[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
        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







                       U. S. GOVERNMENT PRINTING OFFICE
43-839                          WASHINGTON : 1997
___________________________________________________________________________
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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico            EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
JOE SCARBOROUGH, Florida             DENNIS J. KUCINICH, Ohio
JOHN B. SHADEGG, Arizona             ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           DANNY K. DAVIS, Illinois
MARSHALL ``MARK'' SANFORD, South     JOHN F. TIERNEY, Massachusetts
    Carolina                         JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire        THOMAS H. ALLEN, Maine
PETE SESSIONS, Texas                 HAROLD E. FORD, Jr., Tennessee
MICHAEL PAPPAS, New Jersey                       ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      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           ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland       ELEANOR HOLMES NORTON, Washington, 
CHRISTOPHER COX, California              DC
PETE SESSIONS, Texas                 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









                            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











        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 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 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 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:]
    [GRAPHIC] [TIFF OMITTED] 43839.001
    
    [GRAPHIC] [TIFF OMITTED] 43839.002
    
    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.
    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-you-go 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.
    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 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:]
[GRAPHIC] [TIFF OMITTED] 43839.003

[GRAPHIC] [TIFF OMITTED] 43839.004

    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.
    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.
    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 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 
October 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 cash-flow 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 up against these issues over the kind of retirement 
system the Federal 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 cash-based 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.
    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 long-term? 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 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 the Federal Government enjoys a 
taxing power that reaches nationwide, 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.
    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 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 than I do--was doing a very capable job. If it appears to 
be working 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.
    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 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?
    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 billion, 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 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 long-haul 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 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.
    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?
    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.
    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, 
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 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 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?
    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 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 
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, 
when the legislation was passed by Congress transferring 
responsibility 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 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 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-as-you-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. 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 is based on a percentage of impairment instead 
of two-thirds salary, it could be a minimum of 40 percent of 
salary. There were restrictive 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 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
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.
    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 unfunded 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, 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 was hired from 1980 on. The Council could not take 
action for anyone 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.
    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 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.
    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.
    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.]
    [Additional information submitted for the hearing record 
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