[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





         PROTECTING PENSIONS AND ENSURING THE SOLVENCY OF PBGC

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      FINANCE, AND ACCOUNTABILITY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 2, 2005

                               __________

                           Serial No. 109-17

                               __________

       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

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (Independent)
------ ------

                    Melissa Wojciak, Staff Director
                   David Marin, Deputy Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

   Subcommittee on Government Management, Finance, and Accountability

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
VIRGINIA FOXX, North Carolina        EDOLPHUS TOWNS, New York
TOM DAVIS, Virginia                  MAJOR R. OWENS, New York
GIL GUTKNECHT, Minnesota             PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
JOHN J. DUNCAN, Jr., Tennessee

                               Ex Officio
                      HENRY A. WAXMAN, California

                     Mike Hettinger, Staff Director
               Tabetha Mueller, Professional Staff Member
                         Nathaniel Berry, Clerk
            Adam Bordes, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 2, 2005....................................     1
Statement of:
    Elliott, Doug, president, Center on Federal Financial 
      Institutions...............................................    84
    Walker, David M., Comptroller General, U.S. Government 
      Accountability Office; and Brad Belt, Executive Dirctor, 
      Pension Benefit Guaranty Corp..............................     3
        Belt, Brad...............................................    26
        Walker, David M..........................................     3
Letters, statements, etc., submitted for the record by:
    Belt, Brad, Executive Dirctor, Pension Benefit Guaranty 
      Corp., prepared statement of...............................    28
    Elliott, Doug, president, Center on Federal Financial 
      Institutions, prepared statement of........................    86
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, various prepared statements.....    39
    Walker, David M., Comptroller General, U.S. Government 
      Accountability Office, prepared statement of...............     6

 
         PROTECTING PENSIONS AND ENSURING THE SOLVENCY OF PBGC

                              ----------                              


                        WEDNESDAY, MARCH 2, 2005

                  House of Representatives,
Subcommittee on Government Management, Finance, and 
                                    Accountability,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd R. Platts, 
(chairman of the subcommittee) presiding.
    Present: Representatives: Platts, Towns and Duncan.
    Staff present: Mike Hettinger, staff director; Dan Daly, 
counsel; Tabetha Mueller, professional staff member; Jessica 
Friedman, legislative assistant; Nathaniel Berry, clerk; Adam 
Bordes, minority professional staff member; and Cecelia Morton, 
minority office manager.
    Mr. Platts. The Subcommittee on Government Management, 
Finance and Accountability will come to order.
    We are awaiting the arrival our ranking member. Mr. Towns 
will be here shortly as well as Mr. Belt, who is in the 
building or working his way into the building.
    We are going to go ahead and get started because we expect 
the first vote on the floor to be at 2:45 or 3 p.m. Our hope is 
to get in at least an hour or more before any votes happen.
    The solvency of the Pension Benefit Guaranty Corp. has 
become an issue of great concern. Over the past decade, the 
financial picture at the PBGC has shifted dramatically from 
surpluses of nearly $10 million in 2000 to a reported $24 
billion deficit in 2004. Structural changes in the U.S. economy 
have put a disproportionate strain on firms that traditionally 
offer employees defined benefit plans, the type guaranteed by 
the PBGC.
    As we look at the future for the affected sectors of the 
economy, specifically the manufacturing and the airline 
industries, Congress needs to take a hard look at pension 
reform. Without action, we risk not only jeopardizing the 
financial security of 44 million American pensioners with the 
possibility of a costly taxpayer bailout to fulfill the 
promises made to those workers.
    With an estimated $400 billion in unfunded pensions, the 
need to act is urgent. It may not be a crisis today but if we 
do not act, it will become one.
    President Bush, in his fiscal year 2006 budget, has 
proposed a variety of reforms aimed at meeting these 
challenges. My colleague and chairman on the Committee on 
Education and the Workforce, Chairman John Boehner, has taken 
the lead in vetting these proposals. As Congress discusses 
these reforms, there is a need to understand the structure of 
the PBGC, how it is managed and how it will implement new 
statutory tools.
    Many in the financial community have expressed concern that 
problems at the PBGC are not a function of the economic 
downturn and that there are structural issues that need to be 
addressed if any reforms are to work effectively. Specifically, 
there is a concern that the statutory framework of the PBGC 
precludes it from responding to financial events that affect 
solvency and while the PBGC is, in essence, an insurer, it 
lacks the mechanisms employed by traditional insurance 
companies to mitigate risk. A clearer understanding of these 
and other structural management issues will ensure that 
Congress considers reform proposals in the most effective 
manner possible.
    As a member of the Education and Workforce Committee, I 
look forward to working with Chairman Boehner and I hope to 
offer unique insights gleaned from this hearing today.
    We have a very distinguished panel here today, Comptroller 
General, David M. Walker, former Acting Executive Director of 
the PBGC, who certainly brings a wealth of experience to our 
hearing. We will be joined by Mr. Brad Belt, the current 
executive director of the PBGC. Our second panel will consist 
of Mr. Doug Elliott, president, Center on Federal Financial 
Institutions.
    We appreciate each of our witnesses being here today and 
the testimony they have provided to us in writing as well.
    I will now yield to our ranking member, the gentleman from 
New York, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman, for holding 
this hearing today on the current state and future challenges 
of the Pension Benefit Guaranty Corp.
    I welcome our panel of witnesses and look forward to a 
candid exchange of ideas on how we can better address the 
challenges of both the PBGC and our Nation's retirees.
    In 1974, Congress identified the long-term need to 
establish a Government-run program that would step in and 
manage and administer privately run, defined benefit pension 
plans for companies experiencing overbearing financial 
hardships. The principle was simple, by establishing a Federal 
program that would serve as a backstop for companies who 
sponsored pension plans, the private sector would continue to 
provide adequate retirement benefits for employees who have 
demonstrated loyalty and continued service to their firms. The 
financing mechanism for the program would be equitable and 
would ensure that both the Government and employers had a stake 
in the preservation of strong, defined benefit retirement 
systems.
    As more beneficiaries become eligible for benefits and 
fewer workers participate in defined benefit plans, there is 
general consensus among analysts at PBGC that assets and cash-
flow will provide insufficient improvements over the next two 
decades. Therefore, it is only appropriate for us to begin a 
serious debate about the future goals and objectives of the 
PBGC while developing appropriate remedies that are fair and 
equitable among employers and employees alike.
    As we hear from our distinguished panel today, I hope we 
can be mindful of the broader themes that seem to be more 
pertinent over the long term as short term policy adjustments 
will fail to remedy the underlying deficiencies of the PBGC.
    For example, I know there is a school of thought that 
believes the core economic challenge facing the PBGC can be 
resolved through premium adjustment alone. While I agree that 
premiums are a part of the problem, it fails to address whether 
the Congress believes the PBGC can remain an adequate safety 
net to the private marketplace in the future.
    Specifically, we must carefully evaluate whether the PBGC 
is living up to its responsibilities as a pension fund 
regulator as plans continue to endure financial distress and 
damaging losses on their investments. Until these issues are 
resolved, the long term sustainability of the PBGC as a 
reliable safety net for the private sector and its workers 
cannot be ensured.
    Once again, Mr. Chairman, thank you for holding this 
hearing and I am eager to hear from our witnesses.
    Thank you.
    Mr. Platts. Thank you, Mr. Towns.
    We have been joined by Mr. Bradley Belt, current executive 
director, PBGC. Thanks for joining us here today.
    Mr. Belt. My apologies, Mr. Chairman, for my tardiness. The 
President is actually visiting the Hill today and we got held 
up by his motorcade. I hope you will forgive me.
    Mr. Platts. We always give him priority, that is for sure. 
We are glad to have you, and you are actually here just in 
time.
    We are going to begin with Mr. Belt and Mr. Walker and then 
we will proceed to our second panelist and then go to Q and A 
for all three of you after we have heard from everyone.
    If I can ask the two of you to stand and take the oath 
before you begin your testimony.
    [Witnesses sworn.]
    Mr. Platts. We will now begin with your oral testimony. I 
think we are going to limit it and try and stay around 5 
minutes as best you can and we will get into Q and A.

    STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 
  GOVERNMENT ACCOUNTABILITY OFFICE; AND BRAD BELT, EXECUTIVE 
            DIRCTOR, PENSION BENEFIT GUARANTY CORP.

                  STATEMENT OF DAVID M. WALKER

    Mr. Walker. It is good to be back before you this time to 
discuss the challenges facing the Pension Benefit Guaranty 
Corp. and the defined benefit pension system. I would like the 
entire statement to be included in the record and I will move 
to summarize.
    Mr. Platts. Without objection.
    Mr. Walker. The PBGC issue as a subset of a broader 
challenge. One of the things you may be familiar with is that 
the GAO in the last 2 weeks has issued a document called 
``Twenty First Century Challenges, Reexamining the Base of the 
Federal Government.'' I think if you, Mr. Towns and your 
colleagues haven't had an opportunity to look at this document, 
I would strongly recommend that you do so.
    Basically, among other things, it says we are on an 
imprudent and unsustainable fiscal path and that tough choices 
are going to have to be made with regard to discretionary 
spending, mandatory spending, entitlement programs and tax 
policies. I also note that a vast majority of the Federal 
Government is based upon policies, programs, functions and 
activities that made sense when they were put into place but in 
many cases have not been subject to fundamental review, 
reexamination, reprioritization and in some cases, 
reengineering since they were put into place.
    The PBGC was put into place in 1974. A lot has changed in 
the world since 1974 and I think we have seen over the years, 
some things have worked and some things haven't work. So we 
need to fundamentally step back and reassess what makes sense 
for today and tomorrow.
    In that regard, I include on pages 2 and 3 of my statement 
that in light of past trends and future challenges, there are 
some very fundamental questions I think have to be asked and 
answered about the PBGC which I won't take the time to repeat 
right now. I think they illustrate the fact that the PBGC is a 
subset of our broader reexamination challenge.
    I think it is critically important that we recognize that 
while PBGC does not face an immediate crisis, it does have a 
large and growing financial problem and it would be prudent to 
address it sooner rather than later. I would respectfully 
suggest you cannot solve the problem merely through looking at 
additional revenues, premium or otherwise. There need to be 
reforms in the insurance program, changes in the funding 
standards, and enhanced transparency. In addition, you should 
consider providing PBGC with some additional authorities that 
insurance-type entities would normally have in order to balance 
the interests of the various parties.
    I think it is also important to keep in mind that this is 
not just about the Pension Benefit Guaranty Corp. because the 
PBGC does not insure all promised benefits. It is not only 
important to ensure the long range, financial integrity and 
viability of the Pension Benefit Guaranty Corp., but also to 
try to enhance the retirement security of millions of Americans 
who are working and those who are retired because frequently 
when plans terminate and are assumed by the PBGC, participants 
do not receive all their promised benefits. Therefore, it is 
not just the PBGC we should be concerned about.
    We almost have somewhat of the three bears theory here. Let 
me clarify what I mean by that. It is very important that 
actions be taken that are systemic in nature with regard to the 
PBGC. It is important they be effective enough in order to 
assure the long-term viability of the PBGC and the retirement 
security of workers and retirees.
    On the other hand, care needs to be taken not to go too far 
because if you go too far, it can result in providing 
incentives for people to leave the defined benefit system and 
they are already leaving it in large numbers at the present 
point in time. That is one of the factors contributing to the 
PBGC's challenge.
    There have been a number of reforms in the PBGC over the 
years, including during the time that I was Acting Executive 
Director of the PBGC as well as Assistant Secretary of Labor 
for Pensions and Health, to try to reduce the put option, the 
moral hazard, if you will, in trying to be able to offload 
obligations onto PBGC. Time has proven they are not adequate. 
While if markets return and interest rates rise, PBGC's current 
financial condition would be enhanced, I think it is pretty 
clear that reforms are necessary in order to put it on a sound 
and sustainable path in the future.
    In conclusion, while I have a tremendous amount of 
information included in my testimony including a number of 
ideas for consideration by this subcommittee and the Congress 
at large, I think we have to recognize that action is necessary 
and the sooner we act, the better because the sooner you act, 
as long as we balance these interests, the less traumatic the 
changes will have to be, and the more time there can be for the 
transition.
    In some ways, Mr. Chairman and Mr. Towns, I would 
respectfully suggest that the same thing goes for the Social 
Security system. It does not face immediate crisis, but it does 
have a large and growing financial problem. It would clearly be 
prudent to act sooner rather than later. There are frankly more 
than a few analogies between the challenges facing our Social 
Security system and the PBGC. I think it would be prudent for 
Congress to act on both sooner rather than later.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Walker follows:]

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    Mr. Platts. Thank you, Mr. Walker.
    Mr. Belt.

                     STATEMENT OF BRAD BELT

    Mr. Belt. Thank you.
    I want to commend you for holding this hearing on the 
issues facing the Federal Pension Insurance Program and on the 
structural changes that would better enable the Corporation to 
better achieve its mission, as you noted, Mr. Towns, for us to 
live up to our statutory responsibilities.
    I don't want to be too repetitive because I actually find 
myself very much in agreement with the Comptroller General in 
describing the issues facing the program.
    I would note that today's hearing is very timely. In 2004, 
the Single-Employer Pension Insurance Program posted its 
largest year-end shortfall ever, over $23 billion. That is a 
major reason why GAO has once again placed the program on its 
list of high-risk government programs in need of urgent 
attention. We would agree with that.
    This isn't just about the PBGC, it is about the retirement 
security of millions of American workers. The fact is the 
termination of underfunded pension plans can have harsh 
consequences for workers and retirees. When plans terminate, 
workers and retirees' expectations of a secure future may be 
shattered because by law, not all benefits promised under a 
plan are guaranteed.
    Other companies that sponsor defined benefit plans also pay 
the price through higher premiums when underfunded plans 
terminate. Not only will healthy companies end up subsidizing 
weak companies with underfunded plans, they may also face the 
prospect of having to compete against a rival firm that has 
shifted a significant portion of its paper costs onto the 
Government.
    In the worse case, PBGC's deficit could grow so large that 
the premium increase necessary to close the gap would cause 
responsible premium payers to exit the system which would only 
exacerbate the problem. If this were to occur, Congress would 
face pressure to have U.S. taxpayers pay the benefits of 
workers whose pension plans have failed.
    In addition to the $23 billion shortfall already reflected 
on our balance sheet, the insurance program remains exposed to 
record levels of underfunding ND defined benefit plans, more 
than $450 billion in total. Not all of this underfunding poses 
a risk to participants and premium payers, but the shortfall in 
plans sponsored by financially weaker employers has never been 
higher as well, almost $100 billion.
    Despite the structural problems inherent in the current 
system, the PBGC continues to do all it can to meet the 
challenges facing the pension insurance program, from strong 
financial management and robust internal controls to new system 
technologies and a sharper focus on risk management, the 
Corporation is prepared to meet its statutory responsibilities.
    The PBGC's financial reporting continues to present a clear 
picture of the fiscal health of the insurance programs. For 
fiscal year 2004, the PBGC's financial statements received 
their 12th consecutive, unqualified opinion from the 
Corporation's independent auditors, PriceWaterhouseCoopers. I 
certainly can't take the credit for that since I have only been 
executive director for the agency for the past year.
    Also, in recognition of the importance placed on sound 
financial reporting by the Sarbanes-Oxley Act, the PBGC was one 
of the first Federal Government entities to perform a 
comprehensive internal control assessment even though it was 
not required to do so.
    The PBGC has also initiated several changes to enable it to 
better manage the financial risks facing the pension insurance 
program. The first was adoption of a new investment policy that 
would reduce the Corporation's risks resulting from a mismatch 
between assets and liabilities.
    Another initiative will improve the PBGC's ability to 
gather, analyze and act on pension plan funding information and 
to respond to marketplace developments in a timely manner. As 
part of an overall reorganization, the Corporation is 
establishing a new Office of Risk Assessment to strengthen its 
capability to measure and manage risk to the pension insurance 
program.
    The PBGC is also taking aggressive steps to monitor the 
financial condition of pension plans and their sponsors to 
minimize losses where possible for the insurance program. When 
necessary, the PBGC is prepared to negotiate or litigate to 
protect the benefits of plan participants and the interests of 
the insurance program.
    Another top priority has been the establishment of on-line 
services that customers can access at their convenience through 
the Internet. In the past year, the Corporation unveiled new 
self-service accounts for participants and trusted plans and 
for administrators of insured plans and the pension 
practitioners who assist them. Participants and plan 
practitioners can conduct a range of transactions 
electronically at any time of day, year around.
    I would note the PBGC also underwent its first program 
assessment rating tool, referred as the PART by the Office of 
Management and Budget. While the PBGC was scored as effective 
in areas under the Corporation's control, OMB noted ``a risk 
that prevents it from following many insurance industry best 
practices regarding premium structure, risk management, funding 
rules and benefit determination,'' much as the Comptroller 
General noted.
    Mr. Chairman, even as the PBGC does everything it can to 
meet its operational and financial challenges, it is not 
enough. The current legislative framework does not ensure sound 
pension funding and a strong safety net. We believe it is 
critical to enact the administration's reform proposal to 
strengthen the funding rules, enhance the information workers 
get about their pension plan and fix the PBGC premium system. 
Without these changes, the risk of loss for workers, 
responsible companies and taxpayers will remain unacceptably 
high.
    We look forward to working with you and Congress to make 
necessary reforms this year.
    Thank you for inviting me to testify and I would be pleased 
to answer any questions.
    [The prepared statement of Mr. Belt follows:]

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    Mr. Platts. Thank you, Mr. Belt.
    We are going to have Mr. Elliott come up and offer his 
testimony.
    In addition to the testimony we are receiving today, we 
have agreed to enter into the record statements from the 
American Benefits Council, the American Society of Pension 
Professionals and Actuaries and the U.S. Chamber of Commerce. 
We appreciate these organizations providing their perspectives 
on this important issue. Without objection, I move these three 
statements be entered into the record of this hearing.
    [The information referred to follows:]

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    Mr. Platts. Mr. Elliott, we will now move to you. If I 
could first ask you to stand and take the oath.
    [Witness sworn.]
    Mr. Platts. We appreciate your being with us and the wealth 
of your real life, private sector experience in the field we 
are discussing today. We appreciate the written testimony as 
well.
    Would you like to begin with your opening statement?

    STATEMENT OF DOUG ELLIOTT, PRESIDENT, CENTER ON FEDERAL 
                     FINANCIAL INSTITUTIONS

    Mr. Elliott. Thank you for inviting me.
    I commend you for addressing this very important topic from 
the point of view of government efficiency and effectiveness, a 
point of view often neglected elsewhere.
    I am president of the Center on Federal Financial 
Institutions. We are a non-partisan, non-profit think tank that 
focuses on the Federal Government's immense lending and 
insurance activities. We do not advocate positions. Instead, we 
try to inform you so you can make your own decisions. All 
opinions expressed today, therefore, are my own and not those 
of COFFI.
    COFFI has published the only detailed public model of 
PBGC's finances outside of PBGC itself. Our base case showed 
that PBGC would need a $78 billion infusion in today's dollars 
in order to avoid running out of cash over the next 75 years 
assuming present law and policy. This would make it the second 
largest financial bailout in history after the savings and loan 
crisis.
    Without reforms or rescue, our model shows the cash running 
out in 2021. This is consistent with PBGC's 30-year history 
which shows a cumulative loss of $23 billion, demonstrating 
that its premiums are insufficient for the risks it has been 
required to take on.
    What should Congress do? I recommend that Congress examine 
six areas. First, Congress should stop making infrequent, ad 
hoc decisions about PBGC. Instead, it should make some major 
strategic choices that are still unresolved 30 years after 
passage of ERISA. Most importantly, should PBGC premiums fully 
cover its costs? ERISA requires that premium levels be adequate 
to cover full costs and explicitly does not give PBGC access to 
taxpayer funding except for a nominal borrowing amount.
    However, Congress sets premium levels and has consistently 
chosen to set them at levels that have proven to be inadequate. 
Congress could improve the situation by either affirming its 
intention that premiums fully cover costs and creating a 
mechanism to ensure this happens or determining an upper limit 
to premiums with the recognition that taxpayers would subsidize 
any shortfall.
    My written testimony spells out a number of other important 
issues involving premiums. My key point is they should be 
decided based on sound, underlying principles, not as the 
result of ad hoc compromise. Similar issues arise in the area 
of funding rules and restrictions on benefit increases for 
severely underfunded plans.
    Congress currently sets hard and fast rules that cannot be 
altered by PBGC to reflect changing conditions. These rules are 
also immensely complicated since they result from political 
compromises and not an agreement on overall principles.
    Second, Congress should ensure the most effective 
coordination of pension fund regulation. Pension funds and 
pension plans are overseen by the Department of Labor, the IRS, 
other parts of Treasury, PBGC and the SEC. Perhaps this 
division of responsibility works perfectly but it is worth 
seriously examining simplification.
    Third, Congress could optimize PBGC's ability to negotiate 
with troubled companies. Under present law, the Federal 
Government has little negotiating flexibility and that 
flexibility requires the coordination of multiple agencies.
    Fourth, Congress should provide clear, overall investment 
guidelines for PBGC and eliminate micromanagement. The big 
question is whether PBGC should try to minimize risk by holding 
mostly bonds or should invest primarily in stocks like the 
pension funds it insures.
    On the other hand, while leaving PBGC great flexibility on 
the big issue, Congress has made an artificial distinction 
between the investment of funds obtained through premiums, 
which must be invested in bonds, and those obtained from failed 
plans where PBGC has great freedom to choose its investments.
    Fifth, Congress should encourage PBGC to focus careful 
attention on developing an optimal strategic plan for the big 
growth spurt it is growing through. PBGC's job will be more 
than five times bigger by 2006 than it was in 2000. Perhaps 
PBGC's management, who I respect, has everything well under 
control but I have never seen a company that did not perform 
better with vigilant oversight.
    I am sometimes asked about PBGC's expense levels and I must 
confess that I have no idea whether there is a great deal of 
fat or management is performing brilliantly at expense control. 
The information to make this judgment is seriously lacking. 
This is particularly concerning since the Federal budget rules 
do not provide strong incentives to watch expenses closely as 
the large majority of expenses are allocated to the off-budget, 
quasi-trusts.
    This brings me to the final item. Congress should align 
Federal budget rules relating to PBGC with economic reality. 
According to Federal budget rules, PBGC has contributed $12 
billion to deficit reduction over its life, even though 
generally accepted accounting principles, which better reflect 
economic realities, shows a cumulative loss of $23.3 billion. 
Bad accounting creates bad incentives. For example, Congress 
might have been more vigilant to balance premium and risk 
levels if the budget had reflected PBGC's true economic losses.
    Thank you for the opportunity to testify. I look forward to 
your questions.
    [The prepared statement of Mr. Elliott follows:]

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    Mr. Platts. Thank you, Mr. Elliott.
    We are now going to ask Mr. Walker and Mr. Belt to join you 
at the table.
    Mr. Walker, I think we will start with what is the 
financial future as we can best identify right now with PBGC. 
Mr. Elliott talked in his written testimony in their model that 
perhaps in 2021 insolvency would occur. I was wondering if your 
office has done any modeling of that nature in naming a year in 
which the insolvency would happen if no changes would occur?
    Mr. Walker. I don't recall us doing an independent analysis 
of that or being asked to do that. I will tell you that 
different people might have different opinions of what the date 
might be, but I think the bottom line is it is only a matter of 
when, not a matter of if.
    I might note just to put things in context that in the case 
of HI, the Medicare Program, the trust fund on that is supposed 
to run dry in 2019 and in the case of Social Security, it is 
2042. Therefore, this is obviously closer to the former rather 
than the latter. Therefore I would say the sense of urgency for 
action in connection with PBGC and defined benefit system 
reform is somewhat greater, although I think we ought to act on 
all three.
    Mr. Platts. If we use 2018 with Social Security when we 
actually start using bonds, when we start generating less money 
than we are paying, all these dates are going to fall pretty 
tight if we don't act. I think your opening statement that we 
need to look to reform each one of these individually, but 
understand there is the picture of how they are all 
interconnected.
    The PBGC was put on GAO's high risk list back in 1990 and 
came off 5 years later. Can you give us some background on what 
got them on the list then and what they did to get off the 
list?
    Mr. Walker. In fairness, it wasn't the agency that has been 
put back on the high risk list, it is the Single Employer 
Insurance Program which is the subject of this hearing rather 
than the entire agency.
    Basically, as our statement and probably some of the others 
show, if you look at the history of the financial condition of 
the PBGC, it has varied over the years and there were a number 
of reforms enacted into law spanning several periods of time. 
For a brief period of time, PBGC actually had significant 
surpluses. I might note that our country had significant 
surpluses due to a number of very large terminations 
concentrated in a couple of industries, steel and airlines, 
those surpluses and the accumulated surplus changed very 
dramatically in a very short period of time to where at 
September 30, 2004, the PBGC has an accumulated deficit of over 
$23 billion.
    We saw the turn and our view was it was going to get worse 
absent some type of action, not just by the executive branch 
and the PBGC, but also by the Congress. That is why we put the 
PBGC Single Insurance Program back on the high risk list. It is 
also why we are here today.
    Mr. Platts. You touch on the surpluses over several years 
in the late 1990's and I guess a question for maybe all three 
of you is your analysis when we look at the trend and see some 
small deficits increasing through the early 1990's and see 
significant surpluses for about 5 years and then all off the 
charts in the last 3 years.
    What is your assessment of what started driving those 
surpluses or the appearance of surpluses and what came to be in 
2001, 2002 where we are today. Does this tell us something 
about the systematic problems of the way we have structured 
PBGC?
    Mr. Belt. If I might, I would direct your attention to an 
interesting study or report put out by Credit Suisse First 
Boston called ``The Magic of Pension Accounting.'' Part three. 
Their analysts have done a very extensive study of the pension 
insurance program and all the issues related to moral hazard. 
They note beginning in 1999, the period from 1999 to 2003, with 
respect to the S&P 500 which covers more than half of our 
overall liability, the total assets over that 4-year period 
rose by $10 billion, less than a 1 percent compound annual 
growth rate per year while liabilities during that same period 
of time grew by $430 billion, more than a 10 percent compound 
annual growth rate. That was a combination of factors, not the 
least of which was falling asset values in the pension plans, 
also falling interest rates which increased the value of the 
liabilities and also companies were not putting much cash in 
the pension plans during that period of time. They had taken 
advantage of something called credit balances that exist in the 
system right now to be able to take contribution holidays.
    I believe this is in charts in my written testimony. What 
we have seen in companies that we have taken over--like 
Bethlehem Steel, USAirways and United Airlines as well, for 
several years prior to termination, the companies were putting 
no money into the pension plans, notwithstanding the fact that 
the gap was widening between the value of the assets and 
liabilities. In some cases, the liabilities continued to accrue 
normally as well and in some cases, they were actually 
negotiating new benefit increases.
    Mr. Walker. Again, macro and micro, macro with regard to 
the overall defined benefit pension system. As you know, for 
much of the 1990's, the markets went up pretty healthily. In 
the last several years, we have seen that interest rates have 
gone down. As a result for a period of time in the 1990's, the 
overall funding for defined benefit plans was very positive but 
as the markets corrected and as interest rates declined it 
meant the asset values came down and the amount of money it 
took to buy out the liabilities went up significantly because 
interest rates went down. When interest rates go down it costs 
more money to be able to buy out the liability.
    You had the combined effect of reducing asset values, 
increasing liabilities, that causes the bottom line to 
hemorrhage.
    As Brad properly mentioned, there are flaws in the current 
minimum funding standards whereas you had situations where 
companies didn't have to make contributions under the current 
law because they had these credits. At the same point in time, 
the bottom line of their pension plan is hemorrhaging.
    The last thing I would mention is PBGC has received a 
disproportionate amount of its losses from certain industries 
that are subject to quite a bit of competition and in many 
cases, have gone through extensive deregulation, in particular, 
the airline industry and the steel industry. So I think some of 
the losses have been the result of things going on with regard 
to certain industries.
    Mr. Platts. Mr. Elliott.
    Mr. Elliott. If I might add one thing because I think you 
have raised a very important question. We need to understand 
whether we are in an odd period or whether this is the 
accumulated result of a lot of problems. One thing people often 
don't realize who are unfamiliar with the insurance industry, 
PBGC is a credit insurer. Credit insurers tend to have the same 
characteristics as say hurricane insurance. Most years you need 
to make money because every so often, you are going to lose a 
lot of money.
    It is not actually that reassuring that there were a few 
years when PBGC made some money, we needed to be making money 
most years to be ready for the really bad ones that come in the 
credit cycle.
    Mr. Platts. That goes to the graph that tells us that the 
systematic or structural problems with the way we set up the 
system is because we weren't making money but for a few limited 
years more driven by the market valuations, that we clearly 
have a structural problem because we are not putting money away 
for these bad years that are going to come.
    Mr. Elliott. Absolutely. The only extended good period for 
PBGC financially was the fool's paradise at the end of the 
bubble when we all thought we were making money.
    Mr. Belt. I think the more interesting chart if you look 
forward is the dramatic increase in our reasonably possibles, 
that is, the amount of underfunding in pension plans sponsored 
by companies now higher credit risks, that is they are not 
investment-grade risk companies. That is the real concern. We 
have seen a ramp up from about $10 billion in underfunding by 
junk bond-rated companies 2 or 3 years ago to now almost $100 
billion. There is still a lot of risk resident in the system.
    While I agree with David that the bulk of the losses thus 
far have come from two industry sectors, airline and steel, the 
majority of our exposure looking forward is actually in other 
industry sectors.
    Mr. Platts. Kind of setting the stage as far as the type of 
problem we are facing, I wasn't here in Congress when we had 
the savings and loan debacle. Is this issue something that 
without needed reforms, we will have a similar challenge before 
the American taxpayer?
    Mr. Belt. I actually have the dubious pleasure, I guess, of 
having been counsel to the Senate Banking Committee during that 
period of time. I was involved in drafting FIRREA and FDICIA in 
dealing with establishing the Resolution Trust Corp.
    As I noted previously, there are some very real differences 
between that situation and some unfortunate similarities. I 
think the two principal similarities are that there is a 
tremendous lack of transparency in the system. Back then, it 
was something called regulatory accounting principles that were 
used to really hide the problems resident in a lot of the risk 
at that point, and we have the same lack of transparency 
problems under both the financial accounting standards as well 
as ERISA today.
    The other problem most relevant to the S&L situation is the 
tremendous degree of moral hazard that exists in the system. 
That is what we need to address, all the perverse incentives to 
actually shift costs onto the Federal Government.
    I do want to note there are a couple of important 
differences and I think both Doug and David noted this. We are 
not facing a liquidity crisis at this point in time. There was 
a liquidity crisis in the S&L situation where you were dealing 
with demand deposits.
    The other difference is that this is more a function of a 
flaw in the rules themselves. At that point in time, there was 
a lot of malfeasance on the part of Charlie Keatings and others 
that I don't think you see here. It may be you can question 
whether people had prudently matched their pension plans, but 
it appears in most cases, they fully complied with applicable 
requirements, which is part of the problem.
    Mr. Platts. The system allows that underfunding to occur as 
opposed to them circumventing the rules?
    Mr. Belt. United Airlines filed an informational brief in a 
court. We have been dealing with them in bankruptcy right now 
where they potentially present a claim of $6 billion. They take 
some pride in noting they complied with all ERISA's rules and 
regulations. Notwithstanding that fact, they are $8 billion 
underfunded.
    Mr. Walker. It was prior to my tenure but I know my 
predecessor, Chuck Bowsher, spent quite a bit of time 
testifying before Congress before and after the meltdown of the 
savings and loan industry.
    I think it is important we learn from the lessons of the 
past and that we hopefully act before we have to act when the 
facts are clear and compelling. In that regard, it is clear 
that this is not a temporary problem, there are systemic 
problems that need to be addressed.
    I might also note, technically the PBGC is not backed by 
the full faith and credit of the U.S. Government. The PBGC has 
the authority to borrow up to $100 million and that is it. From 
a practical standpoint, yourself as an elected member, can 
imagine what type of public pressure there would be placed on 
the Congress to act if for some reason, the PBGC was not able 
to discharge its responsibilities.
    Therefore, I think from a practical standpoint we shouldn't 
take a lot of comfort in the fact that technically the 
government doesn't have to step in but practically, there would 
be a lot of pressure to do so. That is why it is important to 
engage in the systematic reforms.
    Mr. Platts. I would agree with your assessment that maybe 
legally it is not backed by the full faith and credit but 
morally, it will be and more important while we do move forward 
with these reforms.
    The analogy with the savings and loan and the fact that it 
was too late, whereas we have the chance to bring these issues 
forward. Hopefully we do get our hands around this issue and 
move forward in a positive way.
    You mentioned, Mr. Belt, transparency and similarities and 
the lack of transparency. My understanding is the Form 5500 is 
one of your main sources of information and your analyzing, and 
that is in essence almost 2 year old data. It kind of goes to 
the point of lack of transparency if you are making decisions 
today in the very fast changing marketplace for industries out 
there, the ability to rely on what you have before I assume 
that is one of the areas that we have structural changes and 
your thoughts on that as well, Mr. Elliott.
    Mr. Belt. You make an excellent point, Mr. Chairman. 
Participants can't make informed decisions about their own 
retirement security, shareholders can't make informed 
investment decisions, and regulators can't make informed policy 
decisions when we are dealing with stale information that 
actually hides the true financial status of pension plans, 
particularly in dynamic market environments of today.
    It is in fact the case, the principal source of information 
for all pension plans is the Form 5500 which is a required to 
be filed by all 30,000 D-B plans, when we get that information 
in our hands, it is usually over 2 years old. We do have an 
additional source of information, more timely information, 
information filed under Section 4010 which is information 
required to be filed by companies more than $50 million 
underfunded for pension plans. We do get that on an annual 
basis, and we will have those reports coming in April 15, a 
little over a month from now, and they will actually speak to 
December 31, 2004. That is more timely information.
    We actually have that. Unfortunately, in the law right now, 
ERISA Section 4010 says we have to keep that information 
confidential. We know the more timely financial status 
information. We believe that information should be available to 
the marketplace. It is not just an issue of lack of 
transparency in ERISA with respect to sources of information, 
it is the fact the information provided bearns no relation to 
economic reality in many cases. You have actuarial valuation of 
assets, you have smoothed interest rate, a whole host of 
mechanisms that are really designed to obfuscate current 
economic reality.
    It is a problem not only in ERISA but also in accounting 
standards.
    Mr. Platts. Are there specific proposals that BPGC has put 
forth regarding changing those forms to not allow there to be 
an intentional blurring of the reality?
    Mr. Belt. That is part and parcel of the administration's 
reform proposal.
    Mr. Walker. I want to note that GAO currently is doing work 
on the Form 5500 filing requirement. We anticipate issuing a 
report this summer and expect there will probably be some 
recommendations coming as part of that report.
    The other thing is my understanding is the administration 
is recommending the funding information be expedited, not the 
entire Form 5500 but that the funding information be expedited 
and reported quicker.
    I think one of the concepts that we need to keep in mind is 
when we have a situation that represents a bona fide risk based 
upon a reasonable person, to both the PBGC and the plan 
participants and beneficiaries, information has to be provided 
quicker and there needs to be an enhanced degree of 
transparency as compared to what we have right now because 
history has shown that with a risk-based, targeted degree of 
transparency, it does have a positive behavioral effect. The 
market forces can then come together, whereby retirees, unions, 
and workers can say why aren't you funding my pension plan. I 
think it is prudent to try to help those market forces come to 
bear to minimize the necessity for government intervention.
    I do believe the PBGC is going to need more authority to 
intervene quicker than it has the ability to intervene right 
now in addition to what it can do right now because it doesn't 
have a lot of flexibility at the present time. It holds the 
nuclear option. It can go in and terminate the plan and cause 
it to impose losses on the PBGC and plan participants and 
beneficiaries. It doesn't have enough intermediate options 
which I think it needs to explore more.
    Mr. Platts. Mr. Belt, in the forms that are required, what 
is the ability for you to go out to companies and ask them to 
provide additional information and how successful are you 
likely to be based on the track record where you say you would 
like a little more information to get a clearer picture. They 
say we gave you what you required and that is all we are giving 
you.
    Mr. Belt. We routinely request additional information in 
appropriate circumstances and we have civil subpoena authority 
to request information to conduct investigations. There 
certainly has been some resistance to that in the past given 
the fact that companies take this notion that with respect to 
pensions, leave us alone, you don't really have much business 
meddling in our business. By and large, I would agree with 
that. I don't want to be doing that.
    When they are taking actions, that pose material risk of 
loss to the pension insurance program or they are otherwise 
abusing the pension insurance program in a way that may harm 
the interest of participants, premium payers or the taxpayers, 
then it is incumbent upon us to use the tools at our disposal 
to try to address those situations.
    As David noted, the tool set is fairly limited under 
current law. We call it the atom bomb with a nuclear option. 
That is really a last resort because termination of the plan 
has all the harsh consequences I talked about. In some cases, 
termination may be necessary to avoid future or further losses 
down the road but we would rather get to a position where we 
can say, let us talk about some of these intermediate sanctions 
or remedies and not have to push that button.
    Mr. Platts. As we look at structural changes, to me a 
fairly simple reform of the transparency that gets to the moral 
pressure that is brought or the marketplace pressure to have 
internally companies do better by their pensioners is a fairly 
simple step that doesn't have the risk of negatively impacting 
the economic viability of the company. At least it is a 
starting point as we get into these structural changes.
    Mr. Elliott.
    Mr. Elliott. I would just like to reinforce some of what 
has already been said which is I think there is a misconception 
that the PBGC is an insurance company and a misconception it is 
a regulator. There is a little bit of truth to each, but the 
fact is, as an insurance company, it can't set premiums, it 
can't decide who it is going to take, it can't tell companies 
they are acting in a way that makes them lose their insurance. 
It has almost none of the attributes of an insurance company.
    Mr. Platts. Or as a regulator?
    Mr. Elliott. Yes, and as a regulator, it isn't.
    Mr. Platts. I would like to recognize the gentleman from 
Tennessee, Mr. Duncan, for a statement and then questions.
    Mr. Duncan. Thank you, Mr. Chairman.
    This is a very, very important topic and I am just so sorry 
that I had some other meetings and appointments and couldn't 
get here until now, so I will probably ask about things already 
covered. I want to apologize to the witnesses.
    Mr. Walker seems to come here every time on mind boggling 
topics. A few weeks ago you were here and the Defense 
Department had lost $9 billion in Iraq and then there was $35-
$45 billion that I think had been wrongly handled. I mentioned 
then that Charlie Cook, the very respected analyst, said people 
can comprehend $600 hammers or $900 toilet seats but they 
couldn't comprehend any figure over $1 billion. There is a lot 
of truth in that.
    It just kind of scares me. We have a $8.5 trillion national 
debt. Everyone's eyes glaze over when you talk about that 
because that is such an unbelievable figure you can't 
comprehend that. Then we have these $400-$500 billion deficits 
we continue to run. I sit here and think, how in the world are 
we going to pay all these Civil Service pensions, pay all the 
military pensions, pay all the Social Security pensions, 
Medicare, Medicaid and then you get to the PBGC.
    I mentioned in my last newsletter, very few people even 
know what the PBGC is but it says in this brief, there are 
30,000 plans and 34 million workers. I put in my last 
newsletter to 250,000 homes in my district, the New York Times 
had this story in January that said you have this $23.3 billion 
deficit. Is that going up, coming down or where do we stand?
    Mr. Belt. Three years ago, the single employer program had 
a $7.7 billion surplus. We have had a $31 billion swing to bad 
in our net position over the past 3 years and it certainly is 
our concern that the hole will get much deeper unless we enact 
appropriate reforms now. The first rule of holes Secretary Chao 
talked about when she unveiled the administration's reform 
proposal was, ``Stop digging.''
    Mr. Duncan. Let me ask this and I apologize because I know 
you have probably already covered this, but what do we have to 
do, what reforms are you recommending?
    Mr. Belt. We have a comprehensive set of reforms that are 
attached to the testimony or at least we reference them. They 
are in three areas. One is strengthening the funding rules; 
make sure the companies, in contrast to the current law, are 
appropriately funding their pension plans and if they are 
underfunded, we give them a reasonable period of time to get up 
to fully funded. Second, address some of the moral hazard in 
the system particularly through rationalized premium rules. 
Premiums have been insufficient thus far.
    Mr. Duncan. You have been $16-$19 a month and you want to 
go to $30 a month?
    Mr. Belt. It is actually per year, sir, $19 per plan 
participant per year is what they pay so this would be an 
additional $11 per plan participant per year for what may be $1 
million worth of pension coverage for an annuitant. A lot of 
people complained, the plan sponsors complained about paying 
higher premiums, and I understand none of us likes to pay 
higher premiums.
    Mr. Duncan. That is per year. I didn't realize that.
    Mr. Belt. The premiums haven't been raised since 1994, 
notwithstanding the fact that wages have gone up in the 
interim, the maximum guarantee under law has gone up on a wage 
index in that period of time as well. Losses have grown. A 
viable insurance system has to have premium levels sufficient 
to cover expected claims.
    Historically, we have had about $1 billion annual premium 
revenue at PBGC. That has gone up a little more recently but 
just in the last 3 years, I noted we had a $30 billion swing in 
our net position. Clearly that premium revenue is far 
insufficient to cover expected claims.
    Mr. Duncan. Is the number of plans and the number of 
single-employer workers covered going up or going down?
    Mr. Belt. Actually, a little of both. The number of plans 
has fallen fairly dramatically over the past 20 years from a 
peak of about 112,000 20 years ago to just under 30,000 today 
but most of that was smaller plans. The number of workers 
covered in the system between both the single employer and 
multiemployer program has actually grown a little bit. It is 
about 44 million workers and retirees who are covered by the 
PBGC.
    However, what we see is more than half of those now are 
retirees. Fewer than half are active workers. So there is a 
clear trend line away from the defined benefit plan as we have 
traditionally known it. A lot of companies have looked at 
alternative structures like cash balance plans that you are 
familiar with, but there has definitely been a trend line down.
    Mr. Duncan. Several years ago when I was waiting to change 
a plane in Atlanta, I read a front page article in the Atlanta 
Constitution, that said at that time, several thousand plans a 
year were getting out from under the PBGC because there was too 
much, they thought, red tape and regulations and bureaucracy 
involved. Has that been eased some or are you still getting 
complaints like that?
    Mr. Belt. Indeed and they are very valid complaints. 
ERISA's history is characterized by layering on, tinkering at 
the margins. A little tweak here and there just makes the 
system more complex and needlessly so. We are doing two things. 
The administration's reform proposal is all about substantially 
simplifying the current complex morass of rules and 
regulations. Also, at the PBGC, we are looking at our rules and 
regulations, strengthening where necessary, streamlining where 
we can. An example of that is for the first time allowing 
electronic filing of the Form 4010 that I talked about before 
which heretofore had not been in a standardized format, comes 
in paper forms that look like this, we hand load that in excel 
spreadsheets, and everybody is handwriting these documents. We 
are setting up an electronic environment. We are allowing 
participants and other practitioners to engage with the PBGC 
on-line, which we hadn't done before. So we are doing what we 
can. There is no question that statutory changes are necessary.
    Mr. Duncan. Mr. Walker, what do you say about all this? You 
heard me say a few minutes ago that I don't see how in the 
world we are going to meet all these obligations with the Civil 
Service, military and all that. Do you see problems, the same 
problems I see? What do you think we need to do about this 
right now.
    Mr. Walker. First, there is a big picture and a small 
picture. On the big picture, I would recommend our 21st Century 
Challenges report. It was issued 2 weeks ago and has been sent 
to your office. Basically it says that we are on an 
unsustainable path from the financial and fiscal standpoint for 
the whole government and we are going to have to fundamentally 
restructure discretionary spending, mandatory spending, 
entitlement programs and tax policies.
    PBGC is a subset of that overall challenge. It is on a 
unsustainable path. We need to step back and fundamentally 
reassess what its proper role and function is. It needs 
systemic reforms, many along the lines of what Brad talked 
about. While I agree with you, Mr. Duncan, that it is difficult 
and it might be easier to deal with $600 toilet seats than it 
is $1 billion, I think we can keep in mind that $1 billion is 
about $1.7 million $600 toiletseats, so it is unacceptable 
under any circumstance.
    Mr. Duncan. Let me tell you what I think. You are really in 
a key position. I think this is such a serious problem that I 
think you almost need to be the Paul Revere of this day. You 
need to get out and rally, call peoples' attention to this 
report and these problems we are talking about and how 
unsustainable they are. I think right now most people don't 
realize how serious these problems are and how we are not going 
to be able to pay these.
    Everybody is counting on these military pensions and Civil 
Service pensions. I think people have to demand that the 
Federal Government become much more fiscally conservative if 
they want to draw a check that is going to mean anything. What 
we will start doing I guess is printing more money and that 
won't work for very long. You have a key position being the 
Comptroller General now and so forth.
    Mr. Walker. I can assure you that I am dedicated to doing 
my part and I think that is about the 10th time in the last 2 
weeks I heard somebody call me a Paul Revere. I take that as a 
positive. I am going to do my part but it is going to take a 
lot more people working together to get out the message.
    Mr. Duncan. It is going to take all of us. That is why I 
said I am pleased that Chairman Platts called this hearing 
today because we need to do more of this. I know Todd is doing 
as much as he can but I just shake my head about it. I know one 
of our fellow Republicans was quoted the other day as saying 
something about we didn't need to worry about it because we 
wouldn't be in office a few years from now when all this is 
going to hit but we have some big problems.
    Mr. Platts. When we talk about 2020 or 2042 or 2052, I say 
my son will be eligible to retire from Social Security in 2063 
and my daughter in 2066 which sounds like a long time off until 
you put it in the perspective of those are my children, so 
whether it is Social Security or PBGC, you are right, these are 
issues that we either need to be serious in our approach to 
solving them or else future generations will suffer 
tremendously.
    Mr. Duncan. I think it is going to hit us a lot sooner than 
2042.
    Mr. Walker. I think you both make a good point. Two quick 
comments. One, I think when you talk about numbers, billions, 
trillions, whatever, it is almost mindboggling so you are 
trying to convert it to terms that people can understand. I 
think there are two things people have to keep in mind. Whether 
it is the PBGC or whether the government as a whole, it is 
about values, fiscal responsibility, stewardship and prudence 
being three examples.
    The other thing is it is about people. It is about our 
kids, our grand kids and future generations. So it is about 
values and it is about people. It is just prudent to act sooner 
rather than later because time is working against us. The 
longer we wait, the tougher it is going to be, the more 
dramatic the changes will have to be, and the less transition 
time there will be.
    Mr. Duncan. Thank you.
    Mr. Platts. Tom Brokaw describes our seniors today as the 
greatest generation, saved the world in World War II and the 
importance of them being engaged in these debates, especially 
as it relates to Social Security which is setting the stage. If 
we can do this, then we can take on the real challenge, 
Medicare, which is more staggering and seniors can play such a 
critical role and show their great strength as they did in the 
1940's in defending the world by saving the financial security 
long term for our Nation and our citizens, to be engaged in a 
responsible and active way as opposed to here in Washington, it 
is just so politicized. It is Republicans versus Democrats, not 
good policy.
    It looks like we are going to have a first vote in about 
10-15 minutes. Mr. Walker, I know you need to leave by 3:30 
p.m., so let us get in a few more questions.
    Mr. Belt, as far as when we look at structural changes, 
some entities, specifically FDIC, if that provides a model we 
should be looking at for the type of structural changes we 
should give you and PBGC to address your challenges?
    Mr. Belt. I certainly think that is a useful analog to look 
at, a reasonably successful financial regulator and Federal 
insurer. Ultimately it depends upon the policy decisions made 
by Congress as to the appropriate role of the Pension Benefit 
Guaranty Corp. Both Dave and Doug alluded to this at the 
outset.
    Right now, PBGC has to be several things. We are charged 
with the statutory responsibility of looking out for plan 
participants in a given situation, United Airlines, Bethlehem 
Steel, what have you. We are also charged with the 
responsibility of looking out for the interest of the 44 
million plan participants that we insure. We are also charged 
with making sure we have resources to pay the benefits of the 1 
million people that we are now wards for. They have come in and 
are in trusteed plans. We will be cutting checks for them for 
the next 40 or 50 years.
    We are also specifically charged with keeping premiums as 
low as possible, protecting the interest of premium payers. As 
noted, we are explicitly not backed by the full faith and 
credit of the U.S. Government. We are supposed to be self 
financing. Those are often very difficult to reconcile. In 
fact, they are usually butting heads.
    Every time I have to make a business or policy decision at 
PBGC, I am inevitably goring somebody's ox. If we have to make 
the decision to terminate a pension plan because it is going to 
present a long-term loss or risk to the insurance program as a 
whole, that is going to hurt the interest of the participants 
in that particular plan because they stop accruing benefits, 
and they may have benefits cut back.
    I also can't just write checks willy-nilly and also protect 
the interest of premium payers and the taxpayer as well. We are 
this odd hybrid as Doug noted of being both a traditional 
insurer in some respects, and also a social insurer.
    Mr. Platts. I think Mr. Elliott's first point was Congress 
deciding which is it, social program, insurer, to clearly 
define you are one or the other so you can move forward and 
know what is expected and given the tools within the defined 
mission that you have whereas now we are wanting to be 
everything to everybody, especially when we talk about keeping 
premiums as low as possible, $9 per year for that $1 million in 
potential coverage, yet we know we are not funding it long term 
satisfactorily. You are just competing with yourself.
    Mr. Belt. On the premium, to put it in perspective in 
another case, United Airlines, as an example and they are just 
illustrative, I don't want to pick on United Airlines, but they 
pay about $2 million a year in premiums to the pension 
insurance program but they may present a claim of over $6 
billion to us. The increase in the flat rate premium from $19 
per capita per year to $30 a year, that additional $11 increase 
would be about another $1 million they would have to pay in. 
That would be $1 million additional versus a claim of $6 
billion and they are spending that much litigating in 
Bankruptcy Court mostly against us each and every month.
    Mr. Platts. The example gives a point for us to look at. 
What are your best options as you are watching a company and 
based on review of information that a company is in trouble and 
is going to come in. We talked about you going in and 
involuntarily terminating it. What can you do within the 
responsibilities you currently have?
    Mr. Belt. That is an excellent question. I would break it 
down to pre-bankruptcy and post-bankruptcy because once we are 
in the bankruptcy environment, Chapter 11, our hands are really 
tied by the Bankruptcy Code. Prior to that time, we monitor any 
number of risks to the pension insurance program, and while the 
vast majority of companies act very responsibly, every once in 
a while you come across transactions and maybe they are not 
intended this way or maybe they are, that pose a risk of loss. 
You may be spinning off an underfunded pension plan into a weak 
subsidiary or the other way around. You actually leave behind 
an underfunded pension plan where there is no ability to make 
good on those obligations. There may be a transaction to break 
up a controlled group and we have joint and several liability 
against members of a controlled group.
    In those cases, we would ideally like to be able to go in 
and say, wait a second, what is your plan of action and we need 
to have some protection. You can't abuse the pension insurance 
program that way, just shift the risk to the pension insurance 
program.
    Mr. Platts. What is your ability to say you can't do that? 
How do you say you can't do that?
    Mr. Belt. We say we have concerns and can we talk about 
those concerns and what we might do to address them. Ultimately 
our only real, clearly articulated tool in the statute is to 
say if you don't do anything, we will terminate the pension 
plan. That means we take the liability, the participants are 
hurt.
    Mr. Platts. The company itself may say.
    Mr. Belt. If they are in bankruptcy, they may actually say 
go ahead and take it. Prior to that point in time, it does have 
some adverse consequences for them because it matures the debt 
obligation, may cause problems for them in the credit markets 
and with their other creditors, so they are not necessarily 
going to want to go down that path. Nonetheless it is a high 
level game of brinksmanship and you can imagine with a large 
manufacturing company in a particular sector, going in to say I 
am going to push that button, the kind of pressure we would get 
from this body and across the Hill if it were employees in 
their districts and their States.
    Mr. Platts. Mr. Walker, you were involved in the first 
involuntary termination of a plan. Can you give an example of 
what decisions were made?
    Mr. Walker. I believe I made the decision to terminate the 
first plan involuntarily. I don't know how many have been done 
since then but it had never been done before. That was in the 
mid to late 1980's. It was clear to me that it was a 
circumstance in which it wasn't a matter of whether the plan 
was going to terminate, it was only a matter of when the plan 
was going to terminate and what the degree of underfunding 
would be. Basically, it also dealt with the steel industry and 
the steel industry as I said previously has gone through a lot 
of restructuring. It has a tremendous amount of global 
competition and there are certain features in the steel 
industry plans whereby if a plant shuts down, then very 
lucrative, early retirement benefits can end up popping up 
overnight. It was pretty clear to me that one or more plants 
were likely to shut down and if we waited to take action after 
that happened, then the fact was the liabilities were going to 
increase significantly. We weren't going to get more recovery 
because the company was worth whatever it was worth. So I made 
the decision to go ahead and involuntarily terminate.
    I negotiated with the labor union, I negotiated with 
management and others to try to achieve an equitable result but 
again, that is the nuclear option. You need to have 
intermediate sanctions that are credible and viable. Let me 
give you an analogy.
    The Internal Revenue Service has the authority to 
disqualify a pension plan due to abuse. They have very rarely 
done so because there are a lot of innocent parties that are 
harmed when you disqualify a pension plan. That is why it is 
important to have credible and meaningful, intermediate 
sanctions.
    I will say this, there is no question you are going to have 
to make some changes in the insurance program, make some 
changes in the funding rules and make some other changes in 
addition to giving the PBGC some additional authority. I think 
you have to deal with several structural changes. It is not a 
matter of whether they need additional revenues, yes, they do, 
but I think we have to debate how much of it should be through 
fixed premiums versus variable or risk related premiums. While 
obviously the weakest companies aren't going to be able to 
carry the full burden, you want to minimize the amount of 
increases you impose on those who ultimately may not ever 
represent a real risk or you may encourage them to leave the 
system. That is one of those balancing of interests you always 
try to achieve. It is difficult.
    Mr. Platts. Mr. Elliott.
    Mr. Elliott. If I could followup on comments about 
sanctions. I would agree it would be helpful for the PBGC to 
have additional sanctions less severe than the so called 
nuclear option but we should also give them carrots. They 
should have the ability to do things that plan sponsors would 
like and may need such as the ability to spread out their 
payments over a longer period of time, for example.
    One reason I say that is that would also give them the 
ability to bargain to some extent with how the pension plan is 
being run, if there is too much equity risk in a particular 
plan, for example. It is hard with a sanction to make them not 
do that but it is easier to say there is this other thing you 
are asking us for, we would give you permission to do it if you 
could show us you will do some things to help us.
    Mr. Platts. We have the incentives for them, kind of 
perverse incentives to shift the burden to the PBGC, give them 
incentives with a positive approach to not do that, and do 
right by their pensioners and ultimately the taxpayers or PBGC.
    Mr. Duncan.
    Mr. Duncan. First of all, I have a report from the GAO that 
says the PBGC covers 34 million workers and in your testimony, 
Mr. Belt, it says 44 million.
    Mr. Belt. There are two different programs, the single 
employer program which is 34 million and about another 10 
million in the multiemployer program.
    Mr. Duncan. You also have a chart here that says there is 
$450 billion in underfunding estimated for 2004?
    Mr. Belt. Correct.
    Mr. Duncan. You also say, which we all realize, and I 
chaired the Aviation Subcommittee for 6 years, the most 
immediate threat is the airline industry. How much of that 
underfunding comes from the airline industry and how much is 
other industries?
    Mr. Belt. We have about a total of exposure to the airline 
industry of about $31 billion, actually somewhat less than that 
now because we have taken over the USAirways plans.
    Mr. Duncan. By far, the great majority of that comes from 
other industries?
    Mr. Belt. That is right.
    Mr. Duncan. When you find a plan that is underfunded, what 
do you do? Do you send a letter, a notice or warning?
    Mr. Belt. Current law allows them to be underfunded and 
allows them to continue to be underfunded. In many cases, they 
can take actions to not put any money into the pension plan, 
and they can take actions to increase benefits. Those are all 
proposed changes in the administration's reform proposal to 
address those flaws.
    Mr. Duncan. Current law allows that. So you are saying so 
far you don't do anything, you don't even say a letter saying 
we feel your plan is underfunded or anything like that?
    Mr. Belt. We have no authority to do that because they are 
able to say they are complying fully with the minimum funding 
requirements established under ERISA and Title I and Title IV 
right now, and the Internal Revenue Code.
    Mr. Duncan. One of the reforms you are recommending is that 
you be given some authority to do something about that?
    Mr. Belt. The administration's reform proposal that Dave 
and Doug alluded to is focused first and foremost on 
strengthening the funding rules so that we understand what the 
current financial status of the pension plan is at given point 
in time and then we make sure we take away a lot of these 
mechanisms like smoothing and like credit balances that have 
been used by plan sponsors under current law to allow the hole 
to get deeper and deeper and deeper and say you have to fund up 
that deficit over a reasonable period of time, 7 years.
    We also put in place benefit limitations so that in fact as 
you get further underfunded, more benefit limitations kick in 
so we don't want companies in the position of not honoring the 
promises they have already made, and we want them to stop 
making new promises which are ultimately going to be hollow. 
There are many elements like that embedded in the 
administration's reform proposal.
    Mr. Duncan. A few minutes ago we talked about the $23.3 
billion and how that has been generated in the last 3 years but 
you have 3,500 failed plans that are under your mound?
    Mr. Belt. That is correct.
    Mr. Duncan. I assume that has speeded up in the last few 
years?
    Mr. Belt. Actually, no. The number of plans we take over 
that are either voluntarily terminated or distressed 
terminations or abandoned, those 3,500, the number per year has 
not significantly increased. The amount of underfunding in the 
pension plans we have taken over has dramatically increased. 
Using the catastrophic or hurricane insurance analogy, we have 
been hit by the Hurricane Andrew and several others in 
succession over the last 2 or 3 years.
    While in the past there were a lot of companies that had 
$100 million of underfunding, we now have had Bethlehem Steel 
with $3.7 billion, $3 billion in USAir, potentially United 
Airlines of $6 billion and many others in the multiple hundreds 
of millions of dollars, that were over $1 billion worth of 
underfunding.
    Mr. Duncan. Thank you. We had a hearing a few weeks ago 
about the Defense Department and how we weren't taking any 
action against these companies that have ripped off the 
Government, but this is another important area that we ought to 
take some action on.
    Mr. Platts. We are working with our witnesses and trying to 
help raise that awareness because your statement earlier that 
when you take all the issues together, each one is pretty 
challenging, when you take them all together, it is 
overwhelming. The sooner we get to working on the solutions, 
the better. I assure you as a subcommittee we want to continue 
to help raise awareness. As a non-authorizing committee, part 
of our role from a subcommittee standpoint is being a Paul 
Revere within the Congress to help raise the awareness among 
our own colleagues.
    Mr. Duncan. I appreciate the three of you coming here today 
to talk about this. I think it is a very important problem we 
need to do something about.
    Mr. Platts. Mr. Belt, can you decline to take over a plan 
if it will impact the solvency of PBGC? What are your rights to 
say no, we aren't going to do it for x, y and z?
    Mr. Belt. As was noted, we can't decline or deny insurance 
no matter how high a risk the sponsor of the plan poses and 
even if they fail to pay premiums or make contributions to 
their plans. That is the social insurance aspect. Then there is 
a mechanism under current law where companies can seek to 
transfer their pension obligations to the pension insurance 
program, to the Federal Government insurance program if they 
meet certain statutory criteria established by Congress, the 
distress termination application. That is not a decision for 
better or worse the PBGC makes. That is in the hands of the 
Bankruptcy Court and a bankruptcy judge.
    Unfortunately from my standpoint, the bankruptcy judge's 
interests are not aligned with those of the other premium 
payers or the participants, they are aligned with those of the 
debtor. Their sole responsibility is to ensure that the company 
is able to successfully emerge from bankruptcy and be very 
healthy in doing so, so they have tended to buy into the 
argument that they can't afford these pension plans and would 
not be able to emerge without them.
    We do present detailed financial analysis to the bankruptcy 
courts but we have no control.
    Mr. Platts. Do you have the right to appeal? No. So you can 
make your case but you accept what the bankruptcy judge rules?
    Mr. Belt. Correct.
    Mr. Platts. You don't have the ability to prevent a plan.
    Mr. Belt. I stand corrected. We can appeal outside the 
bankruptcy court to the district court on that decision.
    Mr. Platts. If a plan wants to in anticipation of turning 
over the plan, if they plus up their benefits, you have to 
accept that?
    Mr. Belt. No. There is kind of a fail-safe mechanism in 
current law that guanantees of benefits granted within the 
previous 5 years are phased in over a period of time and that 
is to avoid exactly that situation. That also implicates issues 
like shutdown benefits which are not pre-funded. There are 
mechanisms to require phase-in of guarantees of benefits 
granted over the prior 5-year period.
    Mr. Platts. We talked about structural changes but we 
didn't touch on personnel. Do you have the manpower to meet the 
challenges you are facing especially if we give you more 
authority and have structural changes achieved? Do you have the 
people you need?
    Mr. Belt. We have extraordinarily dedicated and capable 
staff at the PBGC but it is also true we are facing an 
extraordinary operational and financial pressure that the 
organization has faced previous to this time. Those are going 
to continue and likely to exacerbate so it is incumbent upon us 
to make sure we have the best and brightest talent and that is 
particularly so in the area of risk management. The numbers we 
are talking about not are only the on-balance-sheet risks we 
face, we are managing $40 billion plus in assets, about $70 
billion in liabilities but also these contingent liabilities 
and trying to monitor the risks out there with limited 
resources requires that we have extraordinarily capable people 
who understand the capital markets, who understand risk and can 
really bring these tools to the Government.
    We are going out with a national search for a chief 
financial officer right now, trying to bring in the best and 
the brightest. I am looking at people from within government 
but also outside in the private sector, same with the General 
Counsel and new head of the Office of Risk Assessment. As you 
know, we are somewhat constrained in attracting the best and 
brightest to government as we all are.
    Mr. Platts. I imagine in comparison to the SEC and some of 
the new ability they have been given under Sarbanes-Oxley to go 
after the key personnel. You don't have that same level of 
flexibility?
    Mr. Belt. We do not have the same kinds of flexibilities as 
the FDIC and the other banking regulators, the SEC and others.
    Mr. Platts. Mr. Elliott, the proposed reforms put forth 
thus far, your opinion on how far they would go to restoring 
long term solvency to PBGC?
    Mr. Elliott. The administration has put forth a very bold 
proposal to my surprise because obviously any bold proposal 
distributes a lot of pain. I think if passed it probably would 
solve the PBGC's problem. The issue is it would also put severe 
stress on the defined benefit system. There are a myriad of 
details I won't go into but that is the pro and the con.
    Mr. Platts. And the risk of plans being terminated because 
of the cost of continuing them?
    Mr. Elliott. Or frozen in any event. I think it will push a 
number of plans toward freezing.
    Mr. Belt. We respectfully disagree with that conclusion 
because as a policy matter, the last thing the administration 
and the President want to do is further impair the retirement 
security of millions of Americans and as a business matter, the 
last thing I want to do is drive out my principal revenue base, 
have all the good actors and premium payers leave the system 
and leave the bad apples behind. We think we have struck an 
appropriate balance but there is no question this issue has 
been raised as to whether we have pushed too hard and people 
will look to exit the system.
    I would note that under current law, we have had a trend 
line downwards. No one is establishing new defined benefit 
plans except the United Methodist Church over the last several 
years. We would like to arrest that. We think we need to clean 
up the rules and our balance sheet before we can do that.
    Mr. Platts. Based on the testimony I saw summaries from 
Senator Grassley's hearing yesterday, the business community 
and the labor community would share Mr. Elliott's concern. They 
see it as being too extreme and the economic impact. Is that a 
fair read?
    Mr. Belt. The business community certainly complained about 
a number of aspects of the proposal. They don't want to pay 
higher premiums. They have made that very clear. They want to 
maintain the mechanisms that I talked about before, the 
smoothing mechanisms that kind of hide the current state of 
economic reality, and they want to maintain the ability to not 
pay in using credit balances notwithstanding the fact they may 
still be underfunded.
    I understand their desire to retain those things. They want 
to have the free put to the government, I understand their 
desire to retain that but we don't want that poses an 
unacceptable risk to the taxpayer, that is not appropriate. 
Also with respect to labor unions, I think a lot of unions 
actually support many aspects of the administration's proposal. 
But you heard the United Auto Workers who have been on record 
saying they want taxpayer moneys, they want this to be a 
taxpayer bale out. That has been true since United Auto Workers 
pushed for the original creation of the pension insurance 
program prior to establishment of ERISA in the 1960's.
    Mr. Platts. An important perspective on what I read from 
yesterday and the history in that issue.
    Mr. Elliott. So nobody misunderstands, I am neither 
advocating nor opposing the administration's proposal. I merely 
mean to say there are serious cons as well as pros.
    Mr. Platts. But it is substantive and truly seeking to 
address the challenges before you?
    Mr. Elliott. Absolutely. I highly commend them for that. It 
is a plan that if followed through I think really would take 
care of the PBGC deficit.
    Mr. Platts. Mr. Walker, your thoughts on what has been put 
forth thus far by the administration and your sentiments on how 
successful it would be versus the risk associated with moving 
forward?
    Mr. Walker. First, there are a lot of details contained in 
my testimony that I would commend to you and the subcommittee. 
I am willing to meet separately on this issue. I would say 
bottom line is there is absolutely no question in my mind that 
Congress needs to act and should act in this Congress, 
preferably in this session of this Congress.
    I also believe the administration is putting forth a 
comprehensive proposal that deals with transparency, with 
funding, with certain insurance reforms. The scope of the 
package I believe is good. I believe there are a few elements 
of the package that need further examination but I think it is 
definitely a positive step forward and I believe that Congress 
needs to act on comprehensive legislation hopefully in this 
session of this Congress.
    Mr. Platts. Has there been much response to the greater 
transparency or do they still want to keep everything secret 
and confidential?
    Mr. Belt. That is difficult to discern. If you read some of 
the testimony in the second panel from yesterday's Finance 
Committee hearing, there are indications of why support even 
stronger disclosure. If that is true, I am delighted and would 
embrace and let us sign on the dotted line.
    Mr. Platts. That would help and the marketplace pressure 
going to work.
    I apologize in having to run over for votes. Try to keep 
close to the 3:30 p.m. commitment, Mr. Walker and safe travels. 
I appreciate your insights, helping to educate me as one who is 
probably going to be called to vote on some significant 
proposals in the coming year. It really has helped me and 
hopefully helped to broaden the exposure of what the risk is 
out there and if we don't act. All three of you, your knowledge 
base is tremendous and I am sure as a body, we will continue to 
call on all three of you as we move forward.
    We will keep the testimony open for 2 weeks and the record 
open for additional information you want to submit.
    I appreciate both staff for their work on this hearing.
    The hearing stands adjourned.
    [Whereupon, at 3:33 p.m., the subcommittee was adjourned.]

                                 
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