[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
       CAFETERIA BENEFIT PLANS: MORE VALUE FOR FEDERAL EMPLOYEES

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE CIVIL SERVICE,
                     CENSUS AND AGENCY ORGANIZATION

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 21, 2002

                               __________

                           Serial No. 107-195

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

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                     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       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

   Subcommittee on the Civil Service, Census and Agency Organization

                     DAVE WELDON, Florida, Chairman
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
CONSTANCE A. MORELLA, Maryland       MAJOR R. OWENS, New York
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
C.L. ``BUTCH'' OTTER, Idaho          ELIJAH E. CUMMINGS, Maryland

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                      Garry Ewing, Staff Director
             Melissa Krzeswicki, Professional Staff Member
                          Scott Sadler, Clerk
            Tania Shand, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 21, 2002.....................................     1
Statement of:
    Jacobs, Dennis, Circuit Judge, U.S. Court of Appeals for the 
      Second Circuit.............................................    69
    Wilson, David E., CFCI, senior consultant and president, 
      Flexben Corp.; Marjorie H. Young, commissioner, Georgia 
      Merit System; Derrick Thomas, national vice president, 
      Second District, American Federation of Government 
      Employees, AFL-CIO; and Leslie Schneider, senior 
      consultant, the Hay Group..................................     7
Letters, statements, etc., submitted for the record by:
    Jacobs, Dennis, Circuit Judge, U.S. Court of Appeals for the 
      Second Circuit:
        Benefit Improvement Initiative executive summary.........    70
        Prepared statement of....................................    89
    Schneider, Leslie, senior consultant, the Hay Group, prepared 
      statement of...............................................    56
    Thomas, Derrick, national vice president, Second District, 
      American Federation of Government Employees, AFL-CIO, 
      prepared statement of......................................    47
    Weldon, Hon. Dave, a Representative in Congress from the 
      State of Florida:
        Prepared statement of....................................     3
        Prepared statement of Colleen M. Kelley..................    95
    Wilson, David E., CFCI, senior consultant and president, 
      Flexben Corp., prepared statement of.......................     9
    Young, Marjorie H., commissioner, Georgia Merit System, 
      prepared statement of......................................    16


       CAFETERIA BENEFIT PLANS: MORE VALUE FOR FEDERAL EMPLOYEES

                              ----------                              


                         TUESDAY, MAY 21, 2002

                  House of Representatives,
  Subcommittee on Civil Service, Census and Agency 
                                      Organization,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2247, Rayburn House Office Building, Hon. Dave Weldon 
(chairman of the committee) presiding.
    Present: Representatives Weldon, Davis, Morella, and 
Norton.
    Staff present: Garry Ewing, staff director; Melissa 
Krzeswicki, professional staff member; Scott Sadler, clerk; 
Tania Shand, minority professional staff member; and Earley 
Green, minority assistant clerk.
    Mr. Weldon. The hearing will now come to order.
    Good afternoon. I want to welcome our witnesses and 
everyone in our audience to this important hearing.
    The purpose of this hearing is to examine cafeteria plans. 
Cafeteria plans are an alternative to one-size-fits-all benefit 
packages that allow individual employees to tailor their 
benefits to meet their own needs. The Federal work force is 1.9 
million people strong, not counting postal workers. Not 
surprisingly, a work force this large is extremely diverse. 
There are both full time and part time employees in the Federal 
work force.
    Federal employees also range across a spectrum of jobs. The 
Government employs top scientists and highly skilled 
information technology workers, professionals and blue collar 
workers.
    There is diversity in age and circumstances of life. Some 
Federal employees are straight out of college and working in 
their first full time job, some are very near retirement. Some 
are single, while others are single parents or married couples 
with children. These groups of employees do not have the same 
needs and interests.
    The needs of employees also change through their careers. 
Young singles do not have the same needs as a middle aged 
couple with children. Employees with young children may have a 
strong interest in a child care benefit. An older employee may 
be more interested in a benefit that would help him or her care 
for elderly parents.
    In short, we do not have a one-size-fits-all world. 
Increasingly, private employers as well as State and local 
governments have recognized this simple fact. And they have 
responded by offering flexible benefits to recruit, and 
importantly, retain, well qualified employees. Consequently, 
the Federal Government finds itself competing for talented 
workers with employers who offer cafeteria plans and other 
flexible benefit programs. Employees find such programs 
attractive because they empower the individual to maximize the 
value of the benefits an employer offers. Many employers have 
found cafeteria plans to be valuable recruiting tools.
    To ensure that the Federal Government will be able to 
compete effectively for talent in today's market, it is the 
obligation of the subcommittee to carefully examine the 
potential offered by cafeteria plans and other flexible benefit 
arrangements. I look forward to benefiting from the views and 
insights of our distinguished witnesses as we examine this 
important issue.
    [The prepared statement of Hon. Dave Weldon follows:]

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    Mr. Weldon. I now recognize the distinguished ranking 
member for his opening statement, Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    First of all, let me thank you for holding this hearing. I 
also want to thank all of the witnesses for coming to 
participate.
    Mr. Chairman, Federal employees can currently participate 
in a number of benefit options offered by the Federal 
Government. They include health insurance, group life 
insurance, long-term care insurance and retirement programs. 
Additionally, Federal employees can earn annual and sick leave 
on a prorated basis.
    However, this does not preclude the Federal Government from 
improving its benefit options and structure for Federal 
employees, particularly at a time when we're trying to recruit 
and retain the best and the brightest for Federal service. To 
this end, the Clinton administration implemented one of three 
primary types of flexible benefit plan options for employees.
    In 2000, the first type of flexible benefit plan, a premium 
conversion plan, was put into place to allow Federal employees 
to pay their Federal employee health benefit premiums on a pre-
tax basis. Permitted under Section 125 of the Internal Revenue 
Code, premium conversion plans would allow employees to convert 
post-tax contributions to pre-tax contributions through salary 
reductions for payment of employee premiums.
    The second type of flexible benefit plan is called a 
flexible spending account, FSAs. FSAs allow employees to 
purchase qualified benefits such as medical or dental expenses 
on a before tax basis. The 1998 Department of Labor survey of 
full-time employees in State and local government found that 47 
percent, 6.7 million people, had access to an FSA. Federal 
employees should also have access to health care and dependent 
care FSAs.
    The third and more controversial flexible spending plan is 
a cafeteria type benefit plan. Cafeteria plans offer employees 
a menu of benefit options. Employees would be allowed to design 
their own benefit package by selecting different types and/or 
levels of benefits that are funded with non-taxable employer 
dollars. Under this plan, each employee is allotted a 
predetermined number of dollars, credits or points with which 
he or she may purchase benefits from options made available by 
the employer.
    A major and very valid concern here is that the Federal 
Government will attempt to control the cost of benefits by 
limiting increases in the number of dollars employees are given 
to purchase benefits. For example, employers generally use the 
increase in the consumer price index as the benchmark for 
annual increases in the amount of dollars they provide 
employees to purchase benefits.
    With inflation averaging 2 to 3 percent in recent years, 
and annual health insurance premium increases averaging between 
10 and 13 percent, the cost of these benefits would be shifted 
to the employee. This and other concerns that have been raised 
about cafeteria plans must be addressed. I hope we address them 
in this hearing.
    Perhaps a cafeteria plan could be designed to address these 
concerns. But shifting the cost of benefits from the Federal 
Government to its already underpaid Federal employees is not an 
option. I look forward to today's testimony, and again, I thank 
you for holding this hearing.
    Mr. Weldon. I thank the gentleman.
    Did the gentlelady from Maryland seek to make a statement?
    Mrs. Morella. Thank you, Mr. Chairman. I just want to add a 
sentence to it. I think this hearing couldn't come at a more 
appropriate time and I thank you for having it. With the FEHBP 
premiums rising by almost 30 percent in the last 3 years, and 
15 percent of the 1.8 million Federal employees not 
participating in the program, we need to look at making 
changes. And while I have serious reservations about the merits 
of cafeteria benefits plans, I want to thank the panelists for 
their testimony, for sharing their personal experience. We will 
keep an open mind.
    Incidentally, if I might just add that I feel required to 
go to the White House because the Maryland Terrapins are going 
to be honored. So I will be back before the end of the hearing, 
probably.
    Thank you, Mr. Chairman.
    Mr. Weldon. I thank the gentlelady, and we do have a second 
panel. So if the President doesn't keep you too long, you 
should be able to be back here later.
    We will now hear from our first panel of witnesses. Before 
us today we have Mr. David Wilson, president of FlexBen Corp., 
in Troy, MI. Mr. Wilson is an expert in designing and 
implementing flexible benefit programs.
    We also have Ms. Marjorie Young, Commissioner of the 
Georgia Merit System. Ms. Young administers the State of 
Georgia's cafeteria plan.
    Our third witness is Mr. Derrick Thomas, who is the 
national vice president of the second district of the American 
Federation of Government Employees.
    And finally, we will hear from Ms. Leslie Schneider, who is 
a Senior Benefits Consultant for the Hay Group in Atlanta, 
Georgia. Ms. Schneider also has extensive experience as a 
consultant with both private and public employers in designing 
and implementing flexible benefit programs.
    I want to thank all of you for joining us here today to 
share your thoughts on these important issues. Without 
objection, your written statements will be made part of the 
record.
    After administering the oath, I will recognize each of you 
for 5 minutes. I would ask that you try to summarize your 
statement within that time period. There are lights in front of 
you that will indicate how much time you have left. The green 
light indicates that you have 4 minutes, you are still in your 
4 minute statement. Then the yellow light turns on when you 
have a minute remaining, and the red light will turn on when 
your time has expired.
    We on the committee also try to comply with the 5-minute 
rule that we are asking you to.
    Now I would ask to administer the oath. The committee 
requires that all witnesses take the oath. So could you please 
rise.
    [Witnesses sworn.]
    Mr. Weldon. Will the court reporter please note thee 
witnesses have answered in the affirmative.
    Again, thank you for being here. Mr. Wilson, we'll begin 
with you. You're recognized for 5 minutes.

  STATEMENTS OF DAVID E. WILSON, CFCI, SENIOR CONSULTANT AND 
  PRESIDENT, FLEXBEN CORP.; MARJORIE H. YOUNG, COMMISSIONER, 
GEORGIA MERIT SYSTEM; DERRICK THOMAS, NATIONAL VICE PRESIDENT, 
 SECOND DISTRICT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, 
AFL-CIO; AND LESLIE SCHNEIDER, SENIOR CONSULTANT, THE HAY GROUP

    Mr. Wilson. Thank you. Let me begin by thanking you, Mr. 
Chairman, and the members before us today for the opportunity 
to discuss with you one of the most important and wise 
legislative actions passed by this House over the last four 
decade period.
    Section 125 of the Internal Revenue Code, known as 
cafeteria or flexible benefit plans, and its expansion, is 
vital to the financial health of all Americans. As the wisdom 
within our constitution liberates and defines our opportunities 
as Americans, the wisdom and advent of Section 125 within the 
tax code liberates the genius of the marketplace.
    It has and continues to redefine the employer-employee 
financial and reward relationship. It provides employees the 
opportunity to liberate their financial resources within the 
employer-employee reward system, enabling employees to tailor 
their benefits program to their individual and family financial 
and security needs.
    Said simply, employees and their dependents love choice. 
The opportunity of intelligent employee benefit choice results 
in understanding, greater real value and greater employee 
appreciation. Understanding the broad adoption of employee 
benefit plan choice and Section 125 by the private sector, 
State, county and municipal employers over the last 20 year 
period, we are very pleased to see the Federal Government's 
embracement of Section 125 beginning with President Clinton's 
adoption of non-taxable employee premiums and now the 
implementation of health care and dependent care reimbursement 
accounts under the Bush administration.
    We have encouraged the continued and prompt adoption of 
employee benefit choice by the Federal Government through the 
establishment of a broad based flexible benefit plan structure. 
This is both a competitive need and a requirement for the 
delivery of maximum award financial value to American workers 
who dedicate themselves to national service. It is the right 
and wise thing to do. Americans love choice. America's private 
sector and Government workers alike appreciate the opportunity 
to secure their financial well being and financial security.
    What is a flexible benefit plan? I'd like to go through a 
couple of things that I presented in my testimony. One is that 
it is established under Section 125 of the Internal Revenue 
Code. This section of the Code establishes that employees shall 
not be taxed differently than employers in the purchase of 
employee benefits simply because employees have choice. A 
flexible benefit plan is a benefit delivery system, it is not 
the benefit. It is the milk truck, not the milk.
    I'd like to address the concept of credit formula plans 
later, if we may.
    Effectively managed, the flexible benefit plan liberates 
and focuses financial resources on the important financial 
security needs of the individual employee and his or her 
family, creating employee appreciated financial value. By 
definition, it requires annual and ongoing education by the 
employer, providing the employee the opportunity to learn, 
create understanding and create increased value. It is 
dependent on the utilization of technology and advancements in 
technology that continue to create new value and knowledge 
management opportunities.
    It liberates the genius of the marketplace to never-ending 
new opportunities to increase the value of the employer-
employee relationship and its financial reward to employees. It 
establishes the core foundation within the marketplace for the 
continued evolution of employee-centric consumerism and the 
evolution of the employer-employee financial security/reward 
system.
    I presented in my testimony a summation, if you will, of 
what the marketplace perceives to be a standard flexible 
benefit plan in the traditional sense, 1985 to 1993 kind of 
genre. I won't go into that, I'll leave that to questions that 
you may have.
    I do present following that in the testimony a depiction of 
what a flexible benefit plan might look like today. Let me just 
draw on the time that I have remaining some comparisons between 
the old and the new. In the early years, we defined a flexible 
benefit plan as a benefit plan that had basically statutory 
benefits under Section 125 as the offerings and many offerings 
in the medical plan design area, for example, fewer options 
deeper into the menu.
    Today if you look at best practice, you're going to see 
fewer medical plan options, try to drive attention to the 
employee making a good financial decision relative to health 
care, but using more of the dollars to get a stronger 
underpinning of the total financial security of the employee. 
This is the value. The employee gets to see the whole security 
value of the benefit program over time, and thus begins to make 
wise decisions that create more value for them.
    I think my time is just about to expire.
    [The prepared statement of Mr. Wilson follows:]

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    Mr. Weldon. Thank you, Mr. Wilson.
    Ms. Young, you're recognized for 5 minutes.
    Ms. Young. Chairman Weldon and committee members, I 
appreciate the opportunity to address the subcommittee 
concerning the State of Georgia's benefit plans.
    As Commissioner of the Georgia Merit System, I administer a 
cafeteria plan. This agency has been administering this plan 
since 1986. I also serve on the board of the Employer's Council 
on Flexible Compensation as many of my predecessors have in 
support of cafeteria plans.
    Our benefits have been a fundamental part of our total 
reward or compensation initiative, enabling the State of 
Georgia to address major issues, such as turnover in our work 
force, employee requests for increased benefit choices, and 
taxpayer demand for more cost-effective government. As employee 
benefit costs have risen, the pre-tax element of the Internal 
Revenue Code Section 125 plan, coupled with the economies of 
scale realized through the large group plans, have mitigated 
cost increases for our participants, allowing for greater 
benefit selection at an affordable level that is attractive to 
current and potential employees.
    While the Georgia Merit System offers the flexible benefit 
and deferred compensation plan, the Georgia Department of 
Community Health offers the State Health Benefit Plan. The two 
departments coordinate open enrollment period between April and 
mid-May for the plan year beginning July 1st. The Georgia 
Department of Community Health and the Georgia Merit System 
offer an array of benefits through the cafeteria plan design. I 
have enclosed exhibit A and the attachments displaying the 
details of our current options.
    In addition to the health plan options offered by the 
Department of Community Health, the Georgia Merit System offers 
term life insurance up to a maximum of five times pay and 
offers spousal and dependent life care insurance; short term 
disability with two options of 7 day and 30 day waiting 
periods; long term disability; dental insurance; legal 
insurance; vision insurance; and long term care insurance, as 
well as health care spending accounts and child care spending 
accounts.
    We attribute a substantial portion of our success to a 
coordinated benefit package that addresses the individual 
financial needs and desires of employees. For example, the 
State of Georgia has a liberal leave policy for both annual and 
sick leave. Employees accrue 1.25 days of sick leave and 
between 1.25 and 1.75 days of annual leave, depending on years 
of service. Our short term disability coverage provides for a 
7-day waiting period for those employees who have not accrued 
adequate leave to cover their disability period. Then we offer 
more affordable coverage with a 30 day waiting period for those 
who have more accrued leave.
    Another example of benefit coordination relates to our long 
term disability plan. An employee is eligible through the 
Georgia Employee's Retirement System to receive a disability 
retirement after 13 years and 4 months of service. The 
disability retirement is coordinated with our long term 
disability plan to ensure affordable premiums for employees.
    The benefits plans are designed to ensure that there is no 
overlap of coverage. Let me say that we compare our services to 
not only Fortune 500 companies but to other companies in 
Georgia, and find that our employees are very pleased in 
comparison with our plans.
    I want to emphasize the importance of excellent 
communication during the implementation of the cafeteria plan. 
It's really important that employees understand the benefits 
and employers understand the risks. For example, an employer 
needs to evaluate the impact of pre-payment of benefits through 
the health insurance spending accounts.
    I want to emphasize some things that I think would make 
cafeteria plans more helpful. It would be helpful to employers 
if a more accommodating structure could be legislatively 
enacted to make spending accounts a legitimate reimbursement 
account, to have them operate like the child care spending 
account. A second legislative improvement would be to do away 
with the forfeiture, the use it or lose it, features of the 
health care spending account, allowing unused coverage to roll 
forward.
    A third legislative improvement would permit retirees to 
participate on a pre-tax basis in spending accounts and other 
benefits options. And finally, legislation is needed to permit 
long-term care premiums to be paid on a pre-tax basis. The cost 
of long-term care insurance is substantial and this would help 
considerably in mitigating those costs. We think it would make 
a great improvement in our total compensation and total rewards 
for recruiting and retaining employees.
    [The prepared statement of Ms. Young follows:]

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    Mr. Weldon. Thank you very much.
    Mr. Thomas, you are recognized now for 5 minutes.
    Mr. Thomas. Thank you, Mr. Chairman, and members of the 
committee. On behalf of the more than 6,000 Federal and 
District of Columbia employees AFGE represents, I thank you for 
the opportunity to testify before you today.
    AFGE is strongly opposed to the establishment of cafeteria 
plans in FEHBP. We believe that the Federal Government, as an 
employer, has a duty to provide health insurance benefits to 
all its employees and a cafeteria plan approach would take us 
even farther away from the goal than we are today. FEHBP has 
several serious flaws that makes it more expensive than it 
should be. Its financing structure, along with its high cost, 
have made health insurance unaffordable for a large and growing 
number of Federal employees and their families. Introduction of 
cafeteria plans would only make this problem worse.
    Cafeteria plans are deceptive. Under the slogan of freedom 
of choice, the plans force employees into either/or decisions 
between benefits that should be provided universally. Health 
insurance is not a choice that some people need and others do 
not. It is not a benefit that appeals to some but not others. 
Health insurance is a crucial component of economic security. 
As such, it should remain the employer's financial 
responsibility to provide, as part of a comprehensive 
compensation package.
    Cafeteria plans have much the same impact on a group's 
insurance risk as vouchers or medical savings accounts. They 
provide a financial incentive for young, healthy workers to 
drop in and out of coverage. This in turn leads to an average 
risk that is higher than it would be under universal coverage 
of the group, and thus higher than necessary costs for the 
program as a whole.
    Health insurance is most efficiently provided to large, 
diverse groups who pool their risk in order to pay less on 
average than any one would have to pay for him or herself. 
Cafeteria plans, along with MSAs or vouchers, defy this basic 
principle of group insurance. Cafeteria plans for Federal 
employees would transform the basic structure of the health 
insurance program from a defined benefit to a defined 
contribution. Defined contribution programs are best understood 
as vouchers. With a voucher structure for FEHBP, the Government 
could set its contribution each year without regard to changing 
health insurance premiums or other cost and without regard to 
the percentage of the premium the voucher would cover.
    In any year that the voucher is increased by a smaller 
percentage than the increase in premium, the overall share of 
the Government's contribution would fall. When vouchers and 
cafeteria plans have been contemplated for FEHBP in recent 
years, legislative proposals have suggested annual adjustment 
equal to the CPI, which is used in the Government's budget to 
adjust baseline agency budgets. If such a plan had been in 
effect over the past 4 years, FEHBP's most popular plan, the 
Blue Cross/Blue Shield standard option, the cafeteria plan 
voucher would have only been increased by 9.5 percent, while 
premiums went up by 49 percent.
    Although cafeteria plans may at first seem like a vehicle 
for facilitating health coverage for the more than 200,000 
uninsured Federal employees, by allowing them to tradeoff cash 
value of benefits now provided by the Government in favor of 
other benefits not fully subsidized, serious potential problems 
do exist. First, employees may not have the skills or expertise 
to design a benefit package that is best for them from among 
the options presented. If forced to choose, how does a young 
family rank its simultaneous need for child care, health care 
and time away from work and disability insurance? Which is 
expendable? Which can be foregone?
    The employer's only motivation for establishing cafeteria 
plans is to save money on employee benefits. Because cafeteria 
plans carry their own additional administrative costs, just to 
keep employee benefit costs constant requires benefit cuts. 
Since the reason most commonly cited by the uninsured who are 
eligible for FEHBP participation is lack of affordability, 
lowering the Government's share and raising the employee's 
share is hardly the way to achieve universal coverage.
    The combination of cafeteria plans and FSA holds numerous 
potential problems for employees. FSAs involve having workers 
voluntarily reduce their gross pay by specific amounts in an 
amount equal to the difference between what the employer pays 
for benefits and the costs of the benefit. The worker chooses 
the amount of the salary reduction at the start of the plan 
year.
    Another financial disadvantage to workers of combined FSAs 
and cafeteria plans also comes from the fact that employee 
contributions to FSAs are salary reductions. Thus, benefits 
based upon salary are automatically lowered. Life insurance and 
disability insurance would be similarly affected, unless the 
Government specifically decides to rewrite the terms of its 
policies for Federal employees. Social Security benefits will 
be lower for workers who lower their salaries in a combined FSA 
cafeteria plan. The Government could, of course, compensate 
Federal employees for these differences, but that would deprive 
it of the primary motivation to establish these plans, saving 
money.
    That concludes my statement. Thank you.
    [The prepared statement of Mr. Thomas follows:]

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    Mr. Weldon. Thank you very much, Mr. Thomas.
    Before recognizing Ms. Schneider, the Chair will announce 
that it is his intent to hear the testimony of Ms. Schneider, 
and then recess for the votes on the floor. There is a series 
of three or four votes, then we will reconvene for questioning 
of the panel after the votes are completed. Ms. Schneider, you 
are recognized for 5 minutes.
    Ms. Schneider. Thank you for the opportunity to testify on 
cafeteria benefit plans.
    Flexible benefit plans allow organizations to offer their 
work force a choice between non-taxable benefits, such as 
health benefits or disability coverage, and taxable benefits, 
such as additional cash in their pay. Typical reasons for 
implementing a flexible benefit plan include meeting the needs 
of a diverse work force, giving employees more decision power 
and a higher return on their benefit dollars, providing both 
employees and employers with tax advantages, raising employees' 
awareness of the cost and value of benefits, assisting 
employers in attracting and retaining quality employees, and 
allowing the employer to better predict their benefit costs.
    There are three primary types of flex plans. The first is a 
premium conversion plan, which the Federal Government has 
already implemented. The second type of plan is flexible 
spending accounts, which let employees set aside money on a 
pre-tax basis in either health care or dependent day care 
account, to reimburse themselves for eligible expenses.
    The third type of plan is a full flexible benefit plan. The 
most utilized types of full flex plans are structured in one of 
two ways. The first is a credit plan in which the employer 
provides a set of core benefits for all employees and then a 
set of optional benefits from which the employee may select to 
purchase either flex credit or salary reduction. Unused credits 
can be taken as cash.
    The second type of plan is a trade plan that includes a 
standard set of benefits and allows the employee to either 
trade up or down. Trading down for less expensive benefits 
results in additional dollars that the employee can use to 
purchase more generous benefits, or take as cash.
    Overall, 84 percent of employers surveyed in the Hay 2001 
Benefits report offer premium conversation plans, 78 percent 
offer health care FSAs and 83 percent offer dependent day care 
FSAs. Twenty-two percent offer full flex plans, with 61 percent 
of these offering credit plans.
    The typical design and implementation process includes 
first, defining the plan objectives. These typically include 
financial, employer relations, administration and employee 
communications objectives. Second, identifying challenges to 
implementing a new program, for example, systems constraints. 
Third, gathering information on existing plans, competitive 
employer plans and employee and management opinions regarding 
the benefit.
    Fourth, based on the information gathered in the program 
objectives, developing a set of guiding principles for the plan 
design, which might include things like the existing HMO and 
PPO medical plans will be offered, there will be a choice of 
dental plans; flexible spending accounts will be included. The 
next step is to design the plan based on the guiding 
principles. The design includes the types of coverage, level of 
choice that will be offered, employee contribution strategy and 
use of credits, and if credits are used, the credit structure 
and formula, whether employees will have complete freedom to 
choose the options they want or will be required to select 
benefits in certain categories, consequences of not enrolling 
and whether the plan design changes will be phased in over 
time.
    Once the plan is designed, final steps include selecting 
vendors or developing internal capabilities for enrollment, 
administration and new plan options, modifying payroll and 
human resource systems for the new plan, developing 
administrative procedures and guidelines, developing and 
distributing employee communications, and administering the 
enrollment.
    With the proper investment of time, resources and money, a 
well designed flex plan can be effectively used to meet the 
needs of a diverse work force, attract and retain highly 
qualified employees, and maximize the value of benefits to 
employees. The three critical components of flex plans are plan 
design, administration and communication. For a plan to be 
successful, it is essential that all of these components are 
carefully implemented.
    Over the last 20 years, employers have faced many 
challenges with the design and implementation of flex plans. 
With the advancement of technology, the administration and 
communication have become more cost efficient and effective 
than ever before. Today there are many established best 
practices for employers to draw from as they consider these 
plans.
    The unique organizational structure, complexity and sheer 
size of the Federal work force will create challenges that will 
have to be addressed as you proceed with your consideration of 
flexible benefits.
    Thank you.
    [The prepared statement of Ms. Schneider follows:]

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    Mr. Weldon. I thank the gentlelady. The committee now 
stands in recess for 4 votes, for 30 minutes.
    [Recess.]
    Mr. Weldon. The hearing will now resume. I want to thank 
all the witnesses for waiting. Sorry for the extended delay. We 
had a series of five recorded votes on the Floor of the House.
    The Chair now recognizes himself for 5 minutes of 
questioning. Let me begin with perhaps several of you, Mr. 
Wilson, Ms. Schneider in particular can respond to this. Ms. 
Young testified that the State of Georgia has found cafeteria 
plans a necessity when trying to attract employees. I found 
that extremely interesting. In your experiences, Mr. Wilson and 
Ms. Schneider, have cafeteria plans actually made employers 
more attractive in the labor marketplace, would you say?
    Ms. Schneider. I think for most employees, if they've 
experienced a flexible benefit plan somewhere else that they 
have worked, when they're looking for employment, it is 
something that they look for because of the choice and because 
of the tax advantages that are involved. I don't have specific 
statistics that talk about or address the attraction and 
retention issue, but certainly know that in talking to 
employees and focus groups, that kind of thing, employees enjoy 
the plan and there are certain aspects that they miss greatly 
if they don't have the opportunity to participate in them in 
the future.
    Mr. Wilson. Our experience clearly indicates that employees 
value choice to the point that they value it economically. 
There's no question that for our clients that they report back 
to us significant value appreciation, both in terms of surveys 
that we help them conduct, but realities in the hallway, that 
geez, this is great, why didn't we do this before?
    Clearly from the perspective of an employee who has had a 
prior experience, and that employer does not have a flexible 
benefit plan, it is highly unlikely they will go to work for 
that employer that has a standard, traditional plan.
    Mr. Weldon. So it's an impediment for employers that do not 
offer it to attract employees who have been previously working 
at a place where they had a flexible benefit?
    Mr. Wilson. I think that's true.
    Mr. Weldon. Was that one of the drivers, Ms. Young, that 
drove the State of Georgia to adopt cafeteria plans, just the 
ability to attract employees?
    Ms. Young. Yes, it was the ability to attract employees and 
our employees' awareness of things that were happening in the 
private sector. One of the things that we've been struggling 
with, and I know that's true not only with the State, but 
probably in private sector, at the local level and at the 
Federal level, we're struggling with retaining our work force 
and attracting the work force, especially our young people.
    As we surveyed, we had some consultants come in and review 
our benefits program. They compared us to Fortune 500 
companies, as well as employers across the State of Georgia. 
They strongly compliment our plan and have made recommendations 
even for future improvements. But it was through consultants' 
evaluation of the original plans that the original cafeteria 
plan was set up. Because employees were asking, frankly, they 
asked for a whole lot more than what we're doing, they're still 
asking, because we survey them.
    So it's based on what the employees asked for that we're 
doing.
    Mr. Weldon. So the driving force is to meet the needs and 
requirements of the employees in the competitive marketplace?
    Ms. Young. Yes.
    Mr. Weldon. It was not a desire to save money on the part 
of the State legislature?
    Ms. Young. No.
    Mr. Weldon. Mr. Thomas in his testimony raised an important 
point about health care benefits gobbling up other benefits 
with health care inflation being what it is. How do these 
flexible benefit plans deal with that typically? I guess in 
some of them the health benefit is outside the flexible 
benefit?
    Ms. Young. Yes.
    Mr. Weldon. Is that how you handle it in Georgia?
    Ms. Young. Yes, as a matter of fact, we have two separate 
agencies managing the program. There's a Department of 
Community Health that administers the health benefits, and my 
agency administers the flexible benefits. The health benefits 
have no negative impact at all on the benefits to the 
employees, because employees basically choose their benefits, 
choose what they want and pay for what they want. It has no 
impact on the health plan.
    Mr. Weldon. Are there examples in the private sector where 
there have been plans where the health benefit and the other 
benefits are all together and have been problems with health 
care inflation?
    Ms. Schneider. Typically, when the health care benefits are 
included in the plan, the credit formula is designed to cover a 
certain percentage of those health care benefits. So it 
actually can be designed so that the employee contribution 
percentage, as you relate back to the health care, is no 
different than if it were an outside flexible benefit plan, 
except that it's pre-tax and they have the ability to trade.
    So you might say in your credit formula that, as an 
employer, we're going to make sure that there are enough 
credits to cover 80 percent of the health care costs, would be 
an example in perhaps 80 percent.
    Mr. Weldon. So by locking in that percentage, you have the 
protection on health care inflation issues?
    Ms. Schneider. Yes. It's a design issue.
    Mr. Wilson. Mr. Chairman, this is a point of education, I 
think. In my opening remarks, I tried to convey that a flexible 
benefit plan is a delivery system compared to a car. You can 
get into a car and use it for transportation, to go to work and 
pick up your family and use it productively. Or you can get in 
the car and smash it into a wall.
    The concept of a flexible benefit plan intelligently 
managed is to provide productive choice to the employee 
population that they are going to value within the total reward 
system. Making decisions not to duplicate benefits 
unnecessarily, but to purchase the benefits that are of 
greatest value to them.
    I think the point I would want to make here is that in the 
management of health care costs, there is no question that by 
creating more value within the flexible benefit plan, employees 
have made decisions not to necessarily buy the most expensive 
health care plans. They've decided to buy a plan that maybe is 
a little less expensive because they want more dental coverage. 
They find that the health care reimbursement count would be 
more important to fund because their child has orthodontia 
expenses in that year, and the dental plan doesn't cover that 
full cost.
    So the point that I would want to try to relate to you here 
is that almost all of these are design issues. Not the car, 
whether the car is red or blue or what the interior is, can 
simply be addressed by design issues, the question about health 
care costs, actuarially going up because some employees don't 
take the health benefit plan. You design around those issues. 
That does not occur in the marketplace. We know what that is. 
We know how to actuarially expect what will happen given the 
design of the plan.
    Ms. Young. And Mr. Chairman, may I add that we began the 
cafeteria plan in 1986. It's only been in the last 3 years that 
the plan has been separate from the health plan. The same 
agency, the Georgia Merit System, administered both of them 
together until 3 years ago, when the State health plan was 
pulled out in order to create another department with a focus 
on community health.
    Mr. Weldon. OK, so it was not separated because of the 
issues that Mr. Thomas brought up?
    Ms. Young. No. That had nothing to do with it.
    Mr. Weldon. It was an unrelated issue?
    Ms. Young. Yes.
    Mr. Weldon. OK. Ms. Schneider, as a Floridian, I was 
particularly interested in your experience in helping set up 
the Miami-Dade County program. Could you describe to me whether 
that covers only non-union employees or both, and a little bit 
about your experience there?
    Ms. Schneider. Miami-Dade County of course has to deal with 
several unions. The unions, some union employees have a choice 
of whether or not to go into the flexible benefit plans and 
utilize the union health benefits or the county benefits. The 
plan itself is set up so that there is a flat credit amount 
that's given. Employees get additional credit, so they select 
lower level medical plans, and then they choose, with their 
credits, to purchase medical, dental actually is provided as a 
benefit plan that they don't need credits to purchase.
    But vision, life insurance, above one times pay, and then 
outside the plan, and flexible spending accounts they have, and 
then outside the plan they have a group legal plan that's part 
of the total package.
    Mr. Weldon. So it covers all employees, union and non-
union?
    Ms. Schneider. I'm not sure if all union employees are a 
part of it. I know that there are some union employees who have 
a choice of whether or not they want to be part of the plan.
    Mr. Weldon. Was there opposition from the unions when the 
plan was initially set up?
    Ms. Schneider. It has been part of the labor negotiations 
on a continuing basis. And the parties worked together to come 
up with a plan that's suitable for all parties. It's been in 
existence for quite a while, though.
    Mr. Weldon. OK. Mr. Thomas, you argue that when employees 
reduce their taxable salary by using flexible spending accounts 
they will also reduce the amount of their pensions, life 
insurance and disability insurance, which are all based on the 
employee's salary.
    Since this was contrary, and this may have been in your 
written statement that I originally reviewed and not in your 
verbal statement, since this was contrary to my understanding, 
I asked OPM, which advised me that it was not the case, 
according to OPM, like premium conversion, FSAs will not reduce 
the gross salary on which these benefits are based. I have a 
letter from OPM stating that. And I ask unanimous consent, 
without objection, to introduce that into the record.
    I was wondering if you wanted to clarify your position on 
that issue.
    Mr. Thomas. Social Security benefits would go down. As you 
know, a number of Federal employees are now covered by the 
Social Security benefit program. Those benefits would be 
affected by the reduction in their income, as opposed to those 
Federal employees who are covered under the Civil Service 
Retirement Plan, which I believe is what OPM is referring to.
    Mr. Weldon. But the statement that you had made in your 
written statement that contributions into pensions would go 
down, that is not my understanding of it, correct? That is not 
true?
    Mr. Thomas. Yes.
    Mr. Weldon. OK. I don't have any other questions. And the 
ranking member has not returned yet from the voting, so I want 
to thank all the witnesses here in this first panel. I again 
want to apologize for keeping you all waiting. Your testimony 
has been very, very informative.
    The Chair notes that some Members may have additional 
questions they may wish to submit in writing. So without 
objection, the hearing record will remain open for 2 weeks for 
Members to submit written questions to these witnesses and 
place their responses in the record.
    The first panel is now excused. Again, thank you very much. 
The committee appreciates your time.
    On our second panel, we have the Honorable Dennis Jacobs. 
Judge Jacobs sits on the U.S. Court of Appeals, Second Circuit, 
in New York City.
    Judge Jacobs, as before, you are required to take the oath.
    [Witness sworn.]
    Mr. Weldon. Thank you. You may have a seat. Will the court 
reporter please note the witness has answered in the 
affirmative.
    Judge Jacobs, you're the only witness in this panel and I 
seem to be the only one here, so I will be somewhat flexible on 
the 5-minute rule as it's right now only my time and your time 
that we're dealing with. But if you could, please summarize 
your written statement to the best of your ability. You are 
recognized now for an opening statement.

   STATEMENT OF DENNIS JACOBS, CIRCUIT JUDGE, U.S. COURT OF 
                 APPEALS FOR THE SECOND CIRCUIT

    Judge Jacobs. Thank you very much, Mr. Chairman.
    I'm Dennis Jacobs, Circuit Judge of the Court of Appeals 
for the Second Circuit. I sit in New York. I appear today on 
behalf of the Judicial Conference of the United States, which 
is the policymaking body of the Federal Judiciary. I have this 
distinction because I chair the Conference Committee on 
Judicial Resources, which has jurisdiction over personnel 
matters.
    It's a privilege to speak to the interests of 32,000 
people, and I am acutely aware from what I've learned at the 
earlier panel that the matters that this subcommittee are 
considering will affect an enormous number of people in ways 
that are far-reaching, and that could reach forward into a 
generation and affect people's lives in very real and important 
ways.
    I have been anxious and pleased to receive your invitation 
to testify, because we have implemented a cafeteria benefits 
plan. We've had excellent experience with it. And I thought 
that I would tell you briefly why we did it and what our 
experience has been with what it is we have done.
    We implemented the plan in response to a need. In the 
1990's, in the early to middle 1990's, there was something of a 
crisis because health care premiums were going up and benefits 
were going down. There was a tremendous anxiety existing among 
employees in the Federal Judiciary.
    And in response to that, the director of the Administrative 
Office, L. Ralph Mecham, initiated recommendations that were 
adopted by the Judicial Conference to seek out the advice of 
one of the Nation's foremost advisors on benefits, the Towers 
Perrin Group. They issued a report in March 1998. I remember 
the report very well because I was, at the time, one of the 
newest members of the Committee on Judicial Resources. It was 
enough to stir genuine anxiety.
    The Federal Judiciary, like I believe other branches of 
Government, was at a point where we could expect large numbers 
of baby boomers to be retiring, and we would have to replace 
them. And we wanted to replace them with people of comparable 
talent, skill and dedication. We knew that we had identifiable 
competitors for those services, not just in the private sector 
but also within State government and State courts.
    The Towers Perrin report indicated that we were quite 
deficient and perhaps even flatly uncompetitive with the 
agencies and institutions that would be hiring the people that 
we needed.
    We have spent the intervening years filling the gaps that 
the Towers Perrin study has identified. It occurred to me 
coming down here that it might be useful to file for the 
reference of the committee the executive summary of that, which 
I have read and which has been a very useful document, to 
outline the nature of those deficits and the recommendations.
    Mr. Weldon. Without objection, we will take a copy of that 
and submit it into the record.
    [The information referred to follows:]

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    Judge Jacobs. Thank you very much.
    Partially in response to the Towers Perrin program, in 
March 1998 the director of the administrative office was given 
authority to establish a program of supplemental benefits. We 
have done that. I think with your indulgence, I'll just review 
the five programs that we have established very briefly.
    One is a health care reimbursement account. The employee 
decides before the end of the calendar year how much money to 
set aside on a pre-tax basis to pay certain medical expenses. 
These sums are used for co-payments, deductibles, vision, 
dental care, everything that's not covered, virtually 
everything that is not covered, by the Federal employee health 
benefits. About 7,500 employees enrolled in that in the year 
2002. It's a very high number, and it reflects the high level 
of interest that Towers Perrin had detected when they conducted 
their study.
    We also instituted a dependent care reimbursement account. 
It works, there are bells and whistles that differ, but 
basically it is also a program by which employees deposit money 
and uses that money to pay for benefits that are not otherwise 
available, such as child care, care for sick dependents, 
elderly people, and so forth.
    About 9,000 employees of the Federal Judiciary are 
participating in these reimbursement accounts. That's about 27 
percent of those who are eligible. This is a very high 
percentage. We are advised by experts in the area that the 
usual for the area would be 10 or 15 percent out in the 
national work force. It reflects a very high interest in it and 
also reflects, I think, an intense educational effort to 
publish the details and the information about these programs to 
warn people of some pitfalls that lie in them, that is, for 
example, a use-it-or-lose-it feature that was referred to by 
one of the speakers on the earlier panel, and to make people 
sufficiently comfortable with it.
    Our experience is that complicated as it is, it's extremely 
valuable. And every year, appreciable additional percentages of 
people participate. The data of that is in my report, and I'm 
not going to tarry over the actual numbers. But the success of 
that program has been in part a result of a very determined 
educational effort.
    The program is a great benefit to everyone concerned. One 
of the subjects that people most cite as a benefit, an 
advantage that they have from the health care account, is being 
able to pay for orthodontia. For young children, it is an 
astonishingly expensive item. It is not at all uncommon for 
people to pay for it on an installment basis, because it is 
such a huge expenditure. These funds are available. The health 
care reimbursement account has now reached a $10,000 limit, a 
very large and very substantial benefit.
    To go on to the next program, which is the premium payment 
program, it essentially reduces by about 38 percent the cost of 
the Federal employee health benefit, because it allows a 
deduction from the pay check every month which is placed 
directly in an account that pays the premium. I should add that 
does not affect annuities or other arrangements. It does, as 
you have pointed out, Mr. Chair, it does affect Social Security 
payments, but in a completely insignificant way.
    Next to last, the Federal Judiciary long term care program 
allows people to pay premiums to buy 5 years of coverage for 
long term care, not only for themselves, the employee can buy 
such coverage regardless of pre-existing conditions, without a 
medical examination, but also allows purchase of a long-term 
care program for relatives, parents, grandparents and others. 
The nature of the custodial arrangements that are insured are 
legion. It can be a nursing home, it can also be home care, it 
can be community care and so on.
    Finally, we instituted a commuter benefit program, which 
allows employees to set aside pre-tax dollars to pay for mass 
transit and parking expenses.
    Programs like these are common, as the subcommittee has 
learned from the prior panel, common in State government and 
the private sector. We implemented these measures within the 
existing statutory framework, but to do more, we require 
legislation. And we would propose to add these benefits on a 
cost sharing basis. We would like to establish a full 
cafeteria-style program, funded in part by a modest 
contribution from the Judiciary as employer. We are thinking in 
terms of $500, at least as an example, but we would have to do 
a good deal of actuarial work in order to come up with the 
exact amount that would be useful.
    The programs that we envision could be offered would be 
dental insurance, foremost, because a very large proportion of 
the expenses accrued under the health care reimbursement 
account is for dental care. This clearly is a felt need. Vision 
insurance, leave conversion, expanded commuter subsidies, also 
very important, short-term and long-term care disability.
    Mr. Weldon. I've let you go on for 10 minutes now. Could 
you try to wrap it up?
    Judge Jacobs. The astonishing thing I have learned on my 
years on the committee has been that it's really very difficult 
to figure out what other people need in the way of benefits. 
This cafeteria system is a way of assuring that people can make 
their own choices based on their own needs, based on their own 
family circumstances. And if I were to go on, I would basically 
be repeating much of what you said, Mr. Chairman, when this 
meeting started. That's a good note, I think, to end on.
    [The prepared statement of Judge Jacobs follows:]

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    Mr. Weldon. Great. Thank you very much. I appreciate your 
testimony. It's been very, very informative.
    I take it, based on your testimony, that you have 
experienced an improved ability to retain and attract employees 
as a consequence of offering this? Has it been an overall 
useful recruiting and retention tool?
    Judge Jacobs. We think it has been. Although as members in 
the earlier panel indicated, it is not so easy to quantify 
this. Recruiting and hiring in the Federal Judiciary takes 
place in about 110 courts, spread all over the country. To know 
whether people are having trouble or not having trouble, we 
would have to, as it were, survey 100 chief judges.
    But if there are problems, we hear about it. We think that 
the primary benefit of this is in retention. We compete with 
State courts for many of the same people doing many of the same 
things. It is a very hard thing for us to lose people that we 
have trained at great cost and expense to State courts that do 
offer these cafeteria programs. So we are quite confident that 
we are seeing an improved measure of retention.
    Mr. Weldon. Mr. Thomas in his testimony earlier in the 
first panel made a statement that one of his concerns was that 
some employees would have difficulty understanding or 
negotiating these plans with all the choices in them. Have you 
had any experience in that arena, where employees have had 
problems with it?
    Judge Jacobs. We have had no problems. I believe, however, 
that Mr. Thomas is identifying a real concern. I think the 
concern can be dealt with with very carefully drawn brochures. 
And most of all, we in the Federal Judiciary use an interactive 
link, so that someone who has a question about their benefits 
can contact the benefits officer in their court. The benefits 
officer in their court can ask a very specific question and it 
will be answered in Washington the same day.
    So we think it's very important, I agree that many of these 
arrangements are complicated. And they involve, and they 
require, a certain level of explanation by the Government. I 
think it's a responsibility, when you're offering these things, 
to explain them. But we have developed brochures for it, and we 
have had no trouble, because we have made a substantial effort.
    Mr. Weldon. Would you be willing to work with the committee 
in developing legislation to authorize the Judiciary to offer a 
full-fledged cafeteria plan?
    Judge Jacobs. The Judiciary and the staff, the 
administrative office and I would dearly love the opportunity 
to do that.
    Mr. Weldon. Well, I thank you for your testimony and I 
again thank all the witnesses. And with no other Members here 
for questioning, the hearing is coming to a conclusion. The 
Chair notes that some Members, as stated before, may have 
additional questions, particularly for the second panel. We 
will keep the record open for 2 weeks to allow sufficient time 
for the submission of written questions and responses from our 
witnesses.
    I also ask unanimous consent to enter into the record the 
written statement submitted by the National Treasury Employees 
Union and the Senior Executive Association.
    [The information referred to follows:]

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    Mr. Weldon. With that, the meeting is now adjourned.
    [Whereupon, at 2:47 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [Additional information submitted for the hearing record 
follows:]

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