[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:]
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[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.
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    Mr. Scarborough. I would like to introduce and recognize 
the gentlelady from Maryland, Mrs. Morella.
    Mrs. Morella. Thank you, Mr. Chairman. I want to 
congratulate you and to congratulate us on the Civil Service 
Subcommittee on having you chair it. I look forward to working 
with you during this Congress.
    I am chairing another committee right now, but I wanted to 
come down for the markup on these two bills and the 
opportunity, having looked at your testimony, to perhaps pose 
one question that pertains to the second bill that we are going 
to mark up, which has to do with our Thrift Savings Plan 
enhancements, which deals with portability and deals with 
allowing people to join our Thrift Savings immediately.
    But picking up on the Federal Reserve, Mr. Kelley and Mr. 
Flynn, let us look at Thrift Savings. FERS employees contribute 
to their Thrift Savings Plan accounts, and you have mentioned 
that Federal Reserve employees can contribute up to 20 percent 
of pay to either pre-tax or post-tax investment options, up to 
the IRS cap?
    Mr. Flynn. Yes, ma'am.
    Mrs. Morella. FERS employees are capped at 10 percent 
contributions to their pre-tax TSP accounts, even if these 
limits leave them well below the IRS caps.
    For the past 4 years this subcommittee has been unable to 
advance a proposal--we have advanced it out of the 
subcommittee, out of the full committee, on the floor of the 
House--this proposal, allowing the employees to contribute to 
the IRS limit. The administration opposes the provision for 
budgetary reasons.
    I want to ask both of you, how does the Federal Reserve do 
for its employees something that we cannot enact for other 
Federal employees?
    Mr. Kelley. I would not want to try to answer that, but I 
would like to say that I think our employees consider their 
ability to contribute up to the maximum permissible limit under 
IRS regulations to be a very valuable benefit. While I do not 
have any statistics at my fingertips as to who does that, my 
impression is that a very substantial percentage of Federal 
Reserve employees are contributing up to the maximum. In fact, 
I think that our H.R. people have a considerable burden of 
helping people to figure out just how much they can in fact 
contribute without getting into trouble, because it is 
considered to be a very important opportunity.
    Mrs. Morella. Mr. Flynn, do you not see an inequity in 
this, sir?
    Mr. Flynn. Mrs. Morella, I will try to be as artful as I 
can in my answer.
    I seem to remember a similar question that you asked 
Director LaChance at a hearing very similar to this, not very 
long ago----
    Mrs. Morella. Yes.
    Mr. Flynn [continuing]. Where she offered, I think, her 
view that there is ample evidence about the small savings rate 
that we see in the economy, and she pointed out how important 
it is to the President that there be savings for income 
security and retirement. In fact, there was a summit convened 
on that very topic last June. And in looking at those two 
factors, she indicated that she thought that anything that 
could be done that would encourage people to 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.]

                                   
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