but for paragraph (2) of subsection (b), such individual would be subject to this chapter.’’.

(c) PROVISIONS RELATING TO CERTAIN FORMER EMPLOYEES.—A former employee

of the Board of Governors of the Federal Reserve System who—

(1) has at least 5 years of civilian service (other than any service performed

in the employ of a Federal Reserve Bank) creditable under the benefit structure

for employees of the Board of Governors of the Federal Reserve System appointed before January 1, 1984, that is a component of the Retirement Plan for

Employees of the Federal Reserve System, established under section 10 of the

Federal Reserve Act;

(2) was subsequently employed subject to the benefit structure in which employees of the Board of Governors of the Federal Reserve System appointed on

or after January 1, 1984, participate, which benefit structure is a component of

the Retirement Plan for Employees of the Federal Reserve System, established

under section 10 of the Federal Reserve Act (and any redesignated or successor

version of such benefit structure, if so identified in writing by the Board of Governors of the Federal Reserve System for purposes of chapter 84 of title 5,

United States Code); and

(3) after service described in paragraph (2), becomes subject to and thereafter entitled to benefits under chapter 84 of title 5, United States Code,

shall, for purposes of section 302 of the Federal Employees’ Retirement System Act

of 1986 (100 Stat. 601; 5 U.S.C. 8331 note) be considered to have become subject

to chapter 84 of title 5, United States Code, pursuant to an election under section

301 of such Act.

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—Subject to succeeding provisions of this subsection, this

section and the amendments made by this section shall take effect on the date

of enactment of this Act.

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(2) PROVISIONS RELATING TO CREDITABILITY AND CERTAIN FORMER EMPLOYEES.—The amendments made by subsection (a) and the provisions of subsection

(c) shall apply only to individuals who separate from service subject to chapter

84 of title 5, United States Code, on or after the date of enactment of this Act.

(3) PROVISIONS RELATING TO EXCLUSION FROM CHAPTER.—The amendments

made by subsection (b) shall not apply to any former employee of the Board of

Governors of the Federal Reserve System who, subsequent to his or her last period of service as an employee of the Board of Governors of the Federal Reserve

System and prior to the date of enactment of this Act, became subject to subchapter III of chapter 83 or chapter 84 of title 5, United States Code, under the

law in effect at the time of the individual’s appointment.

Æ

Mr. CUMMINGS. I would caution against using this hearing to determine whether or not retirement fund assets should be invested

in the private market. Investing retirement funds is a proposition

that should be examined thoroughly with testimony from the administration, investment experts, and all other affected parties before any decision is made or action taken.

I thank the witnesses for coming today to testify and I look forward to the subcommittee taking swift action on the bill.

[The prepared statement of Hon. Elijah E. Cummings follows:]

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Mr. SCARBOROUGH. Thank you, Mr. Cummings.

Now I would like to recognize the gentlelady from the District of

Columbia, who is a great friend of residents of this capital city, Ms.

Norton.

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

I would like to thank our new chairman, Mr. Scarborough, and

the ranking member, Mr. Cummings, for working together to bring

this important issue before our subcommittee in such a timely fashion. I recognize that only 50 employees are now involved, but that

number will accumulate, and for even 1 employee, this is a great

burden and a burden that the employee should not have to bear

at all because the oversight is ours. The legislation we take up

today will cure that oversight, one created when we adopted the

Federal Employees Retirement System.

Essentially what we do here is to ensure that the affected Board

employees are able to carry retirement benefits to new positions

within the Federal Government. If one of the affected employees

transfers to another Federal agency, she begins to accrue retirement benefits under FERS as though she were a new Government

employee.

The bill allows affected Board employees to transfer to another

agency and elect to be treated as though previously serving the

amount of time under the FERS program that she did under the

Board retirement program.

This bill has particular importance for the Thrift Savings Plan,

since the employee will be able to contribute to the plan and ultimately receive the amount she would have received had she otherwise been in the plan. Particularly today, when 368,000 Federal

employees have been down-sized and another 300,000 civilian and

military personnel are likely to be targeted for some kind of downsizing or privatization over the next 5 years, the ability to move to

other Federal agencies without being penalized is fair and is essential.

I look forward to hearing from today’s witnesses and to the continued bipartisan support that this committee brings to this issue

today.

Thank you very much, Mr. Chairman.

Mr. SCARBOROUGH. Thank you, Ms. Norton.

Now I would like to ask our witnesses, since Government Reform

is obviously an investigative committee, if you would stand up and

take the oath before your testimony.

[Witnesses sworn.]

Mr. SCARBOROUGH. Thank you. Be seated.

Today we are honored to have the Honorable Edward Kelley with

us, who is Governor of the Federal Reserve System, and we also

have William Flynn, III, known as Ed Flynn, the Associate Director

of Retirement and Insurance Services for OPM.

I would like to start with you, Mr. Kelley.

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STATEMENTS OF EDWARD W. KELLEY, JR., GOVERNOR, FEDERAL RESERVE SYSTEM; AND WILLIAM E. FLYNN, III, ASSOCIATE DIRECTOR, RETIREMENT AND INSURANCE SERVICES,

OFFICE OF PERSONNEL MANAGEMENT

Mr. KELLEY. Good morning and thank you, Mr. Chairman. I

would like to request that my full statement be placed in the record

of these hearings.

Mr. SCARBOROUGH. Without objection, so ordered.

Mr. KELLEY. Thank you.

Mr. Chairman, Representative Cummings, Representative Norton, I am pleased to testify on behalf of the Board of Governors on

the Federal Reserve Board Retirement Portability Act, H.R. 807,

and to provide the subcommittee with information on the Federal

Reserve Retirement System.

The Board strongly supports this legislation. The bill would allow

certain employees who leave the Board to work for other agencies

and who then retire under the Federal Employees Retirement System, or FERS, to receive pensions reflecting all of their Federal

service, which is not the case under current law. On behalf of the

Board and its employees, let me particularly thank you, Mr. Chairman Scarborough, and Representatives Cummings, Morella, Mica,

Waxman, Norton, Davis, Hoyer, and Moran for introducing this important legislation.

Quickly, by way of background, the Federal Reserve System has

its own defined benefit retirement plan, composed of two parts: the

Board Plan, covering Board employees hired before 1984—approximately 600 persons—and the Bank Plan, covering Board employees

hired during and after 1984, and all employees of the Reserve

Banks, in total about 24,000 persons.

Mr. Chairman, the first half of my prepared statement covered

the material which the three of you all, in your opening remarks,

have already covered. I think it would be redundant if I repeated

that. You all stated the issue very effectively. It is very clear that

you understand it quite well, and I greatly appreciate your careful

attention to this issue, which you have evidenced by your opening

remarks. I think I will just skip over discussing the issues of this

bill because you have effectively summarized it in virtually the

same terms in which I was going to attempt to do it.

Let me proceed, then, to respond briefly to the subcommittee’s request for an overview of the Federal Reserve System Retirement

Plan and information on the management of its pension plan assets.

The Federal Reserve System Retirement Plan is a defined benefit

plan, qualified under Section 401(a) of the tax code, consisting of

the two benefit structures mentioned a moment ago. The plan provides retirement benefits for virtually all employees of the Federal

Reserve Board and the Federal Reserve Banks. The Federal Reserve Banks and the Board, as employers, are responsible to ensure

the funding required to pay the benefits promised to participants,

and have contributed to the plan at varying levels as determined

necessary by the Plan Actuary.

Since 1986, the Actuary has determined that no employer contributions are required, and currently the retirement plan’s assets

exceed both the plan’s accrued liability, as well as its total liability.

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Plan assets based on a 5-year moving average as of January 1,

1998, were $4 billion, while the current value of plan assets at the

end of 1998 was $5.8 billion. The total benefit obligation as of January 1, 1998, which includes both past and future service and future salary increases, was $3.5 billion, while benefits actually accrued to date were valued at $2.8 billion.

The Federal Reserve Thrift Plan is the System’s defined contribution savings plan, comparable to the Government’s Thrift Savings Plan [TSP]. The Federal Reserve Thrift Plan differs from TSP

in that it offers both pre-tax and after-tax savings components, a

wider variety of investment options, and allows higher contribution

rates—up to 20 percent of salary, subject to IRS limitations.

The Federal Reserve System places fiduciary responsibility for

the investment of both its defined benefit and defined contribution

savings plans in a committee of five senior System officers. This

oversight committee is currently comprised of three Federal Reserve Bank presidents, one member of the Board—and I serve in

that capacity at this time—and the first vice president of the New

York Reserve Bank. At the end of 1998, the pension and savings

plans had investments valued at $8.1 billion, with $5.8 billion of

that representing the pension plan assets.

Our oversight committee distances itself from asset allocation

and security selection decisions to avoid the appearance of a conflict of interest with the System. Instead, the committee functions

as a ‘‘manager of managers,’’ selecting independent investment

firms and giving them a common, balanced investment mandate, as

set forth in our investment objectives and guidelines document, a

copy of which has been provided to the subcommittee. This document is part of our investment advisory agreement with each firm,

and delegates to them asset allocation decisions within broad parameters set by the committee, security selection, and the voting

of proxies.

Currently, eight firms are retained to manage our pension assets,

of which about two-thirds were invested in equities as of year’s

end. I believe, Mr. Chairman, that you may have mentioned that

80 percent of our funds were invested in equities; it is actually

about 65 or 66 percent, rather than the maximum allowable percentage of 80 percent.

Managers are selected by written criteria that include past performance, desired equity and fixed income investment styles, trading and research capabilities, expense levels, and so forth. Management expenses for the entire plan are less than one-quarter of 1

percent of invested assets. A small staff in New York monitors

portfolio activity and performance, reporting on both to the committee on a monthly basis.

Performance of invested assets is measured against three benchmarks: first, versus the expected long-term rate of return for plan

investments used in actuarial evaluation, which is currently 9 percent; second, versus a trailing 36-month composite return index;

and third, in comparison to the plan’s peer group in the Wilshire

Trust Universe Comparison Service.

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I am pleased to be able to report that the plan has met or exceeded each of those benchmarks over many years.

Thank you, Mr. Chairman. I would be pleased to attempt to answer any questions that the committee may have.

[The prepared statement of Mr. Kelley follows:]

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Mr. SCARBOROUGH. Thank you, Mr. Kelley. We appreciate it.

Mr. Flynn.

Mr. FLYNN. Mr. Chairman, good morning. I want to thank you

and members of the subcommittee for inviting us to testify today

to discuss the Federal Reserve Board’s service credit proposal. The

Board’s proposal would make service credit available under the

Federal Employees Retirement System for post-1988 Board service

covered by its retirement system.

Very briefly, in setting a context for today’s hearing, I point out

that very few Federal employees are covered under retirement systems other than the Civil Service and Federal Employees Retirement System. With that in mind, providing credit under the Federal Employees Retirement System for employment with the Federal Reserve Board is, we believe, warranted. To the degree that

participants or sponsors of other plans may seek service credit in

a similar fashion, we think it makes sense to examine each of them

on their own merits.

Now, generally, under the old Civil Service Retirement System,

all periods of service as a Federal employee under Title 5 can be

used for retirement purposes, but only under a single retirement

system. When the Federal Employees Retirement System was created, it was designed as a fully funded system, paid for by employer and employee contributions. Following a transition period

that ended at the end of 1988, service credit for civilian employment is available only for service that was covered under the system at the time that it was performed.

The original Federal Employees Retirement System Act did, however, include one exception. It provided service credit for post-1988

non-covered service performed under the Foreign Service Retirement System, and under that exception a former Foreign Service

employee waives credit under the Foreign Service System and pays

a deposit equal to the contributions, with interest, he or she would

have made to the Federal Employees Retirement System. Credit

may be similarly transferred by an employee between retirement

systems in the opposite direction.

Now, by statute, there are no explicit funding provisions for

these transfers covering employer contributions to the respective

systems. The provisions work because there is reciprocity between

the two systems. Since credit goes both ways, the effect is to offset

the cost of credit by savings from service transfers.

Now, there is no evidence that this mechanism for the Foreign

Service was created exclusively for that system, so it is likely that

the lack of similar provisions for Title 5 service in other retirement

systems was inadvertent.

Historically, transfers of employees between Title 5 employment

and the Federal Reserve Board have been common. After 1988,

however, the Board found that individuals were reluctant to transfer because they knew that the time could not be credited if and

when they returned to Title 5 employment. Accordingly, we worked

closely with the Board’s staff to create the proposal before you

today. In terms of both policy and funding, it was logical to provide

for service credit on the same basis as for Foreign Service employment.

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We believe it is a good bill that provides a reasonable solution

to the matter.

Mr. Chairman, your invitation also posed several questions related to funding of the Government’s retirement systems. In particular, your letter asks whether there are other Federal retirement

systems invested in equities, and what the state of their funding

is.

The GAO report from 1996, mentioned in your letter, offers an

answer to that question. While the figures could be updated, the

investment placement in unfunded liabilities of all the retirement

systems are in the appendix to that report.

In the balance of your invitation letter, Mr. Chairman, you asked

several additional questions relating to projected performance of

the Retirement and Disability Fund under scenarios that envision

investment of all or a portion of its assets in private securities. As

you know, administration of the Civil Service and Federal Employees Retirement Systems and the Retirement and Disability Fund

itself are matters that are governed by statute. As such, they reflect a broad consensus based on policy conclusions that have been

ratified by Congress and the administration over many decades. Indeed, the creation of the Federal Employees Retirement System

and the Thrift Savings Plan reflect the evolution of that consensus.

The Federal Employees Retirement System explicitly recognizes

that private savings can and do play an important and beneficial

role in achieving income security in retirement. That system crafts

a balance between the security of a defined benefit and the risks

associated with private investment.

The bottom line is that investment of retirement fund assets is

an important and complex matter. We should be willing to regularly review those policies, but changes should be made only after

careful and circumspect review, taking into consideration the views

of all interested parties and mindful of the potential for profound

budgetary and economic consequences from such changes.

As just one example of that, I call the subcommittee’s attention

to the testimony of Mr. James Blum, referenced in your letter of

invitation. His testimony from 1997 included a broad review of the

policy issues associated with financing the Federal Government’s

retirement systems. He pointed out the consequences, both negative and positive, of varying approaches to funding retirement benefits, and those consequences remain as valid today as they were

then.

Mr. Chairman, that concludes my statement, and I would be

happy to answer any questions you or other members of the subcommittee may have.

[The prepared statement of Mr. Flynn follows:]

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Mr. SCARBOROUGH. Thank you, Mr. Flynn.

I would like to start with some questions for Mr. Kelley, and I

would like to just briefly compare the two systems that we are talking about today.

As I read your attachment B to the Federal Reserve testimony,

it appears that the Federal Reserve Bank Plan has a higher salary

replacement and retirement than FERS, and that it costs the agency less. The numbers are pretty interesting. Of the two retirement

systems that have comparable benefits, the Federal Reserve system

appears to cost zero dollars to taxpayers—I think I went back to

1985 or 1986—whereas the Civil Service Retirement System right

now does not have money in it. We are about half a trillion dollars

in debt as far as liabilities go, and it costs the taxpayers and the

Federal employees, I guess, if you add them together, an aggregate

of about 11 or 12 percent. And that fluctuates, obviously, year to

year.

I would like to ask you, what provides the Federal Reserve System such an advantage in developing a retirement plan?

Mr. KELLEY. Well, the Federal Reserve System Plan was established in 1934, I believe, and it, from its earliest times, was able

to invest more broadly than the Federal Government has invested

its trust funds, and for many years it has had an equity component

in it.

As you know, since World War II the basic course of the equity

market has been up, and that has obviously helped the funding position of the plan. Most particularly, since 1982, when the long bull

market that we are presently in had its origins, the plan has done

very well.

Another point that I would make is that early on, right up until

it became clear that we were substantially overfunded in this,

when contribution ceased in 1986, the system itself had made very

conservative—and by that I mean quite generous and substantial— contributions to the corpus of the fund. As a consequence, the funding was strong all along as a result of those contributions. Then

that, of course, meant that there were funds in the plan to be able

to take advantage of good markets when they came along.

Mr. SCARBOROUGH. Are the taxpayers exposed to any liability for

these Federal Reserve System benefits?

Mr. KELLEY. No, sir. We have built this plan so that the only

way that taxpayers could in any way be adversely affected would

be that if we had such an extended period of adverse investment

results that our overfunding disappeared and we somehow got into

an underfunded position, and had to make bookkeeping entries

that recorded a debit against our income, which would result in us

having to reduce the payments we made to the Treasury.

Currently, this fund is better than just neutral for taxpayers. We

are actually booking a credit against Federal Reserve income, in accordance with GAAP, as a result of this overfunded status of our

plans, and that credit which we book into Federal Reserve income

is remitted to the Treasury General Fund as a part of the income

stream that we pay into the Treasury every week.

So actually, the taxpayer is receiving a net benefit from this fund

in that sense at this time.

Mr. SCARBOROUGH. What is that credit currently?

41

Mr. KELLEY. I am not sure what the amount is. I believe it is

on the order of $30 million or $40 million currently. It is a very

complex calculation that is done in accordance with GAAP. Please

do not ask me to recite to you how that accounting flows, but we

would be glad to provide that to you if you would like to have it.

Mr. SCARBOROUGH. I could ask you that question, but I would not

understand the answer. [Laughter.]

I went to the University of Alabama and I was very bad at math.

Let me ask you this, though. I want to followup, because over the

past 2 years this subcommittee has monitored the transition of assets managed by the District of Columbia Retirement Board to the

Department of the Treasury. Like the Federal Reserve, the D.C.

Retirement Board had equity assets, but these were funded at only

about 45 percent of the retirement benefits.

You know, in last year’s omnibus appropriations bill the Secretary of the Treasury was directed to liquidate those assets, ‘‘consistent with other Federal retirement programs,’’ and to use $2.4

billion of that to pay for other spending. Now, the employees’ pensions will be paid for by Federal taxpayers rather than out of the

earnings of those investments.

Let me ask you, if you will walk with me down this path, for a

scenario for the Fed. Let’s say we don’t fix our Social Security problem, for instance, this year or any year, and at some point the economy drops into a recession and our surpluses disappear. Since we

have not terminated any significant Government programs or reduced entitlement spending, we will reach 2013 with few resources

and mounting Social Security deficits. The Secretary of the Treasury, who is short of funds, looks at the overfunded Federal Reserve

Retirement Program and says, ‘‘Hey, I have a deal for you. I will take the extra $20 billion in your retirement fund and assure you

that your annuities will be paid from the full faith and credit of

the American taxpayers.’’ Mr. Kelley, how would you respond to the Secretary? That is

question No. 1.

Question No. 2 is, are there any firewalls that have been set up

in this system to make sure that your surpluses are not raided?

Mr. KELLEY. Well, I think that the answer to the Secretary of the

Treasury would be in terms of those firewalls. First of all, quite

aside from the political implications of such a request, those funds

that we are discussing that are in the Federal Reserve Retirement

Plan do not reside with or under the power of the Board anymore.

Once they go into that plan, they are exclusively and legally dedicated to funding the benefits that the Board has contracted for

with its employees, and in that sense they belong to the beneficiaries. We have some good lawyers here in the room, and I am

not a lawyer at all, but I do not believe it would be possible for us

to touch that fund for that purpose if we should somehow desire

to do so.

Mr. SCARBOROUGH. OK. So your funds cannot be raided in the

same way the D.C. funds were, then?

Mr. KELLEY. No, sir.

Mr. SCARBOROUGH. OK.

Let me ask you a question about whether there is any sort of rub

here between your system and other systems. It has to do with the

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investing that you have talked about already in this committee. I

have a couple questions for you. Alan Greenspan, in January, testified before the Ways and Means Committee, and they were talking

about private investment of Social Security funds. Obviously, as

you know, Chairman Greenspan opposed that, in part because

there was the potential for politics getting involved in investment

decisions.

Nonetheless the Fed itself, in its own system, will invest with

some guidelines; and the provision says, as you know, ‘‘no investment should be made or continued in a company whose products

or activities are subject to broad-based social or political censure.’’

That vision is contained in a July 22, 1998 memo approved by the

Committee on Investment Performance, and it certainly sounds

like a preemptive strike against social investment.

What was the first time it was introduced? When did such a provision first enter the Fed’s guidelines?

Mr. KELLEY. My best recollection of that—and frankly, I am not

very clear on the history of that provision—but I believe that it did

come to the attention of the Investment Committee perhaps no further back than 1996 or 1997, and was considered for a period of

time and eventually passed by the Investment Committee and became one of our guidelines.

Mr. SCARBOROUGH. OK. And let me ask you this, because we are

obviously comparing two systems, your system which is extremely

successful—and one of the questions that we are going to have to

ask not only about the future of other retirement systems, but also

of Social Security, is how we walk this fine line, if you could provide me some guidance.

Again, I want to key back on the words that are part of your

guidelines which say that you are going to stay away from activities that are subject to broad-based social or political censure.

Could you help put a little bit of meat on those bones? Would

that include tobacco companies, gun companies, pharmaceutical

companies that produce certain products that are objectionable?

Help me out here.

Mr. KELLEY. Since that became one of our guidelines, it has not

been further discussed in terms of any practical recommendation or

suggestion that something be proscribed. So there is no flesh to put

on those bones at this point.

Mr. SCARBOROUGH. OK.

Mr. KELLEY. It has not been dealt with, as a practical matter,

nor has any particular security of any sort been proscribed under

that guideline.

Mr. SCARBOROUGH. So there has not been an investment that

your Board has wanted to move on that has been stopped because

of that?

Mr. KELLEY. No, sir.

Mr. SCARBOROUGH. OK.

I wanted to ask a question or two of you, Mr. Flynn, briefly.

When we read about the long-term problems facing the Social Security System, which is funded by the same pay-as-you-go mechanism, obviously, that most Federal retirement systems are funded

under, citizens are alarmed because of a shortfall that could begin

43

in the next 10 to 15 years, when the baby-boom generation starts

to retire.

Federal employees have been in such a shortfall condition for

more than 20 years, and this year payroll deductions and employer

contributions will provide less than one quarter of the funding

needed to support current pensions. OPM’s annual reports have projected that the shortfall will increase to more than $100 million

annually within the next 20 years.

In the 105th Congress, the Budget Committee directed this committee to reduce the deficit in direct spending by amounts of about

$4 billion. The Budget Committee proposed options that included

COLA delays, changing the retirement benefit calculation base

from high-3 to high-5, and increased retirement contributions from

employees and their agencies.

Some tough choices have been made with respect to COLA delays

and benefit cuts, but employees are paying more for their retirement benefits, and will be, at least for the next 4 years.

Mr. Flynn, does the absence of funding that is independent of

current receipts leave employees and annuitants continually vulnerable to proposals to delay cost of living adjustments, to reduce

benefits in some other ways, or to increase contribution levels, or

do other things that may not be helpful to Federal employees and

retirees?

Mr. FLYNN. Mr. Chairman, that is a big question. Let me try and

perhaps set a little context, and then give you an answer.

The Civil Service Retirement and Disability Fund, the trust fund

that we manage at the Office of Personnel Management, contains

assets for two retirement systems: the old Civil Service Retirement

System, that was essentially closed to new entrants in 1983, and

the new Federal Employees Retirement System, to which almost

all new Federal employees today are appointed.

You talked a minute ago about the unfunded liability of the Retirement Fund. The unfunded liability, which is, as I think you indicated, Mr. Chairman, $512 billion or $518 billion, is an unfunded

liability that is exclusively the product of the way in which the

Government financed the older Civil Service Retirement System.

The newer Federal Employees Retirement System is designed to be

financed under Government financing mechanisms, to be financed

on a fully funded, accruing basis, so that the employee contributions and agency contributions that are coming in every 2 weeks

will finance the benefits of the participants in that system.

So if I could, just real quickly, separate out where the unfunded

liability is, and then talk about that just for a second, because it

is something that oftentimes gets misunderstood and does in fact,

from time to time, lead to suggestions in the context of the overall

budget for reducing benefits, whether that be in the form of cost

of living adjustments or different formulas for determining what a

monthly annuity would be, and so on and so forth.

The unfunded liability has been recognized. It has been recognized, disclosed, and reported since 1969. A series of amendments

occurred in 1969 to limit the continued growth of the unfunded liability, and a series of legislative initiatives from 1969 until the

creation of the Federal Employees Retirement System did the same

thing.

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The Federal Employees Retirement System has a mechanism in

it that ultimately will finance the unfunded liability of the Civil

Service Retirement System. So there was, in 1983, specific legislative action agreed to by the Congress and ratified by the administration that deals with that unfunded liability over time.

The second point that I want to make is that if you look at the

Retirement and Disability Fund as consisting of two programs, the

assets of the fund—that is to say, the assets of the older system

and the newer system—are available to pay all the benefits required of the system. So even though, on an ongoing basis, receipts

to the fund do not match outlays from the fund on a year-to-year

basis, the fact of the matter is that the balance of the fund is available to pay benefits, and there will always be a balance available

to pay benefits for as long as anyone cares to project into the future.

Now, when it comes to the Federal budget at large—not just the

retirement system—the manner in which Federal programs are financed does make these retirement programs, and other programs,

subject to scrutiny from 1 year to the next. That is part of the process and that is something that we have all had to deal with. There

have been hearings here and in other forums about protecting the

Government’s retirement fund from those kinds of situations, and

there are views, obviously, on both sides of the question. But just

to set that as a context, I hope that helps a little bit.

Mr. SCARBOROUGH. It does. And I have a few more questions, but

I would like to pass it over to the ranking member, Mr. Cummings.

Mr. CUMMINGS. Thank you, Mr. Chairman.

I am trying to figure out, Mr. Kelley, the timing of this legislation here. Can you kind of just give us a little more background as

to why we are acting now? And was there something in particular

that made this happening right now very important? I understand

what the problem is; I am just trying to figure out—— Mr. KELLEY. No, you do indeed. Your summary was excellent.

But there are two things that I would mention there.

No. 1 is that if anyone who is caught in this situation at this

time, whereby they have this split pension calculation under current law, if they were to retire now or before this legislation is

passed, their retirement would be figured on the current law basis

and they would be stuck. To my best knowledge that has not happened to anyone yet, but it could at any time, because of course,

folks get a year older every year. It will happen if the law does not

pass.

We have been aware of this for some time, and I believe this legislation has been around for 5 years now, and another phenomenon

is happening. I believe you were the one who summarized a number of employees at the Board who are in this dilemma at this

time, in that they are covered by what we call the Bank Plan due

to their post-1984 employment. The ones who have full reciprocity

under present law are our older employees, who are covered by our

Board Plan, which is fully fundable back-and-forth with the CSRS.

But the phenomenon that I would point out to you is that these are

older employees who currently enjoy adequate portability, and they

are going to decline in number over time. And meanwhile, the ones

who have come to the service post-1984 are slowly going to become

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all of our employees; and over the course of a very few years, if this

were to languish, our entire workforce would be in this

unidirectional problem.

So I believe there is considerable urgency in those two senses to

get this done.

Mr. CUMMINGS. Now, with regard to your hiring new people, do

you believe or have evidence that this has been a factor in whether

people come on with you?

Mr. KELLEY. I am told that it is, because people like to have the

thought that they can transfer to other agencies and perhaps come

back to the Board, and perhaps come to the Board briefly and then

go back to their home agencies. So as you or perhaps the chairman

observed, there is not a huge number of these individuals—I guess

it was Ms. Norton—but even though they are not many, they are

very important Government servants who are providing important

service to our country, and I do not believe that they ought to be

inhibited or disadvantaged in their ability to provide that service

at the highest and best location that they are called to. But there

is, under this present law, a very meaningful inhibition on the part

of folks who are in this situation to move about and perhaps pursue their career objectives at the highest and best level.

Mr. CUMMINGS. Now, this is modeled after the Foreign Service

law, is that right? It was an effort to correct the Foreign Service

situation, is that correct?

Mr. KELLEY. I do not think anyone is clear as to how this happened, and our folks have tried to find some reference in the legislative history here. But somehow, when the new plan got set up in

1983, there was a provision made for the Foreign Service, which is

exactly what we need—but only for the Foreign Service.

Mr. CUMMINGS. Mr. Flynn, do you know of any other agencies

that this would apply to? This is it? In other words, agencies in a

similar situation?

Mr. FLYNN. There are a number of other Federal retirement systems, Mr. Cummings, where this potentially could apply, but generally speaking they are small, specialized retirement plans for

Federal judges, members of the Farm Credit System, things of that

nature.

I think that with the Foreign Service Retirement System and the

Federal Reserve Board, we are probably looking at the two retirement systems where this would be most likely to occur. We would

not expect to see it in others, but we certainly would be willing to

look at the interest of others if that should materialize.

Mr. CUMMINGS. So nobody has presented a case to you?

Mr. FLYNN. No.

Mr. CUMMINGS. I am just wondering, we have a situation where

we are trying to correct a problem. I think you said, Mr. Kelley,

that it has been around for a while.

Mr. KELLEY. Yes, sir.

Mr. CUMMINGS. Since I am fairly new to the Congress, I am just

curious. Has there been an objection to it? Or is just language in

the legislative process? What has been the issue, do you know?

Mr. KELLEY. Well, I personally am new to this issue, also. It has

fairly recently come to my attention. But I am told that we have

been aware of it for some time, and it has been presented to the

46

Congress before, but before H.R. 807 it has always been mixed up

in other legislation and for one reason or another fell by the wayside in the process and just never got done.

Mr. CUMMINGS. Mr. Flynn.

Mr. FLYNN. Mr. Cummings, I would agree with Governor Kelley.

This is a matter that we have known about. The numbers are

small. There have been provisions under consideration in the past,

and I think it has gotten ripe at this point. But I am not aware

of any objections in the past.

Mr. CUMMINGS. OK. I thought maybe there was something that

we were missing. When you get this kind of bipartisan spirit, you

begin to wonder whether we are missing something. [Laughter.]

Mr. Flynn, you noted that the GAO report is 3 years old?

Mr. FLYNN. Yes, sir, 1996.

Mr. CUMMINGS. Yes. Is that significant? I mean, should it be updated?

Mr. FLYNN. I do not think it is particularly significant. It is a

broad overview of the Federal retirement systems that are available. The appendix to the report, obviously, is going to contain financial information that is that old or older, because it takes time

to collect it. And with the exception of reflecting, for example, the

performance of the equity markets over those past 3 years, I do not

think that substantively there would be any particular reason to

suggest that it is out of date and needs to be updated.

Mr. CUMMINGS. So I take it that if we do not act on this soon,

this year or next year, it just creates more problems for more people?

Mr. FLYNN. Yes, sir.

Mr. CUMMINGS. All right. Thank you very much.

Mr. SCARBOROUGH. Thank you, Mr. Cummings.

Just a couple of quick followups. First of all, if I am not mistaken, in the 104th Congress we did pass this reform out of this

subcommittee and committee and the House. It was attached to another bill, which was killed in the Senate. Imagine that.

Second, just a quick followup, Mr. Flynn. I was curious, what

about the intelligence retirement system? Do they have portability,

that you know of?

Mr. FLYNN. They have portability. As I mentioned, in terms of

the older systems, I think I would have to check on post-1988 portability prospectively and perhaps give you an answer to that.

Mr. SCARBOROUGH. If you could provide us with an answer to

that, we can make that part of the record, without objection.

Mr. FLYNN. I’d be happy to.

[The information referred to follows:]

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Mr. SCARBOROUGH. I would like to introduce and recognize the

gentlelady from Maryland, Mrs. Morella.

Mrs. MORELLA. Thank you, Mr. Chairman. I want to congratulate you and to congratulate us on the Civil Service Subcommittee

on having you chair it. I look forward to working with you during

this Congress.

I am chairing another committee right now, but I wanted to come

down for the markup on these two bills and the opportunity, having looked at your testimony, to perhaps pose one question that

pertains to the second bill that we are going to mark up, which has

to do with our Thrift Savings Plan enhancements, which deals with

portability and deals with allowing people to join our Thrift Savings immediately.

But picking up on the Federal Reserve, Mr. Kelley and Mr.

Flynn, let us look at Thrift Savings. FERS employees contribute to

their Thrift Savings Plan accounts, and you have mentioned that

Federal Reserve employees can contribute up to 20 percent of pay

to either pre-tax or post-tax investment options, up to the IRS cap?

Mr. FLYNN. Yes, ma’am.

Mrs. MORELLA. FERS employees are capped at 10 percent contributions to their pre-tax TSP accounts, even if these limits leave

them well below the IRS caps.

For the past 4 years this subcommittee has been unable to advance a proposal—we have advanced it out of the subcommittee,

out of the full committee, on the floor of the House—this proposal,

allowing the employees to contribute to the IRS limit. The administration opposes the provision for budgetary reasons.

I want to ask both of you, how does the Federal Reserve do for

its employees something that we cannot enact for other Federal

employees?

Mr. KELLEY. I would not want to try to answer that, but I would

like to say that I think our employees consider their ability to contribute up to the maximum permissible limit under IRS regulations

to be a very valuable benefit. While I do not have any statistics at

my fingertips as to who does that, my impression is that a very

substantial percentage of Federal Reserve employees are contributing up to the maximum. In fact, I think that our H.R. people

have a considerable burden of helping people to figure out just how

much they can in fact contribute without getting into trouble, because it is considered to be a very important opportunity.

Mrs. MORELLA. Mr. Flynn, do you not see an inequity in this, sir?

Mr. FLYNN. Mrs. Morella, I will try to be as artful as I can in

my answer.

I seem to remember a similar question that you asked Director

LaChance at a hearing very similar to this, not very long ago——

Mrs. MORELLA. Yes.

Mr. FLYNN [continuing]. Where she offered, I think, her view

that there is ample evidence about the small savings rate that we

see in the economy, and she pointed out how important it is to the

President that there be savings for income security and retirement.

In fact, there was a summit convened on that very topic last June.

And in looking at those two factors, she indicated that she thought

that anything that could be done that would encourage people to

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save for income security and retirement was a good thing, and I

think that is a view that I would share as well.

Mrs. MORELLA. I appreciate that very much, and I think the

President and the Treasury Department are going to realize that

these savings that he believes in, that we all believe in, since the

United States has such a low savings rate, is one that certainly

should be allowed for individuals to enhance their savings and

their pension retirement funds by virtue of an equity. Mike Causey

has written about it a great deal. I know of nobody who disagrees

on both sides of the aisle, even with different philosophies of it. As

a matter of fact, the President has this—what is it, the new ‘‘USA

401(k)’’ and yet our Federal employees cannot even give that

amount.

So I guess I am hearing from both of you that you do think it

is a good idea and will continue to push that forward with the help

of this subcommittee and the full committee and the Ways and

Means Committee.

I thank you.

Thank you, Mr. Chairman, for allowing me to get that little lecture in.

Mr. SCARBOROUGH. OK, thank you so much.

We are going to go ahead and finish up the hearing and then go

to the markup after the vote, so the Chair now recognizes the

gentlelady from the District of Columbia, Ms. Norton.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. Kelley, I regret that my opening statement may have been

unclear. I didn’t realize, and should have, that the Board would

have its own version of a Thrift Savings Plan. I should have realized that if the Federal Government had that, then certainly the

Board of Governors would have had that for its own employees.

I would like to know whether, under our bill, when an employee

transfers, will the entire corpus—what the Government has contributed and what the employee has contributed—simply transfer

over, so that perhaps no contribution will have to be made in order

to come into our own Federal Government agency’s Thrift Savings

Plan?

Mr. KELLEY. Well, we have to be careful. We are talking about

two different plans now. Basically, the portability that we have

been discussing in H.R. 807 has to do with the defined benefit plan,

the pension plan itself, and there are rather complex arrangements

that have to be made technically to make sure that there is equity

between plans when an employee goes from one plan to another.

But that can be done, and it is fully taken care of in your bill.

The other plans are defined contribution plans. The Thrift Savings Plan and our Thrift Plan are defined contribution plans, and

there still is a problem of portability when one goes from a Thrift

Savings Plan institution to us. Portability there is not perfected

and is not at this time in your bill.

Ms. NORTON. So if the employee was in your Thrift Savings Plan,

what happens to the contributions that the employee has made in

your Thrift Savings Plan if the employee wants to now join the

Thrift Savings Plan of a Federal agency?

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Mr. KELLEY. Well, first of all, it is fully vested and is entirely

theirs, so there is no way they are going to forfeit anything out of

that plan.

Ms. NORTON. All right. So it really is two different plans?

Mr. KELLEY. That’s right. And they have two different sets of effects.

Ms. NORTON. I see. But they can go into our Thrift Savings

Plan—— Mr. KELLEY. Yes. Now, I am frankly not clear about the portability out of our Thrift Plan into the Thrift Savings Plan. I would

be very happy to generate an answer to that question and provide

it to the committee if that would be helpful.

Ms. NORTON. Mr. Chairman, I would appreciate this information

very much, because I am not sure what happens to the Government’s contribution. Then there is the contribution that the employee has made, and now you have two Thrift Savings Plans, and

I am not sure what the bottom line effect is, and I think that for

employees for whom these plans are so valuable, that would have

meaning.

So I would appreciate receiving an answer. I don’t have any problem with marking up the bill, but I would appreciate an answer.

Mr. KELLEY. We would be very happy to do that.

Mr. SCARBOROUGH. If you could forward that and we will make

it a part of the record, if there is no objection.

[The information referred to follows:]

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Ms. NORTON. Is what we are doing today retroactive, so that if

somebody is retired, if 1 of these 50 folks is gone, that person can

be made whole? Or is that person just a loser?

Mr. KELLEY. My understanding is at this point, if this bill is

passed promptly, there will be no losers. But we run that risk if

this runs on and on.

Ms. NORTON. All right. I want to make sure of that. I have in

mind the employee who says, ‘‘Well, I have to go; this is such a better opportunity at XYZ Agency,’’ she goes, is lost, and may have retired from XYZ Agency. Now I just want to make sure that we do

not end up with yet another bill needed for yet another set of losers.

Mr. KELLEY. Over my right shoulder, I am assured that you are

correct on that.

Ms. NORTON. OK.

The chairman has raised a very important point about what happened to the D.C. Retirement Fund. First I want to make it abundantly clear that it is the Congress that forced the District to turn

over its funds and to spend out of its funds. That’s the last thing

that the District would have wanted to do. But what the Congress

said was that this pension liability, which is 100 percent Federal

liability, ‘‘we will not take on. What we will do, and the only way

we will take this on, is if you pay down—you, District of Columbia

employees—what you have put into it. At that point we reduce our

costs, and we are willing to take over what we should have had in

the first place.’’ So that was the first inequity.

But the District of Columbia had absolutely no choice because if

this fund were still outstanding in 2004, the District would go bust,

if I can use a colloquial expression. That is to say, it would not be

what we have just gone through, which is the kind of insolvency

that Philadelphia and New York had. The city would blow up because a huge amount would fall due; the Federal Government pulls

back and is not a part of the fund at all. So the District, in essence,

was forced to liquidate what employees had already paid in.

Second, the Federal Government should not have wiped out the

fund, and I certainly agree with the chairman that that is the last

thing we envisioned would happen. But someone told me after this

happened that, ‘‘Eleanor, didn’t you recognize that the Federal

Government never leaves any loose change hanging around?’’

[Laughter.]

What in effect has happened is that the obligations have now

been consolidated, in effect, into the Federal retirement obligations,

and under law there is no way to avoid that now unless the Federal Government were to pass additional legislation saying we no

longer are obligated.

I do want to say that I would have preferred to see the fund left

intact, and for it to build on the equity already in the fund. It

would have saved the Government money. We already had a system that was doing well. So I regret it, but I do think that we

ought to understand why it happened that way. Because of the way

scoring is done, the Federal Government—the administration—said

no, the Congress certainly was not willing to come up with the

money, and so essentially we were left with a take-it-or-leave-it

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proposition. We had to take it because we could not afford to be left

there a few years from now, essentially with a city in smoke.

I would like to ask a question—I know I am holding people up,

but I want to ask a question about investments, though, because

I do think that the question that the chairman has put on the table

about investment in equities is one that has to be considered, especially since the President wants to invest Social Security funds.

Those of you who have a vote may want to run over and vote and

not have to be making a 50-year dash, so I will leave it to the

chairman, because I think your time is running.

Mr. SCARBOROUGH. Well, it is running. If you were to submit the

written questions, we could leave the record open for 2 weeks and

they could answer them.

Ms. NORTON. I would be pleased to do that.

[Questions and answers referred to follow:]

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Mr. SCARBOROUGH. We are down to 5 minutes and would like to

adjourn, and then go to markup.

Any objections?

Ms. NORTON. No objection.

Mr. SCARBOROUGH. Well, we would like to thank you all.

Let me say very quickly that I concur with the gentlelady. She

was put in an extremely difficult position in the 105th Congress on

the so-called ‘‘bail-out,’’ so I certainly concur with everything you

said regarding the D.C. situation.

I want to thank both of our witnesses for coming and testifying

before us today. It certainly was insightful, and we will leave the

record open for 2 weeks and send any further questions we may

have to you.

Thank you, and this hearing is adjourned.

[Whereupon, at 11:40 a.m., the subcommittee adjourned.]

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