    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

           H.R. 807, FEDERAL RESERVE BOARD RETIREMENT PORTABILITY ACT

    =======================================================================

                                    HEARING

                                   before the

                       SUBCOMMITTEE ON THE CIVIL SERVICE

                         COMMITTEE ON GOVERNMENT REFORM
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                       ON

                                    H.R. 807

    TO AMEND TITLE 5, UNITED STATES CODE, TO PROVIDE PORTABILITY OF SERVICE
    CREDIT FOR PERSONS WHO LEAVE EMPLOYMENT WITH THE FEDERAL RESERVE BOARD
                TO TAKE POSITIONS WITH OTHER GOVERNMENT AGENCIES

                                   __________

                               FEBRUARY 25, 1999

                                   __________

                               Serial No. 106-19

                                   __________

           Printed for the use of the Committee on Government Reform

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

                                     ______

                       U.S. GOVERNMENT PRINTING OFFICE
    57-737                     WASHINGTON : 1999

                         COMMITTEE ON GOVERNMENT REFORM

                         DAN BURTON, Indiana, Chairman
    BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
    CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
    CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
    JOHN L. MICA, Florida                GARY A. CONDIT, California
    THOMAS M. DAVIS, Virginia            PATSY T. MINK, Hawaii
    DAVID M. McINTOSH, Indiana           CAROLYN B. MALONEY, New York
    MARK E. SOUDER, Indiana              ELEANOR HOLMES NORTON, Washington,
    JOE SCARBOROUGH, Florida                 DC
    STEVEN C. LaTOURETTE, Ohio           CHAKA FATTAH, Pennsylvania
    MARSHALL ``MARK'' SANFORD, South     ELIJAH E. CUMMINGS, Maryland
        Carolina                         DENNIS J. KUCINICH, Ohio
    BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
    DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
    ASA HUTCHINSON, Arkansas             JOHN F. TIERNEY, Massachusetts
    LEE TERRY, Nebraska                  JIM TURNER, Texas
    JUDY BIGGERT, Illinois               THOMAS H. ALLEN, Maine
    GREG WALDEN, Oregon                  HAROLD E. FORD, Jr., Tennessee
    DOUG OSE, California                             ------
    PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont
    JOHN T. DOOLITTLE, California            (Independent)
    HELEN CHENOWETH, Idaho

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
               David A. Kass, Deputy Counsel and Parliamentarian
                          Carla J. Martin, Chief Clerk
                     Phil Schiliro, Minority Staff Director

                       Subcommittee on the Civil Service

                       JOE SCARBOROUGH, Florida, Chairman
    ASA HUTCHINSON, Arkansas             ELIJAH E. CUMMINGS, Maryland
    CONSTANCE A. MORELLA, Maryland       ELEANOR HOLMES NORTON, Washington,
    JOHN L. MICA, Florida                    DC
    DAN MILLER, Florida                  THOMAS H. ALLEN, Maine

                                   Ex Officio

    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                       George Nesterczuk, Staff Director
                              Garry Ewing, Counsel
                             John Cardarelli, Clerk
                Tania Shand, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on February 25, 1999................................     1
    Text of H.R. 807.................................................     6
    Statement of:
        Kelley, Edward W., Jr., Governor, Federal Reserve System; and
          William E. Flynn, III, Associate Director, Retirement and
          Insurance Services, Office of Personnel Management.........    13
    Letters, statements, etc., submitted for the record by:
        Cummings, Hon. Elijah E., a Representative in Congress from
          the State of Maryland, prepared statement of...............     9
        Flynn, William E., III, Associate Director, Retirement and
          Insurance Services, Office of Personnel Management:
            Information concerning portability.......................    47
            Prepared statement of....................................    31
        Kelley, Edward W., Jr., Governor, Federal Reserve System:
            Information concernign Thrift Savings Plans..............    51
            Prepared statement of....................................    16
        Norton, Hon. Eleanor, a Representative in Congress from the
          District of Columbia, followup questions and responses.....    54
        Scarborough, Hon. Joe, a Representative in Congress from the
          State of Florida, prepared statement of....................     3

           H.R. 807, FEDERAL RESERVE BOARD RETIREMENT PORTABILITY ACT

                                  ----------

                          THURSDAY, FEBRUARY 25, 1999

                      House of Representatives,
                     Subcommittee on the Civil Service,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10:37 a.m., in
    room 2247, Rayburn House Office Building, Hon. Joe Scarborough
    (chairman of the subcommittee) presiding.
        Present: Representatives Scarborough, Morella, Cummings,
    and Norton.
        Staff present: George Nesterczuk, staff director; Gary
    Ewing, counsel; John Cardarelli, clerk; Ned Lynch, senior
    research director; Jeff Shea, professional staff member; Tania
    Shand, minority professional staff member; and Jean Gosa,
    minority staff assistant.
        Mr. Scarborough. Good morning. Let me begin by welcoming my
    colleagues to the first hearing of the Civil Service
    Subcommittee for the 106th Congress. Continuing their service
    on the subcommittee for the majority is the former chairman,
    Mr. Mica, and Mrs. Morella. The new members for the majority
    are Mr. Hutchinson, the gentleman from Arkansas, and Mr.
    Miller, my friend from the great State of Florida. For the
    minority, the ranking member is Mr. Cummings, who is continuing
    his service, as is the gentlelady, Ms. Norton. Mr. Allen of
    Maine is a new member on the minority side. I would like to
    welcome all the Members and look forward to a productive
    working relationship with my colleagues on the subcommittee.
        Our jurisdiction is rather broad, covering pay and benefits
    for Federal workforce employees, and includes the rules for
    hiring, rewarding, and disciplining the employees. For those
    times when disputes arise or disciplinary actions are taken, a
    fairly elaborate appeals system has been established. This will
    also be falling in our jurisdiction.
        As we deal with these matters, I want to assure everyone of
    my commitment to the principle that excellence in the workplace
    should be rewarded consistent with the contribution to public
    service. We do have a responsibility, as stewards of the public
    interest, to ensure that our investment in human capital
    provides effective service for the American people so that
    their hard-earned tax dollars are spent wisely.
        We have already begun our work with the markup of H.R. 416,
    the Retirement Corrections bill, on February 3rd. I expect that
    bill will be taken to the floor of the House in the next few
    days. Next month we will hold hearings on extending long-term
    care insurance benefits to Federal employees, and examine some
    additional employee benefit issues.
        Today we are going to review the operation of two different
    pension systems within the Federal benefits structure. The
    examples before us compare a well-funded system, supported by
    long-term investments, with a system that has--for nearly 80
    years--existed on a ``pay-as-you-go'' basis, with no
    substantial investment directed to the payment of future
    benefits.
        Under current law, employees of the Federal Reserve System,
    which is a well-funded system, who might desire to continue
    their Federal service with other agencies, face portability
    problems. These barriers limit their ability to gain credit
    under the Federal Employment Retirement System for their
    service with the Federal Reserve Board. After this hearing we
    will mark up legislation that will finally remove this
    impediment to greater mobility in Federal agencies.
        Because nearly 80 percent of the Fed's pension program is
    invested in a diversified portfolio of equities, it is
    thriving. Over the past 10 years it has averaged nearly a 16
    percent annual return on investment, and the Fed has no
    unfunded liability. Instead, it has assets with an estimated
    value of more than $7 billion that enable it to provide a
    better benefit than FERS.
        In contrast, the Civil Service Retirement and Disability
    Fund has reported unfunded liabilities exceeding $512 billion.
    While the market has thrived, the system has experienced
    declining interest rates on its holdings of Treasury
    securities. Even worse, because taxpayers must redeem both the
    principal and any interest attributed to these Treasury
    securities, each year Federal employees and annuitants face the
    specter of COLA delays, increased retirement deductions from
    their pay, or possible changes in the terms of their benefits--
    all traceable to the need to appropriate money to pay the
    accrued benefits.
        These pressures are not accidental. They are a direct
    result of a design flaw that relies on future tax receipts to
    pay for growing retirement liabilities. The Federal Reserve's
    management of its retirement system demonstrates that it is
    possible to fund full benefits for employees without imposing a
    growing burden on future taxpayers.
        [The prepared statement of Hon. Joe Scarborough follows:]

        [GRAPHIC] [TIFF OMITTED] T7737.001

        [GRAPHIC] [TIFF OMITTED] T7737.002

        Mr. Scarborough. I look forward to our witnesses'
    discussions on the differences between these systems, and I
    certainly hope that we can gain some useful insights on
    managing the Civil Service Retirement System more effectively
    and wisely.
        Now I would like to turn it over to my ranking member and
    friend, Mr. Cummings, for any comments he may have.
        Mr. Cummings. Thank you very much, Mr. Chairman.
        I want to congratulate you on your appointment, and I
    certainly look forward to working with you and all the other
    subcommittee members. I am glad that we are starting off this
    session with an issue that has bipartisan support.
        Under current law, if an employee of the Federal Reserve
    Board leaves to work for another Federal agency, the employee
    is required to join FERS, the Federal Employees Retirement
    System. Under the current FERS statute, time spent working at
    the Board after 1988 does not count as ``creditable service''
    toward a FERS annuity. Though they have not had a break in
    Federal service, affected employees will receive smaller
    pensions upon retirement.
        This outcome resulted from an oversight that occurred when
    the FERS statute was written in the late 1980's. It affects
    Federal Reserve Board employees hired after 1983 who have
    worked at the Board after 1988. In human terms, the problem
    affects about 50 employees who have already left the Board for
    other agencies, and potentially affects about 1,000 people--
    about 60 percent of the Board's current workforce--should they
    move to other agencies and then retire under FERS. Over time,
    unless the problem is fixed, an even larger proportion of the
    Board's workforce will potentially be adversely affected.
        It is worth noting that employees who come to work at the
    Board from other Federal agencies do not have a comparable
    problem, because the Board's retirement plan gives all Board
    employees full credit toward retirement for all their
    Government service.
        H.R. 807 solves this problem of unequal treatment. It makes
    post-1988 Board service ``creditable service'' under FERS. As a
    result, affected employees will get the pensions they have
    earned, the pensions they should get--pensions that reflect all
    their Federal service. The employees, however, will have to
    give up any Board pension they would otherwise get and make a
    contribution to FERS to ``buy'' credit for the Board time. This
    quid pro quo is fair, prevents ``double dipping,'' and ensures
    that those who benefit will be treated the same as other
    Federal employees under FERS.
        The bill is similar to language in current law that
    addresses the same problem for Foreign Service employees. I
    understand that this legislation has been discussed with staff
    at OPM, who agree that there is a problem, that the problem
    should be fixed, and that this legislation does so
    appropriately.
        [The text of H.R. 807 follows:]
    106th CONGRESS
    1st Session
                                   H. R. 807

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

                                     ______

                        IN THE HOUSE OF REPRESENTATIVES

                               February 23, 1999

     Mr. Scarborough (for himself, Ms. Norton, Mr. Cummings, Mrs. Morella,
     Mr. Hoyer, Mr. Davis of Virginia, Mr. Moran of Virginia, Mr. Waxman,
    and Mr. Mica) introduced the following bill; which was referred to the
                         Committee on Government Reform

                                     ______

                                     A BILL

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

        Be it enacted by the Senate and House of Representatives of the
    United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

        This Act may be cited as the ``Federal Reserve Board Retirement
    Portability Act''.

    SEC. 2. PORTABILITY OF SERVICE CREDIT.

        (a) Creditable Service.--
                (1) In general.--Section 8411(b) of title 5, United States
            Code, is amended--
                        (A) by striking ``and'' at the end of paragraph
                    (3);
                        (B) in paragraph (4)--
                                (i) by striking ``of the preceding
                            provisions'' and inserting ``other paragraph'';
                            and
                                (ii) by striking the period at the end and
                            inserting ``; and''; and
                        (C) by adding at the end the following:
                ``(5) a period of service (other than any service under any
            other paragraph of this subsection, any military service, and
            any service performed in the employ of a Federal Reserve Bank)
            that was creditable under the Bank Plan (as defined in
            subsection (i)), if the employee waives credit for such service
            under the Bank Plan and makes a payment to the Fund equal to
            the amount that would have been deducted from pay under section
            8422(a) had the employee been subject to this chapter during
            such period of service (together with interest on such amount
            computed under paragraphs (2) and (3) of section 8334(e)).
    Paragraph (5) shall not apply in the case of any employee as to whom
    subsection (g) (or, to the extent subchapter III of chapter 83 is
    involved, section 8332(n)) otherwise applies.''.
                (2) Bank plan defined.--Section 8411 of title 5, United
            States Code, is amended by adding at the end the following:
        ``(i) For purposes of subsection (b)(5), the term `Bank Plan' means
    the benefit structure in which employees of the Board of Governors of
    the Federal Reserve System appointed on or after January 1, 1984,
    participate, which benefit structure is a component of the Retirement
    Plan for Employees of the Federal Reserve System, established under
    section 10 of the Federal Reserve Act (and any redesignated or
    successor version of such benefit structure, if so identified in
    writing by the Board of Governors of the Federal Reserve System for
    purposes of this chapter).''.
        (b) Exclusion From Chapter 84.--
                (1) In general.--Paragraph (2) of section 8402(b) of title
            5, United States Code, is amended by striking the matter before
            subparagraph (B) and inserting the following:
                ``(2)(A) any employee or Member who has separated from the
            service after--
                                ``(i) having been subject to--
                                        ``(I) subchapter III of chapter 83
                                    of this title;
                                        ``(II) subchapter I of chapter 8 of
                                    title I of the Foreign Service Act of
                                    1980; or
                                        ``(III) the benefit structure for
                                    employees of the Board of Governors of
                                    the Federal Reserve System appointed
                                    before January 1, 1984, that is a
                                    component of the Retirement Plan for
                                    Employees of the Federal Reserve
                                    System, established under section 10 of
                                    the Federal Reserve Act; and
                                ``(ii) having completed--
                                        ``(I) at least 5 years of civilian
                                    service creditable under subchapter III
                                    of chapter 83 of this title;
                                        ``(II) at least 5 years of civilian
                                    service creditable under subchapter I
                                    of chapter 8 of title I of the Foreign
                                    Service Act of 1980; or
                                        ``(III) at least 5 years of
                                    civilian service (other than any
                                    service performed in the employ of a
                                    Federal Reserve Bank) creditable under
                                    the benefit structure for employees of
                                    the Board of Governors of the Federal
                                    Reserve System appointed before January
                                    1, 1984, that is a component of the
                                    Retirement Plan for Employees of the
                                    Federal Reserve System, established
                                    under section 10 of the Federal Reserve
                                    Act,
                            determined without regard to any deposit or
                            redeposit requirement under either such
                            subchapter or benefit structure, or any
                            requirement that the individual become subject
                            to either such subchapter or benefit structure
                            after performing the service involved; or''.
                (2) Exception.--Subsection (d) of section 8402 of title 5,
            United States Code, is amended to read as follows:
        ``(d) Paragraph (2) of subchapter (b) shall not apply to an
    individual who--
                ``(1) becomes subject to--
                        ``(A) subchapter II of chapter 8 of title I of the
                    Foreign Service Act of 1980 (relating to the Foreign
                    Service Pension System) pursuant to an election; or
                        ``(B) the benefit structure in which employees of
                    the Board of Governors of the Federal Reserve system
                    appointed on or after January 1, 1984, participate,
                    which benefit structure is a component of the
                    Retirement Plan for Employees of the Federal Reserve
                    System, established under section 10 of the Federal
                    Reserve Act (and any redesignated or successor version
                    of such benefit structure, if so identified in writing
                    by the Board of Governors of the Federal Reserve System
                    for purposes of this chapter); and
                ``(2) subsequently enters a position in which, but for
            paragraph (2) of subsection (b), such individual would be
            subject to this chapter.''.
        (c) Provisions Relating to Certain Former Employees.--A former
    employee of the Board of Governors of the Federal Reserve System who--
                (1) has at least 5 years of civilian service (other than
            any service performed in the employ of a Federal Reserve Bank)
            creditable under the benefit structure for employees of the
            Board of Governors of the Federal Reserve System appointed
            before January 1, 1984, that is a component of the Retirement
            Plan for Employees of the Federal Reserve System, established
            under section 10 of the Federal Reserve Act;
                (2) was subsequently employed subject to the benefit
            structure in which employees of the Board of Governors of the
            Federal Reserve System appointed on or after January 1, 1984,
            participate, which benefit structure is a component of the
            Retirement Plan for Employees of the Federal Reserve System,
            established under section 10 of the Federal Reserve Act (and
            any redesignated or successor version of such benefit
            structure, if so identified in writing by the Board of
            Governors of the Federal Reserve System for purposes of chapter
            84 of title 5, United States Code); and
                (3) after service described in paragraph (2), becomes
            subject to and thereafter entitled to benefits under chapter 84
            of title 5, United States Code,
    shall, for purposes of section 302 of the Federal Employees' Retirement
    System Act of 1986 (100 Stat. 601; 5 U.S.C. 8331 note) be considered to
    have become subject to chapter 84 of title 5, United States Code,
    pursuant to an election under section 301 of such Act.
        (d) Effective Date.--
                (1) In general.--Subject to succeeding provisions of this
            subsection, this section and the amendments made by this
            section shall take effect on the date of enactment of this Act.
                (2) Provisions relating to creditability and certain former
            employees.--The amendments made by subsection (a) and the
            provisions of subsection (c) shall apply only to individuals
            who separate from service subject to chapter 84 of title 5,
            United States Code, on or after the date of enactment of this
            Act.
                (3) Provisions relating to exclusion from chapter.--The
            amendments made by subsection (b) shall not apply to any former
            employee of the Board of Governors of the Federal Reserve
            System who, subsequent to his or her last period of service as
            an employee of the Board of Governors of the Federal Reserve
            System and prior to the date of enactment of this Act, became
            subject to subchapter III of chapter 83 or chapter 84 of title
            5, United States Code, under the law in effect at the time of
            the individual's appointment.

                                       -

        Mr. Cummings. I would caution against using this hearing to
    determine whether or not retirement fund assets should be
    invested in the private market. Investing retirement funds is a
    proposition that should be examined thoroughly with testimony
    from the administration, investment experts, and all other
    affected parties before any decision is made or action taken.
        I thank the witnesses for coming today to testify and I
    look forward to the subcommittee taking swift action on the
    bill.
        [The prepared statement of Hon. Elijah E. Cummings
    follows:]
    [GRAPHIC] [TIFF OMITTED] T7737.003

    [GRAPHIC] [TIFF OMITTED] T7737.004

    [GRAPHIC] [TIFF OMITTED] T7737.005

        Mr. Scarborough. Thank you, Mr. Cummings.
        Now I would like to recognize the gentlelady from the
    District of Columbia, who is a great friend of residents of
    this capital city, Ms. Norton.
        Ms. Norton. Thank you very much, Mr. Chairman.
        I would like to thank our new chairman, Mr. Scarborough,
    and the ranking member, Mr. Cummings, for working together to
    bring this important issue before our subcommittee in such a
    timely fashion. I recognize that only 50 employees are now
    involved, but that number will accumulate, and for even 1
    employee, this is a great burden and a burden that the employee
    should not have to bear at all because the oversight is ours.
    The legislation we take up today will cure that oversight, one
    created when we adopted the Federal Employees Retirement
    System.
        Essentially what we do here is to ensure that the affected
    Board employees are able to carry retirement benefits to new
    positions within the Federal Government. If one of the affected
    employees transfers to another Federal agency, she begins to
    accrue retirement benefits under FERS as though she were a new
    Government employee.
        The bill allows affected Board employees to transfer to
    another agency and elect to be treated as though previously
    serving the amount of time under the FERS program that she did
    under the Board retirement program.
        This bill has particular importance for the Thrift Savings
    Plan, since the employee will be able to contribute to the plan
    and ultimately receive the amount she would have received had
    she otherwise been in the plan. Particularly today, when
    368,000 Federal employees have been down-sized and another
    300,000 civilian and military personnel are likely to be
    targeted for some kind of down-sizing or privatization over the
    next 5 years, the ability to move to other Federal agencies
    without being penalized is fair and is essential.
        I look forward to hearing from today's witnesses and to the
    continued bipartisan support that this committee brings to this
    issue today.
        Thank you very much, Mr. Chairman.
        Mr. Scarborough. Thank you, Ms. Norton.
        Now I would like to ask our witnesses, since Government
    Reform is obviously an investigative committee, if you would
    stand up and take the oath before your testimony.
        [Witnesses sworn.]
        Mr. Scarborough. Thank you. Be seated.
        Today we are honored to have the Honorable Edward Kelley
    with us, who is Governor of the Federal Reserve System, and we
    also have William Flynn, III, known as Ed Flynn, the Associate
    Director of Retirement and Insurance Services for OPM.
        I would like to start with you, Mr. Kelley.

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

        Mr. Kelley. Good morning and thank you, Mr. Chairman. I
    would like to request that my full statement be placed in the
    record of these hearings.
        Mr. Scarborough. Without objection, so ordered.
        Mr. Kelley. Thank you.
        Mr. Chairman, Representative Cummings, Representative
    Norton, I am pleased to testify on behalf of the Board of
    Governors on the Federal Reserve Board Retirement Portability
    Act, H.R. 807, and to provide the subcommittee with information
    on the Federal Reserve Retirement System.
        The Board strongly supports this legislation. The bill
    would allow certain employees who leave the Board to work for
    other agencies and who then retire under the Federal Employees
    Retirement System, or FERS, to receive pensions reflecting all
    of their Federal service, which is not the case under current
    law. On behalf of the Board and its employees, let me
    particularly thank you, Mr. Chairman Scarborough, and
    Representatives Cummings, Morella, Mica, Waxman, Norton, Davis,
    Hoyer, and Moran for introducing this important legislation.
        Quickly, by way of background, the Federal Reserve System
    has its own defined benefit retirement plan, composed of two
    parts: the Board Plan, covering Board employees hired before
    1984--approximately 600 persons--and the Bank Plan, covering
    Board employees hired during and after 1984, and all employees
    of the Reserve Banks, in total about 24,000 persons.
        Mr. Chairman, the first half of my prepared statement
    covered the material which the three of you all, in your
    opening remarks, have already covered. I think it would be
    redundant if I repeated that. You all stated the issue very
    effectively. It is very clear that you understand it quite
    well, and I greatly appreciate your careful attention to this
    issue, which you have evidenced by your opening remarks. I
    think I will just skip over discussing the issues of this bill
    because you have effectively summarized it in virtually the
    same terms in which I was going to attempt to do it.
        Let me proceed, then, to respond briefly to the
    subcommittee's request for an overview of the Federal Reserve
    System Retirement Plan and information on the management of its
    pension plan assets.
        The Federal Reserve System Retirement Plan is a defined
    benefit plan, qualified under Section 401(a) of the tax code,
    consisting of the two benefit structures mentioned a moment
    ago. The plan provides retirement benefits for virtually all
    employees of the Federal Reserve Board and the Federal Reserve
    Banks. The Federal Reserve Banks and the Board, as employers,
    are responsible to ensure the funding required to pay the
    benefits promised to participants, and have contributed to the
    plan at varying levels as determined necessary by the Plan
    Actuary.
        Since 1986, the Actuary has determined that no employer
    contributions are required, and currently the retirement plan's
    assets exceed both the plan's accrued liability, as well as its
    total liability. Plan assets based on a 5-year moving average
    as of January 1, 1998, were $4 billion, while the current value
    of plan assets at the end of 1998 was $5.8 billion. The total
    benefit obligation as of January 1, 1998, which includes both
    past and future service and future salary increases, was $3.5
    billion, while benefits actually accrued to date were valued at
    $2.8 billion.
        The Federal Reserve Thrift Plan is the System's defined
    contribution savings plan, comparable to the Government's
    Thrift Savings Plan [TSP]. The Federal Reserve Thrift Plan
    differs from TSP in that it offers both pre-tax and after-tax
    savings components, a wider variety of investment options, and
    allows higher contribution rates--up to 20 percent of salary,
    subject to IRS limitations.
        The Federal Reserve System places fiduciary responsibility
    for the investment of both its defined benefit and defined
    contribution savings plans in a committee of five senior System
    officers. This oversight committee is currently comprised of
    three Federal Reserve Bank presidents, one member of the
    Board--and I serve in that capacity at this time--and the first
    vice president of the New York Reserve Bank. At the end of
    1998, the pension and savings plans had investments valued at
    $8.1 billion, with $5.8 billion of that representing the
    pension plan assets.
        Our oversight committee distances itself from asset
    allocation and security selection decisions to avoid the
    appearance of a conflict of interest with the System. Instead,
    the committee functions as a ``manager of managers,'' selecting
    independent investment firms and giving them a common, balanced
    investment mandate, as set forth in our investment objectives
    and guidelines document, a copy of which has been provided to
    the subcommittee. This document is part of our investment
    advisory agreement with each firm, and delegates to them asset
    allocation decisions within broad parameters set by the
    committee, security selection, and the voting of proxies.
        Currently, eight firms are retained to manage our pension
    assets, of which about two-thirds were invested in equities as
    of year's end. I believe, Mr. Chairman, that you may have
    mentioned that 80 percent of our funds were invested in
    equities; it is actually about 65 or 66 percent, rather than
    the maximum allowable percentage of 80 percent.
        Managers are selected by written criteria that include past
    performance, desired equity and fixed income investment styles,
    trading and research capabilities, expense levels, and so
    forth. Management expenses for the entire plan are less than
    one-quarter of 1 percent of invested assets. A small staff in
    New York monitors portfolio activity and performance, reporting
    on both to the committee on a monthly basis.
        Performance of invested assets is measured against three
    benchmarks: first, versus the expected long-term rate of return
    for plan investments used in actuarial evaluation, which is
    currently 9 percent; second, versus a trailing 36-month
    composite return index; and third, in comparison to the plan's
    peer group in the Wilshire Trust Universe Comparison Service.
        I am pleased to be able to report that the plan has met or
    exceeded each of those benchmarks over many years.
        Thank you, Mr. Chairman. I would be pleased to attempt to
    answer any questions that the committee may have.
        [The prepared statement of Mr. Kelley follows:]

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        Mr. Scarborough. Thank you, Mr. Kelley. We appreciate it.
        Mr. Flynn.
        Mr. Flynn. Mr. Chairman, good morning. I want to thank you
    and members of the subcommittee for inviting us to testify
    today to discuss the Federal Reserve Board's service credit
    proposal. The Board's proposal would make service credit
    available under the Federal Employees Retirement System for
    post-1988 Board service covered by its retirement system.
        Very briefly, in setting a context for today's hearing, I
    point out that very few Federal employees are covered under
    retirement systems other than the Civil Service and Federal
    Employees Retirement System. With that in mind, providing
    credit under the Federal Employees Retirement System for
    employment with the Federal Reserve Board is, we believe,
    warranted. To the degree that participants or sponsors of other
    plans may seek service credit in a similar fashion, we think it
    makes sense to examine each of them on their own merits.
        Now, generally, under the old Civil Service Retirement
    System, all periods of service as a Federal employee under
    Title 5 can be used for retirement purposes, but only under a
    single retirement system. When the Federal Employees Retirement
    System was created, it was designed as a fully funded system,
    paid for by employer and employee contributions. Following a
    transition period that ended at the end of 1988, service credit
    for civilian employment is available only for service that was
    covered under the system at the time that it was performed.
        The original Federal Employees Retirement System Act did,
    however, include one exception. It provided service credit for
    post-1988 non-covered service performed under the Foreign
    Service Retirement System, and under that exception a former
    Foreign Service employee waives credit under the Foreign
    Service System and pays a deposit equal to the contributions,
    with interest, he or she would have made to the Federal
    Employees Retirement System. Credit may be similarly
    transferred by an employee between retirement systems in the
    opposite direction.
        Now, by statute, there are no explicit funding provisions
    for these transfers covering employer contributions to the
    respective systems. The provisions work because there is
    reciprocity between the two systems. Since credit goes both
    ways, the effect is to offset the cost of credit by savings
    from service transfers.
        Now, there is no evidence that this mechanism for the
    Foreign Service was created exclusively for that system, so it
    is likely that the lack of similar provisions for Title 5
    service in other retirement systems was inadvertent.
        Historically, transfers of employees between Title 5
    employment and the Federal Reserve Board have been common.
    After 1988, however, the Board found that individuals were
    reluctant to transfer because they knew that the time could not
    be credited if and when they returned to Title 5 employment.
    Accordingly, we worked closely with the Board's staff to create
    the proposal before you today. In terms of both policy and
    funding, it was logical to provide for service credit on the
    same basis as for Foreign Service employment.
        We believe it is a good bill that provides a reasonable
    solution to the matter.
        Mr. Chairman, your invitation also posed several questions
    related to funding of the Government's retirement systems. In
    particular, your letter asks whether there are other Federal
    retirement systems invested in equities, and what the state of
    their funding is.
        The GAO report from 1996, mentioned in your letter, offers
    an answer to that question. While the figures could be updated,
    the investment placement in unfunded liabilities of all the
    retirement systems are in the appendix to that report.
        In the balance of your invitation letter, Mr. Chairman, you
    asked several additional questions relating to projected
    performance of the Retirement and Disability Fund under
    scenarios that envision investment of all or a portion of its
    assets in private securities. As you know, administration of
    the Civil Service and Federal Employees Retirement Systems and
    the Retirement and Disability Fund itself are matters that are
    governed by statute. As such, they reflect a broad consensus
    based on policy conclusions that have been ratified by Congress
    and the administration over many decades. Indeed, the creation
    of the Federal Employees Retirement System and the Thrift
    Savings Plan reflect the evolution of that consensus. The
    Federal Employees Retirement System explicitly recognizes that
    private savings can and do play an important and beneficial
    role in achieving income security in retirement. That system
    crafts a balance between the security of a defined benefit and
    the risks associated with private investment.
        The bottom line is that investment of retirement fund
    assets is an important and complex matter. We should be willing
    to regularly review those policies, but changes should be made
    only after careful and circumspect review, taking into
    consideration the views of all interested parties and mindful
    of the potential for profound budgetary and economic
    consequences from such changes.
        As just one example of that, I call the subcommittee's
    attention to the testimony of Mr. James Blum, referenced in
    your letter of invitation. His testimony from 1997 included a
    broad review of the policy issues associated with financing the
    Federal Government's retirement systems. He pointed out the
    consequences, both negative and positive, of varying approaches
    to funding retirement benefits, and those consequences remain
    as valid today as they were then.
        Mr. Chairman, that concludes my statement, and I would be
    happy to answer any questions you or other members of the
    subcommittee may have.
        [The prepared statement of Mr. Flynn follows:]

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        Mr. Scarborough. Thank you, Mr. Flynn.
        I would like to start with some questions for Mr. Kelley,
    and I would like to just briefly compare the two systems that
    we are talking about today.
        As I read your attachment B to the Federal Reserve
    testimony, it appears that the Federal Reserve Bank Plan has a
    higher salary replacement and retirement than FERS, and that it
    costs the agency less. The numbers are pretty interesting. Of
    the two retirement systems that have comparable benefits, the
    Federal Reserve system appears to cost zero dollars to
    taxpayers--I think I went back to 1985 or 1986--whereas the
    Civil Service Retirement System right now does not have money
    in it. We are about half a trillion dollars in debt as far as
    liabilities go, and it costs the taxpayers and the Federal
    employees, I guess, if you add them together, an aggregate of
    about 11 or 12 percent. And that fluctuates, obviously, year to
    year.
        I would like to ask you, what provides the Federal Reserve
    System such an advantage in developing a retirement plan?
        Mr. Kelley. Well, the Federal Reserve System Plan was
    established in 1934, I believe, and it, from its earliest
    times, was able to invest more broadly than the Federal
    Government has invested its trust funds, and for many years it
    has had an equity component in it.
        As you know, since World War II the basic course of the
    equity market has been up, and that has obviously helped the
    funding position of the plan. Most particularly, since 1982,
    when the long bull market that we are presently in had its
    origins, the plan has done very well.
        Another point that I would make is that early on, right up
    until it became clear that we were substantially overfunded in
    this, when contribution ceased in 1986, the system itself had
    made very conservative--and by that I mean quite generous and
    substantial--contributions to the corpus of the fund. As a
    consequence, the funding was strong all along as a result of
    those contributions. Then that, of course, meant that there
    were funds in the plan to be able to take advantage of good
    markets when they came along.
        Mr. Scarborough. Are the taxpayers exposed to any liability
    for these Federal Reserve System benefits?
        Mr. Kelley. No, sir. We have built this plan so that the
    only way that taxpayers could in any way be adversely affected
    would be that if we had such an extended period of adverse
    investment results that our overfunding disappeared and we
    somehow got into an underfunded position, and had to make
    bookkeeping entries that recorded a debit against our income,
    which would result in us having to reduce the payments we made
    to the Treasury.
        Currently, this fund is better than just neutral for
    taxpayers. We are actually booking a credit against Federal
    Reserve income, in accordance with GAAP, as a result of this
    overfunded status of our plans, and that credit which we book
    into Federal Reserve income is remitted to the Treasury General
    Fund as a part of the income stream that we pay into the
    Treasury every week.
        So actually, the taxpayer is receiving a net benefit from
    this fund in that sense at this time.
        Mr. Scarborough. What is that credit currently?
        Mr. Kelley. I am not sure what the amount is. I believe it
    is on the order of $30 million or $40 million currently. It is
    a very complex calculation that is done in accordance with
    GAAP. Please do not ask me to recite to you how that accounting
    flows, but we would be glad to provide that to you if you would
    like to have it.
        Mr. Scarborough. I could ask you that question, but I would
    not understand the answer. [Laughter.]
        I went to the University of Alabama and I was very bad at
    math.
        Let me ask you this, though. I want to followup, because
    over the past 2 years this subcommittee has monitored the
    transition of assets managed by the District of Columbia
    Retirement Board to the Department of the Treasury. Like the
    Federal Reserve, the D.C. Retirement Board had equity assets,
    but these were funded at only about 45 percent of the
    retirement benefits.
        You know, in last year's omnibus appropriations bill the
    Secretary of the Treasury was directed to liquidate those
    assets, ``consistent with other Federal retirement programs,''
    and to use $2.4 billion of that to pay for other spending. Now,
    the employees' pensions will be paid for by Federal taxpayers
    rather than out of the earnings of those investments.
        Let me ask you, if you will walk with me down this path,
    for a scenario for the Fed. Let's say we don't fix our Social
    Security problem, for instance, this year or any year, and at
    some point the economy drops into a recession and our surpluses
    disappear. Since we have not terminated any significant
    Government programs or reduced entitlement spending, we will
    reach 2013 with few resources and mounting Social Security
    deficits. The Secretary of the Treasury, who is short of funds,
    looks at the overfunded Federal Reserve Retirement Program and
    says, ``Hey, I have a deal for you. I will take the extra $20
    billion in your retirement fund and assure you that your
    annuities will be paid from the full faith and credit of the
    American taxpayers.''
        Mr. Kelley, how would you respond to the Secretary? That is
    question No. 1.
        Question No. 2 is, are there any firewalls that have been
    set up in this system to make sure that your surpluses are not
    raided?
        Mr. Kelley. Well, I think that the answer to the Secretary
    of the Treasury would be in terms of those firewalls. First of
    all, quite aside from the political implications of such a
    request, those funds that we are discussing that are in the
    Federal Reserve Retirement Plan do not reside with or under the
    power of the Board anymore. Once they go into that plan, they
    are exclusively and legally dedicated to funding the benefits
    that the Board has contracted for with its employees, and in
    that sense they belong to the beneficiaries. We have some good
    lawyers here in the room, and I am not a lawyer at all, but I
    do not believe it would be possible for us to touch that fund
    for that purpose if we should somehow desire to do so.
        Mr. Scarborough. OK. So your funds cannot be raided in the
    same way the D.C. funds were, then?
        Mr. Kelley. No, sir.
        Mr. Scarborough. OK.
        Let me ask you a question about whether there is any sort
    of rub here between your system and other systems. It has to do
    with the investing that you have talked about already in this
    committee. I have a couple questions for you. Alan Greenspan,
    in January, testified before the Ways and Means Committee, and
    they were talking about private investment of Social Security
    funds. Obviously, as you know, Chairman Greenspan opposed that,
    in part because there was the potential for politics getting
    involved in investment decisions.
        Nonetheless the Fed itself, in its own system, will invest
    with some guidelines; and the provision says, as you know, ``no
    investment should be made or continued in a company whose
    products or activities are subject to broad-based social or
    political censure.'' That vision is contained in a July 22,
    1998 memo approved by the Committee on Investment Performance,
    and it certainly sounds like a preemptive strike against social
    investment.
        What was the first time it was introduced? When did such a
    provision first enter the Fed's guidelines?
        Mr. Kelley. My best recollection of that--and frankly, I am
    not very clear on the history of that provision--but I believe
    that it did come to the attention of the Investment Committee
    perhaps no further back than 1996 or 1997, and was considered
    for a period of time and eventually passed by the Investment
    Committee and became one of our guidelines.
        Mr. Scarborough. OK. And let me ask you this, because we
    are obviously comparing two systems, your system which is
    extremely successful--and one of the questions that we are
    going to have to ask not only about the future of other
    retirement systems, but also of Social Security, is how we walk
    this fine line, if you could provide me some guidance.
        Again, I want to key back on the words that are part of
    your guidelines which say that you are going to stay away from
    activities that are subject to broad-based social or political
    censure.
        Could you help put a little bit of meat on those bones?
    Would that include tobacco companies, gun companies,
    pharmaceutical companies that produce certain products that are
    objectionable? Help me out here.
        Mr. Kelley. Since that became one of our guidelines, it has
    not been further discussed in terms of any practical
    recommendation or suggestion that something be proscribed. So
    there is no flesh to put on those bones at this point.
        Mr. Scarborough. OK.
        Mr. Kelley. It has not been dealt with, as a practical
    matter, nor has any particular security of any sort been
    proscribed under that guideline.
        Mr. Scarborough. So there has not been an investment that
    your Board has wanted to move on that has been stopped because
    of that?
        Mr. Kelley. No, sir.
        Mr. Scarborough. OK.
        I wanted to ask a question or two of you, Mr. Flynn,
    briefly. When we read about the long-term problems facing the
    Social Security System, which is funded by the same pay-as-you-
    go mechanism, obviously, that most Federal retirement systems
    are funded under, citizens are alarmed because of a shortfall
    that could begin in the next 10 to 15 years, when the baby-boom
    generation starts to retire.
        Federal employees have been in such a shortfall condition
    for more than 20 years, and this year payroll deductions and
    employer contributions will provide less than one quarter of
    the funding needed to support current pensions. OPM's annual
    reports have projected that the shortfall will increase to more
    than $100 million annually within the next 20 years.
        In the 105th Congress, the Budget Committee directed this
    committee to reduce the deficit in direct spending by amounts
    of about $4 billion. The Budget Committee proposed options that
    included COLA delays, changing the retirement benefit
    calculation base from high-3 to high-5, and increased
    retirement contributions from employees and their agencies.
        Some tough choices have been made with respect to COLA
    delays and benefit cuts, but employees are paying more for
    their retirement benefits, and will be, at least for the next 4
    years.
        Mr. Flynn, does the absence of funding that is independent
    of current receipts leave employees and annuitants continually
    vulnerable to proposals to delay cost of living adjustments, to
    reduce benefits in some other ways, or to increase contribution
    levels, or do other things that may not be helpful to Federal
    employees and retirees?
        Mr. Flynn. Mr. Chairman, that is a big question. Let me try
    and perhaps set a little context, and then give you an answer.
        The Civil Service Retirement and Disability Fund, the trust
    fund that we manage at the Office of Personnel Management,
    contains assets for two retirement systems: the old Civil
    Service Retirement System, that was essentially closed to new
    entrants in 1983, and the new Federal Employees Retirement
    System, to which almost all new Federal employees today are
    appointed.
        You talked a minute ago about the unfunded liability of the
    Retirement Fund. The unfunded liability, which is, as I think
    you indicated, Mr. Chairman, $512 billion or $518 billion, is
    an unfunded liability that is exclusively the product of the
    way in which the Government financed the older Civil Service
    Retirement System. The newer Federal Employees Retirement
    System is designed to be financed under Government financing
    mechanisms, to be financed on a fully funded, accruing basis,
    so that the employee contributions and agency contributions
    that are coming in every 2 weeks will finance the benefits of
    the participants in that system.
        So if I could, just real quickly, separate out where the
    unfunded liability is, and then talk about that just for a
    second, because it is something that oftentimes gets
    misunderstood and does in fact, from time to time, lead to
    suggestions in the context of the overall budget for reducing
    benefits, whether that be in the form of cost of living
    adjustments or different formulas for determining what a
    monthly annuity would be, and so on and so forth.
        The unfunded liability has been recognized. It has been
    recognized, disclosed, and reported since 1969. A series of
    amendments occurred in 1969 to limit the continued growth of
    the unfunded liability, and a series of legislative initiatives
    from 1969 until the creation of the Federal Employees
    Retirement System did the same thing.
        The Federal Employees Retirement System has a mechanism in
    it that ultimately will finance the unfunded liability of the
    Civil Service Retirement System. So there was, in 1983,
    specific legislative action agreed to by the Congress and
    ratified by the administration that deals with that unfunded
    liability over time.
        The second point that I want to make is that if you look at
    the Retirement and Disability Fund as consisting of two
    programs, the assets of the fund--that is to say, the assets of
    the older system and the newer system--are available to pay all
    the benefits required of the system. So even though, on an
    ongoing basis, receipts to the fund do not match outlays from
    the fund on a year-to-year basis, the fact of the matter is
    that the balance of the fund is available to pay benefits, and
    there will always be a balance available to pay benefits for as
    long as anyone cares to project into the future.
        Now, when it comes to the Federal budget at large--not just
    the retirement system--the manner in which Federal programs are
    financed does make these retirement programs, and other
    programs, subject to scrutiny from 1 year to the next. That is
    part of the process and that is something that we have all had
    to deal with. There have been hearings here and in other forums
    about protecting the Government's retirement fund from those
    kinds of situations, and there are views, obviously, on both
    sides of the question. But just to set that as a context, I
    hope that helps a little bit.
        Mr. Scarborough. It does. And I have a few more questions,
    but I would like to pass it over to the ranking member, Mr.
    Cummings.
        Mr. Cummings. Thank you, Mr. Chairman.
        I am trying to figure out, Mr. Kelley, the timing of this
    legislation here. Can you kind of just give us a little more
    background as to why we are acting now? And was there something
    in particular that made this happening right now very
    important? I understand what the problem is; I am just trying
    to figure out----
        Mr. Kelley. No, you do indeed. Your summary was excellent.
    But there are two things that I would mention there.
        No. 1 is that if anyone who is caught in this situation at
    this time, whereby they have this split pension calculation
    under current law, if they were to retire now or before this
    legislation is passed, their retirement would be figured on the
    current law basis and they would be stuck. To my best knowledge
    that has not happened to anyone yet, but it could at any time,
    because of course, folks get a year older every year. It will
    happen if the law does not pass.
        We have been aware of this for some time, and I believe
    this legislation has been around for 5 years now, and another
    phenomenon is happening. I believe you were the one who
    summarized a number of employees at the Board who are in this
    dilemma at this time, in that they are covered by what we call
    the Bank Plan due to their post-1984 employment. The ones who
    have full reciprocity under present law are our older
    employees, who are covered by our Board Plan, which is fully
    fundable back-and-forth with the CSRS. But the phenomenon that
    I would point out to you is that these are older employees who
    currently enjoy adequate portability, and they are going to
    decline in number over time. And meanwhile, the ones who have
    come to the service post-1984 are slowly going to become all of
    our employees; and over the course of a very few years, if this
    were to languish, our entire workforce would be in this
    unidirectional problem.
        So I believe there is considerable urgency in those two
    senses to get this done.
        Mr. Cummings. Now, with regard to your hiring new people,
    do you believe or have evidence that this has been a factor in
    whether people come on with you?
        Mr. Kelley. I am told that it is, because people like to
    have the thought that they can transfer to other agencies and
    perhaps come back to the Board, and perhaps come to the Board
    briefly and then go back to their home agencies. So as you or
    perhaps the chairman observed, there is not a huge number of
    these individuals--I guess it was Ms. Norton--but even though
    they are not many, they are very important Government servants
    who are providing important service to our country, and I do
    not believe that they ought to be inhibited or disadvantaged in
    their ability to provide that service at the highest and best
    location that they are called to. But there is, under this
    present law, a very meaningful inhibition on the part of folks
    who are in this situation to move about and perhaps pursue
    their career objectives at the highest and best level.
        Mr. Cummings. Now, this is modeled after the Foreign
    Service law, is that right? It was an effort to correct the
    Foreign Service situation, is that correct?
        Mr. Kelley. I do not think anyone is clear as to how this
    happened, and our folks have tried to find some reference in
    the legislative history here. But somehow, when the new plan
    got set up in 1983, there was a provision made for the Foreign
    Service, which is exactly what we need--but only for the
    Foreign Service.
        Mr. Cummings. Mr. Flynn, do you know of any other agencies
    that this would apply to? This is it? In other words, agencies
    in a similar situation?
        Mr. Flynn. There are a number of other Federal retirement
    systems, Mr. Cummings, where this potentially could apply, but
    generally speaking they are small, specialized retirement plans
    for Federal judges, members of the Farm Credit System, things
    of that nature.
        I think that with the Foreign Service Retirement System and
    the Federal Reserve Board, we are probably looking at the two
    retirement systems where this would be most likely to occur. We
    would not expect to see it in others, but we certainly would be
    willing to look at the interest of others if that should
    materialize.
        Mr. Cummings. So nobody has presented a case to you?
        Mr. Flynn. No.
        Mr. Cummings. I am just wondering, we have a situation
    where we are trying to correct a problem. I think you said, Mr.
    Kelley, that it has been around for a while.
        Mr. Kelley. Yes, sir.
        Mr. Cummings. Since I am fairly new to the Congress, I am
    just curious. Has there been an objection to it? Or is just
    language in the legislative process? What has been the issue,
    do you know?
        Mr. Kelley. Well, I personally am new to this issue, also.
    It has fairly recently come to my attention. But I am told that
    we have been aware of it for some time, and it has been
    presented to the Congress before, but before H.R. 807 it has
    always been mixed up in other legislation and for one reason or
    another fell by the wayside in the process and just never got
    done.
        Mr. Cummings. Mr. Flynn.
        Mr. Flynn. Mr. Cummings, I would agree with Governor
    Kelley. This is a matter that we have known about. The numbers
    are small. There have been provisions under consideration in
    the past, and I think it has gotten ripe at this point. But I
    am not aware of any objections in the past.
        Mr. Cummings. OK. I thought maybe there was something that
    we were missing. When you get this kind of bipartisan spirit,
    you begin to wonder whether we are missing something.
    [Laughter.]
        Mr. Flynn, you noted that the GAO report is 3 years old?
        Mr. Flynn. Yes, sir, 1996.
        Mr. Cummings. Yes. Is that significant? I mean, should it
    be updated?
        Mr. Flynn. I do not think it is particularly significant.
    It is a broad overview of the Federal retirement systems that
    are available. The appendix to the report, obviously, is going
    to contain financial information that is that old or older,
    because it takes time to collect it. And with the exception of
    reflecting, for example, the performance of the equity markets
    over those past 3 years, I do not think that substantively
    there would be any particular reason to suggest that it is out
    of date and needs to be updated.
        Mr. Cummings. So I take it that if we do not act on this
    soon, this year or next year, it just creates more problems for
    more people?
        Mr. Flynn. Yes, sir.
        Mr. Cummings. All right. Thank you very much.
        Mr. Scarborough. Thank you, Mr. Cummings.
        Just a couple of quick followups. First of all, if I am not
    mistaken, in the 104th Congress we did pass this reform out of
    this subcommittee and committee and the House. It was attached
    to another bill, which was killed in the Senate. Imagine that.
        Second, just a quick followup, Mr. Flynn. I was curious,
    what about the intelligence retirement system? Do they have
    portability, that you know of?
        Mr. Flynn. They have portability. As I mentioned, in terms
    of the older systems, I think I would have to check on post-
    1988 portability prospectively and perhaps give you an answer
    to that.
        Mr. Scarborough. If you could provide us with an answer to
    that, we can make that part of the record, without objection.
        Mr. Flynn. I'd be happy to.
        [The information referred to follows:]
        [GRAPHIC] [TIFF OMITTED] T7737.028

        Mr. Scarborough. I would like to introduce and recognize
    the gentlelady from Maryland, Mrs. Morella.
        Mrs. Morella. Thank you, Mr. Chairman. I want to
    congratulate you and to congratulate us on the Civil Service
    Subcommittee on having you chair it. I look forward to working
    with you during this Congress.
        I am chairing another committee right now, but I wanted to
    come down for the markup on these two bills and the
    opportunity, having looked at your testimony, to perhaps pose
    one question that pertains to the second bill that we are going
    to mark up, which has to do with our Thrift Savings Plan
    enhancements, which deals with portability and deals with
    allowing people to join our Thrift Savings immediately.
        But picking up on the Federal Reserve, Mr. Kelley and Mr.
    Flynn, let us look at Thrift Savings. FERS employees contribute
    to their Thrift Savings Plan accounts, and you have mentioned
    that Federal Reserve employees can contribute up to 20 percent
    of pay to either pre-tax or post-tax investment options, up to
    the IRS cap?
        Mr. Flynn. Yes, ma'am.
        Mrs. Morella. FERS employees are capped at 10 percent
    contributions to their pre-tax TSP accounts, even if these
    limits leave them well below the IRS caps.
        For the past 4 years this subcommittee has been unable to
    advance a proposal--we have advanced it out of the
    subcommittee, out of the full committee, on the floor of the
    House--this proposal, allowing the employees to contribute to
    the IRS limit. The administration opposes the provision for
    budgetary reasons.
        I want to ask both of you, how does the Federal Reserve do
    for its employees something that we cannot enact for other
    Federal employees?
        Mr. Kelley. I would not want to try to answer that, but I
    would like to say that I think our employees consider their
    ability to contribute up to the maximum permissible limit under
    IRS regulations to be a very valuable benefit. While I do not
    have any statistics at my fingertips as to who does that, my
    impression is that a very substantial percentage of Federal
    Reserve employees are contributing up to the maximum. In fact,
    I think that our H.R. people have a considerable burden of
    helping people to figure out just how much they can in fact
    contribute without getting into trouble, because it is
    considered to be a very important opportunity.
        Mrs. Morella. Mr. Flynn, do you not see an inequity in
    this, sir?
        Mr. Flynn. Mrs. Morella, I will try to be as artful as I
    can in my answer.
        I seem to remember a similar question that you asked
    Director LaChance at a hearing very similar to this, not very
    long ago----
        Mrs. Morella. Yes.
        Mr. Flynn [continuing]. Where she offered, I think, her
    view that there is ample evidence about the small savings rate
    that we see in the economy, and she pointed out how important
    it is to the President that there be savings for income
    security and retirement. In fact, there was a summit convened
    on that very topic last June. And in looking at those two
    factors, she indicated that she thought that anything that
    could be done that would encourage people to save for income
    security and retirement was a good thing, and I think that is a
    view that I would share as well.
        Mrs. Morella. I appreciate that very much, and I think the
    President and the Treasury Department are going to realize that
    these savings that he believes in, that we all believe in,
    since the United States has such a low savings rate, is one
    that certainly should be allowed for individuals to enhance
    their savings and their pension retirement funds by virtue of
    an equity. Mike Causey has written about it a great deal. I
    know of nobody who disagrees on both sides of the aisle, even
    with different philosophies of it. As a matter of fact, the
    President has this--what is it, the new ``USA 401(k)'' and yet
    our Federal employees cannot even give that amount.
        So I guess I am hearing from both of you that you do think
    it is a good idea and will continue to push that forward with
    the help of this subcommittee and the full committee and the
    Ways and Means Committee.
        I thank you.
        Thank you, Mr. Chairman, for allowing me to get that little
    lecture in.
        Mr. Scarborough. OK, thank you so much.
        We are going to go ahead and finish up the hearing and then
    go to the markup after the vote, so the Chair now recognizes
    the gentlelady from the District of Columbia, Ms. Norton.
        Ms. Norton. Thank you, Mr. Chairman.
        Mr. Kelley, I regret that my opening statement may have
    been unclear. I didn't realize, and should have, that the Board
    would have its own version of a Thrift Savings Plan. I should
    have realized that if the Federal Government had that, then
    certainly the Board of Governors would have had that for its
    own employees.
        I would like to know whether, under our bill, when an
    employee transfers, will the entire corpus--what the Government
    has contributed and what the employee has contributed--simply
    transfer over, so that perhaps no contribution will have to be
    made in order to come into our own Federal Government agency's
    Thrift Savings Plan?
        Mr. Kelley. Well, we have to be careful. We are talking
    about two different plans now. Basically, the portability that
    we have been discussing in H.R. 807 has to do with the defined
    benefit plan, the pension plan itself, and there are rather
    complex arrangements that have to be made technically to make
    sure that there is equity between plans when an employee goes
    from one plan to another. But that can be done, and it is fully
    taken care of in your bill.
        The other plans are defined contribution plans. The Thrift
    Savings Plan and our Thrift Plan are defined contribution
    plans, and there still is a problem of portability when one
    goes from a Thrift Savings Plan institution to us. Portability
    there is not perfected and is not at this time in your bill.
        Ms. Norton. So if the employee was in your Thrift Savings
    Plan, what happens to the contributions that the employee has
    made in your Thrift Savings Plan if the employee wants to now
    join the Thrift Savings Plan of a Federal agency?
        Mr. Kelley. Well, first of all, it is fully vested and is
    entirely theirs, so there is no way they are going to forfeit
    anything out of that plan.
        Ms. Norton. All right. So it really is two different plans?
        Mr. Kelley. That's right. And they have two different sets
    of effects.
        Ms. Norton. I see. But they can go into our Thrift Savings
    Plan----
        Mr. Kelley. Yes. Now, I am frankly not clear about the
    portability out of our Thrift Plan into the Thrift Savings
    Plan. I would be very happy to generate an answer to that
    question and provide it to the committee if that would be
    helpful.
        Ms. Norton. Mr. Chairman, I would appreciate this
    information very much, because I am not sure what happens to
    the Government's contribution. Then there is the contribution
    that the employee has made, and now you have two Thrift Savings
    Plans, and I am not sure what the bottom line effect is, and I
    think that for employees for whom these plans are so valuable,
    that would have meaning.
        So I would appreciate receiving an answer. I don't have any
    problem with marking up the bill, but I would appreciate an
    answer.
        Mr. Kelley. We would be very happy to do that.
        Mr. Scarborough. If you could forward that and we will make
    it a part of the record, if there is no objection.
        [The information referred to follows:]

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        Ms. Norton. Is what we are doing today retroactive, so that
    if somebody is retired, if 1 of these 50 folks is gone, that
    person can be made whole? Or is that person just a loser?
        Mr. Kelley. My understanding is at this point, if this bill
    is passed promptly, there will be no losers. But we run that
    risk if this runs on and on.
        Ms. Norton. All right. I want to make sure of that. I have
    in mind the employee who says, ``Well, I have to go; this is
    such a better opportunity at XYZ Agency,'' she goes, is lost,
    and may have retired from XYZ Agency. Now I just want to make
    sure that we do not end up with yet another bill needed for yet
    another set of losers.
        Mr. Kelley. Over my right shoulder, I am assured that you
    are correct on that.
        Ms. Norton. OK.
        The chairman has raised a very important point about what
    happened to the D.C. Retirement Fund. First I want to make it
    abundantly clear that it is the Congress that forced the
    District to turn over its funds and to spend out of its funds.
    That's the last thing that the District would have wanted to
    do. But what the Congress said was that this pension liability,
    which is 100 percent Federal liability, ``we will not take on.
    What we will do, and the only way we will take this on, is if
    you pay down--you, District of Columbia employees--what you
    have put into it. At that point we reduce our costs, and we are
    willing to take over what we should have had in the first
    place.'' So that was the first inequity.
        But the District of Columbia had absolutely no choice
    because if this fund were still outstanding in 2004, the
    District would go bust, if I can use a colloquial expression.
    That is to say, it would not be what we have just gone through,
    which is the kind of insolvency that Philadelphia and New York
    had. The city would blow up because a huge amount would fall
    due; the Federal Government pulls back and is not a part of the
    fund at all. So the District, in essence, was forced to
    liquidate what employees had already paid in.
        Second, the Federal Government should not have wiped out
    the fund, and I certainly agree with the chairman that that is
    the last thing we envisioned would happen. But someone told me
    after this happened that, ``Eleanor, didn't you recognize that
    the Federal Government never leaves any loose change hanging
    around?'' [Laughter.]
        What in effect has happened is that the obligations have
    now been consolidated, in effect, into the Federal retirement
    obligations, and under law there is no way to avoid that now
    unless the Federal Government were to pass additional
    legislation saying we no longer are obligated.
        I do want to say that I would have preferred to see the
    fund left intact, and for it to build on the equity already in
    the fund. It would have saved the Government money. We already
    had a system that was doing well. So I regret it, but I do
    think that we ought to understand why it happened that way.
    Because of the way scoring is done, the Federal Government--the
    administration--said no, the Congress certainly was not willing
    to come up with the money, and so essentially we were left with
    a take-it-or-leave-it proposition. We had to take it because we
    could not afford to be left there a few years from now,
    essentially with a city in smoke.
        I would like to ask a question--I know I am holding people
    up, but I want to ask a question about investments, though,
    because I do think that the question that the chairman has put
    on the table about investment in equities is one that has to be
    considered, especially since the President wants to invest
    Social Security funds. Those of you who have a vote may want to
    run over and vote and not have to be making a 50-year dash, so
    I will leave it to the chairman, because I think your time is
    running.
        Mr. Scarborough. Well, it is running. If you were to submit
    the written questions, we could leave the record open for 2
    weeks and they could answer them.
        Ms. Norton. I would be pleased to do that.
        [Questions and answers referred to follow:]

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        Mr. Scarborough. We are down to 5 minutes and would like to
    adjourn, and then go to markup.
        Any objections?
        Ms. Norton. No objection.
        Mr. Scarborough. Well, we would like to thank you all.
        Let me say very quickly that I concur with the gentlelady.
    She was put in an extremely difficult position in the 105th
    Congress on the so-called ``bail-out,'' so I certainly concur
    with everything you said regarding the D.C. situation.
        I want to thank both of our witnesses for coming and
    testifying before us today. It certainly was insightful, and we
    will leave the record open for 2 weeks and send any further
    questions we may have to you.
        Thank you, and this hearing is adjourned.
        [Whereupon, at 11:40 a.m., the subcommittee adjourned.]