Letter to the Full Congress on NEA's Proposal for Temporary Relief - The Separate Liability Funding Solution
April 27, 2009
On behalf of the 3.2 million members of the National Education Association (NEA) we are pleased to present to you our proposed solution to the private defined benefit funding crisis. We are hopeful that Congress will begin discussing the crucial need for temporary pension relief from the Pension Protection Act of 2006 (“PPA”) rules. We look forward to working with you to advance this important goal.
Summary. The survival of employer-sponsored defined benefit pension plans is unlikely unless Congress adopts a stop-gap measure to mitigate the immediate full impact of the funding rules on the plans, which have had to absorb a 40% decline in the market value of their assets since the summer of 2008. The only way to maintain the integrity of the new more stringent funding rules adopted in the Pension Protection Act of 2006 (“PPA”) is to permit plan sponsors to fund the recent historically unprecedented market losses separately over a longer time horizon. If Congress fails to act promptly to provide adequate stop-gap relief to these plan sponsors, they will be forced to bear tremendous financial hardship and risk, including bankruptcy, in order to discharge their increased pension funding burdens.
The Problem. No matter how conscientiously a sponsor might have previously funded its defined benefit pension plan, it could not predict or be prepared to withstand a 40% decline in the market value of the plan’s assets in a nine month period. The new market-based funding rules of the PPA require plan sponsors to absorb the full impact of such losses almost immediately. Even freezing the plan would not let the sponsor escape the heavy burden of making up for the market losses that sprang up so rapidly. And the plan sponsors that are most labor intensive – such as most service organizations – are the hardest hit. For example, NEA surveyed its state affiliates regarding their pension burdens and found the following startling results:
Pension costs as a percent of payroll for eleven NEA state affiliates that sponsor a single employer defined benefit plan range from 19% to 57% and average 34% for the 2008 plan year, and will range from 20% to 53% and average 37% for the 2009 plan year. And for the 2010 and 2011 plan years the burden continues to grow to the point that the typical NEA state affiliate single employer plan sponsor can anticipate pension costs that exceed 40% of their payrolls. One affiliate, which has responsibly funded its pension plan for decades, is facing a $13 million pension funding bill for the 2008 plan year alone.
And the sixteen NEA affiliates that participate in a multiemployer defined benefit pension plan did not fare any better. For example, one affiliate is currently devoting 34% of payroll to pension funding over the next several years, which will require the elimination through attrition of 25 staff employee positions. The other contributing employers face similar hurdles and are anticipating contribution requirements for 2009 ranging from 24% to 37% of payroll.
These costs are simply unsustainable. NEA affiliates report that they will cut programs, services, publications and media, cancel conferences, freeze spending, freeze hiring, layoff staff, freeze their pension plans, freeze salaries, close offices and reduce travel, eliminate training, delay or eliminate plant improvements, and increase member dues. These consequences are facing organizations that are financially healthy with strong budget discipline. Other less financially healthy organizations are likely to be facing even more dire consequences, including bankruptcy, and in some cases liquidation.
The Solution. When it enacted PPA, Congress sent a strong message that employers should be required to fund their pension plans adequately in advance in a way that both reacts to and withstands predictable changes in the financial fortunes of the sponsor and predictable market downturns. However, as seen in the examples provided above, the PPA funding rules make no sense when applied in the unprecedented and unforeseeable market conditions of 2008 and 2009. Strict application of the PPA funding rules in this context would wreak havoc not only on the very plans the rules were supposed to protect, but on the sponsors of those plans as well. To solve this particular problem, it is not necessary to abandon the stricter funding principles of the PPA, if instead plan sponsors are permitted to carve out the historically anomalous market losses of 2008 and 2009 for separate funding treatment. This solution would assure that plan sponsors continue to make funding improvements anticipated by PPA, based on their plan’s assets and liabilities prior to the market upheavals of the last nine months, but would provide a realistic way for sponsors to fund the unanticipated additional liabilities deriving from the recent market conditions.
Beginning with the 2008 plan year, sponsors of defined benefit pension plans – regardless of whether such plans are single-employer or multiemployer plans – would be permitted to split their funding obligation into two separate portions. The primary funding obligation would be determined based on the plan’s current liabilities offset by the plan’s current asset base disregarding any net investment losses sustained during the 2008 and 2009 plan years – regardless of whether such losses were realized. In other words, for purposes of this primary funding obligation, the value of the plan’s assets would never be less than their value as of the first day of the 2008 plan year plus any contributions made thereafter and minus any expenditures made thereafter. Other than this adjustment to the value of the plan’s asset base, the normal funding rules under PPA would apply.
The secondary funding obligation would derive from the need to fund the net investment losses in the 2008 and 2009 plan years that are disregarded for purposes of the primary funding obligation and would run concurrently with the primary funding obligation. The liabilities arising from this secondary funding obligation would be required to be funded, however, over a 30-year period with respect to the 2008 net investment losses and a 29-year period with respect to the 2009 net investment losses, using a fixed interest rate tied to the rate used to develop the plan’s pension liability under the PPA rules. Funding of this secondary obligation would be required to commence immediately upon the close of the 2008 plan year.
Because this new separate liability funding rule would be permissive, no plan sponsor would be required to take advantage of it. And in any future year, a plan sponsor that chose to separately fund the 2008-2009 net investment loss liabilities would be able to merge the secondary liability pool into the primary liability pool. In such year and thereafter, the plan would be required to value the plan’s assets at their market value under the then-current rules. The remaining secondary liabilities merged into the primary liability pool would have to be funded at least as rapidly as the plan’s primary liability pool under the then-current rules.
This new separate liability funding rule would affect only the funding rules imposed on plan sponsors through the Internal Revenue Code (the “Code”) and the Employee Retirement Income Security Act (“ERISA”) and would have no impact on the methodology for determining the plan sponsor’s liabilities for pension obligations under generally accepted accounting principles, i.e., the Financial Accounting Standard 87. And all of the existing funding rules under the Code and ERISA applicable to the funding of both single-employer and multiemployer plans – such as the minimum funding requirements, the funding targets, the benefit restrictions, the excise taxes, etc. – would remain fully applicable to the primary liability pool.
This solution is intended to provide a method for addressing the immediate impact of the PPA on plans facing the current drastic market conditions. It is not intended to be a substitute for any of the proposed specific corrections to the PPA rules themselves, which are meritorious standing alone or in combination with the new separate liability funding rule described above. We urge Congress to enact a bill this session that adopts this vitally needed solution to the very real pension funding crisis facing so many employers today.
We urge Congress to enact a bill this session that adopts this critical solution to the pension funding crisis facing so many employers today.
Director of Government Relations
Manager of Federal Advocacy