Federal and State Legislation Affecting Public Pension Plans

1. Federal and State Legislation Affecting Public Pension Plans 2007 TMRS Training Seminar October 15, 2007 Austin, TX Jeannine Markoe Raymond Director of Federal Relations National Association of State Retirement Administrators

2. Leading Federal Issues for Public Pension Plans • Implementation of the Pension Protection Act (PPA) of 2006 • Healthcare Enhancement for Local PublicSafety (HELPS) Retirees • Interest Rate Cap on DB Plans • Added Exception from 10% Early Distribution Penalty for Public Safety • Increased Media and Regulatory Scrutiny of Public Pension Funding, Regulation & Investments • The New Federal Legislative Landscape • Making the Case for Public Pensions

3. HELPS (Healthcare Enhancement for Local Public Safety) Retirees • Up to $3K May Be Excluded from Income Tax for Health Care or Accident Insurance Premiums of those that Retire as a Public Safety Officer • Treasury Recently Reversed Guidance Stating the Accident or Health Plan Could not be a Self-Insured Plan, Predicated on Technical Correction • Requirement that Transfer Must be Made Directly byDB or 457 Plan to Insurer • 1099 Instructions/IRS Discussions Indicate No Special Reporting Requirements, Exclusion is to be Elected by Individual on 1040.

4. Interest Rate Cap on DB Plans(Sec. 701 of PPA) • AnyDB Plan or Feature that Credits Interest is Considered a Hybrid DB Plan • Age Discrimination in Employment Act (ADEA) Amendments Apply to Gov Plans • Conversion Requirements • Equal Treatment of Similarly Situated Employees • Interest Credit Must be BELOW a “Market Rate of Return” • TMRS, TCDRS, Refund Features in ERS and other plans, DROPs, Survivor Benefits, etc. • Working on Technical Correction for Governmental Plans to treat Rates of Interest Established by a Public Process (i.e. statute, ordinance, administrative procedure, etc.) as “Market Rates of Return”

5. Exception from 10% Early Distribution Penalty • Separation from Service on or after Age 50 (rather than 55) for Public Safety Officers • Treasury Affirmed this Applies to Gov DB Distributions After 8/17/06 Only • Recapture Tax Applies to Distribution Before Effective Date • Exception Does Not Follow Rollovers to Other Plans

6. Federal Divestment Initiatives • Hearings and House-Passed Legislation on Iran (HR 2347) and Sudan (HR 180) • Federal List of Bad Actor Companies • Iran’s energy sector (>$20mil) or Sudan’s power production, mineral extraction, oil-related, or military equipment industries. • Update Every 6 months, Give Advance Notice, Provide Exceptions • Prohibit Federal Procurement Contracts with Companies on List • Permissive, Not a Mandate • New SEC Website Launched, Removed

7. Critical Eye on Adequacy of Public Plan Funding, Regulation and Investments • Media Coverage Fueling Taxpayer Pension Envy • Citing the Potential Conflict Between Long-term Liabilities and Shorter Time Horizon of Political Decision-making • Distorting the True Financial Condition of Public Pensions in General • Extrapolating a Handful of Problems onto Entire Public Pension Community • Advancing Arguments Reflecting an Incomplete Understanding of Public Pension Issues

8. Critical Eye on Adequacy of Public Plan Funding, Regulation and Investments • Heightened Federal Regulatory Environment • Treasury/IRS • EEOC Litigation • SEC Proposals to Regulate Municipal Securities, Oversee and Mandate GASB Standards

9. New Federal Legislative Landscape • More Committees Interested in Pension Issues (Tax, Labor & Investment) • Increased Focus on DC Fees, Financial Relationships with Sponsors and Providers • Greater Concern with Coverage Levels than Benefit Levels (Shift from Improving Employer-Sponsored Benefits to Covering Individuals Without Benefits) • Social Security Solvency (likely through changes such as progressive indexing, increasing eligibility age and wage cap) coupled with add-on universal savings proposal could be the “Great Compromise” • GPO/WEP Reform Will Be Difficult to Move Separate from Solvency Reforms and Will Likely Need an Offset – Concern Mandatory Coverage is the Most Likely “Pay-for”

10. Legislative Landscape, cont. • “PAYGO” Rules Require Offsets for All Spending and Tax Expenditures & Heighten Desirability of Pay-Fors • Need to Keep a Close Watch on Increasing Search for Revenue: • 3% Withholding on Government Purchases of Property and Services Included in Reconciliation Bill Passed in May 2006 (Effective 2011) • Proposed Changes to Taxation of Alternatives • Suggested repeal of pick-ups, application of FICA to cafeteria plans • Roth 457 (~$1B pay-for) • Reevaluation of Pension Policy – With the Limited Percentage of Covered Individuals Can the Largest Tax Expenditure ($124.5B in FY06) be Justified?

11. Making the Case for Public Sector Benefit Designs as National Pension Policy is Reexamined

12. Public Pension Plans Have Been “Getting it Right”

13. Value of Public Pensions to ALL Stakeholders Source of Long-Term Investment Capital Attract and Retain Experienced and Trained Employees to Delivery Vital Public Services Reduce Dependence on Social Programs Distribute Robust, Steady and Reliable Income Streams (totaling more than $140 Billion in 2006) to 7 Million Retirees in Virtually Every City and Town in the Nation Exceeds the personal income generated in the U.S. from farming, forestry and logging, fishing and hunting, and the hotel and lodging industries COMBINED!

14. Efforts by TMRS and Others • Helping Policymakers Understand Public Plan Design • Relaying the Value of Public Retirement Systems to Other Stakeholders (Governments, Taxpayers) • Communicating Value of Benefits to Existing and Potential Employees