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

      OPERATIONAL EXPERIENCE UNDER THE 2001 RAILROAD RETIREMENT REFORM LAW

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

                                    (109-71)

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON

                                   RAILROADS

                                     OF THE

                                  COMMITTEE ON
                       TRANSPORTATION AND INFRASTRUCTURE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 10, 2006

                                   __________

                           Printed for the use of the
                 Committee on Transportation and Infrastructure

                                       ____

                        U.S. GOVERNMENT PRINTING OFFICE
    28-286                      WASHINGTON : 2006
    _____________________________________________________________________________
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                 COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                          DON YOUNG, Alaska, Chairman

    THOMAS E. PETRI, Wisconsin, Vice-    JAMES L. OBERSTAR, Minnesota
    Chair                                NICK J. RAHALL, II, West Virginia
    SHERWOOD L. BOEHLERT, New York       PETER A. DeFAZIO, Oregon
    HOWARD COBLE, North Carolina         JERRY F. COSTELLO, Illinois
    JOHN J. DUNCAN, Jr., Tennessee       ELEANOR HOLMES NORTON, District of
    WAYNE T. GILCHREST, Maryland         Columbia
    JOHN L. MICA, Florida                JERROLD NADLER, New York
    PETER HOEKSTRA, Michigan             CORRINE BROWN, Florida
    VERNON J. EHLERS, Michigan           BOB FILNER, California
    SPENCER BACHUS, Alabama              EDDIE BERNICE JOHNSON, Texas
    STEVEN C. LaTOURETTE, Ohio           GENE TAYLOR, Mississippi
    SUE W. KELLY, New York               JUANITA MILLENDER-McDONALD,
    RICHARD H. BAKER, Louisiana          California
    ROBERT W. NEY, Ohio                  ELIJAH E. CUMMINGS, Maryland
    FRANK A. LoBIONDO, New Jersey        EARL BLUMENAUER, Oregon
    JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
    GARY G. MILLER, California           BILL PASCRELL, Jr., New Jersey
    ROBIN HAYES, North Carolina          LEONARD L. BOSWELL, Iowa
    ROB SIMMONS, Connecticut             TIM HOLDEN, Pennsylvania
    HENRY E. BROWN, Jr., South Carolina  BRIAN BAIRD, Washington
    TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
    TODD RUSSELL PLATTS, Pennsylvania    JIM MATHESON, Utah
    SAM GRAVES, Missouri                 MICHAEL M. HONDA, California
    MARK R. KENNEDY, Minnesota           RICK LARSEN, Washington
    BILL SHUSTER, Pennsylvania           MICHAEL E. CAPUANO, Massachusetts
    JOHN BOOZMAN, Arkansas               ANTHONY D. WEINER, New York
    JIM GERLACH, Pennsylvania            JULIA CARSON, Indiana
    MARIO DIAZ-BALART, Florida           TIMOTHY H. BISHOP, New York
    JON C. PORTER, Nevada                MICHAEL H. MICHAUD, Maine
    TOM OSBORNE, Nebraska                LINCOLN DAVIS, Tennessee
    KENNY MARCHANT, Texas                BEN CHANDLER, Kentucky
    MICHAEL E. SODREL, Indiana           BRIAN HIGGINS, New York
    CHARLES W. DENT, Pennsylvania        RUSS CARNAHAN, Missouri
    TED POE, Texas                       ALLYSON Y. SCHWARTZ, Pennsylvania
    DAVID G. REICHERT, Washington        JOHN T. SALAZAR, Colorado
    CONNIE MACK, Florida                 JOHN BARROW, Georgia
    JOHN R. `RANDY' KUHL, Jr., New York
    LUIS G. FORTUNO, Puerto Rico
    LYNN A. WESTMORELAND, Georgia
    CHARLES W. BOUSTANY, Jr., Louisiana
    JEAN SCHMIDT, Ohio

                                      (ii)

                           SUBCOMMITTEE ON RAILROADS

                      STEVEN C. LaTOURETTE, Ohio, Chairman

    THOMAS E. PETRI, Wisconsin           CORRINE BROWN, Florida
    SHERWOOD L. BOEHLERT, New York       NICK J. RAHALL II, West Virginia
    JOHN L. MICA, Florida                JERROLD NADLER, New York
    SPENCER BACHUS, Alabama              BOB FILNER, California
    JERRY MORAN, Kansas                  ELIJAH E. CUMMINGS, Maryland
    GARY G. MILLER, California           EARL BLUMENAUER, Oregon
    ROB SIMMONS, Connecticut             LEONARD L. BOSWELL, Iowa
    TODD RUSSELL PLATTS, Pennsylvania    JULIA CARSON, Indiana
    SAM GRAVES, Missouri                 PETER A. DeFAZIO, Oregon
    JON PORTER, Nevada                   JERRY F. COSTELLO, Illinois
    TOM OSBORNE, Nebraska                EDDIE BERNICE JOHNSON, Texas
    MICHAEL E. SODREL, Indiana           JAMES L. OBERSTAR, Minnesota
    LYNN A. WESTMORELND, Georgia, Vice-  JOHN BARROW, Georgia
    Chair                                  (ex officio)
    DON YOUNG, Alaska
      (ex officio)

                                     (iii)

                                    CONTENTS

                                   TESTIMONY

                                                                       Page
     Hamberger, Edward, President, Association of American Railroads.     9
     Hixon, James A., Trustee, National Railroad Retirement
      Investment Trust...............................................     9
     Parker, Joel, Trustee, National Railroad Retirement Investment
      Trust..........................................................     9
     Scardelletti, Robert, President, Transportation Communications
      International Union............................................     9
     Schwartz, Hon. Michael S., Chairman, Railroad Retirement Board,
      accompanied by V.M. Speakman, Labor Member, Railroad Retirement
      Board, Jerome Kever, Management Member, Railroad Retirement
      Board, Steven Bartholow, General Counsel, Railroad Retirement
      Board, Kenneth Boehne, Chief Financial Officer, Railroad
      Retirement Board, and Frank Buzzi, Chief Actuary, Railroad
      Retirement Board...............................................     3

              PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

    Brown, Hon. Corrine, of Florida..................................    22
    Costello, Hon. Jerry F., of Illinois.............................    25
    Cummings, Hon. Elijah E., of Maryland............................    27
    Johnson, Hon. Eddie Bernice, of Texas............................    45
    Oberstar, James L. of Minnesota..................................    49
    Young, Hon. Don, of Alaska.......................................    66

                   PREPARED STATEMENTS SUBMITTED BY WITNESSES

     Hamberger, Edward...............................................    32
     Hixon, James A..................................................    42
     Parker, Joel....................................................    52
     Scardelletti, Robert............................................    56
     Schwartz, Hon. Michael S........................................    58

                           SUBMISSION FOR THE RECORD

     Schwartz, Hon. Michael S., Chairman, Railroad Retirement Board,
      accompanied by V.M. Speakman, Labor Member, Railroad Retirement
      Board, Jerome Kever, Management Member, Railroad Retirement
      Board, letter concerning the Widow(er)s' Intitial Minimum
      Benefit Amount (WIMA), June 9, 2006............................    63

      OPERATIONAL EXPERIENCE UNDER THE 2001 RAILROAD RETIREMENT REFORM LAW

                                  ----------

                            Wednesday, May 10, 2006,

            House of Representatives, Subcommittee on
                Railroads, Committee on Transportation and
                Infrastructure, Washington, D.C.
        The subcommittee met, pursuant to call, at 2:00 p.m., in
    room 2167, Rayburn House Office Building, the Hon. Steven C.
    LaTourette [Chairman of the subcommittee] presiding.
        Mr. LaTourette. The Subcommittee will come to order. Good
    afternoon, I want to welcome you all to this afternoon's
    hearing about the Operational Experience Under the 2001
    Railroad Retirement Reform Law.
        In 1998, this Subcommittee, under chairman Jack Quinn, held
    a hearing about the need to reform our Nation's railroad
    retirement system. At that time, the system was headed for a
    crisis. Due to the severe downsizing of the industry, fewer and
    fewer employees were paying into the railroad retirement
    system. Meanwhile, the number of retirees and surviving spouses
    continued to increase.
        Fortunately, after years of effort by rail labor,
    management and members on both sides of this Committee, the
    Railroad Retirement and Survivors' Improvement Act of 2001 was
    signed into law. Enactment of this legislation was a great
    victory for railroad workers and their families as well as the
    railroads themselves. The 2001 legislation reduced the
    retirement age from 62 to 60, provided enhanced Tier II
    benefits for retirees and their surviving spouses, and reduced
    taxes on current railroad employees. This was achieved by
    allowing the National Railroad Retirement Investment Trust to
    invest in a diversified portfolio rather than exclusively in
    low yield Government securities. In what is truly a pleasant
    surprise, the investment trust has performed far better than
    anyone expected back in 2001. The portfolio has grown
    remarkably, and payroll taxes have actually declined.
        Today, I am looking forward to hearing more about the
    success of the National Railroad Retirement Investment Trust as
    well as any continuing issues faced by the Railroad Retirement
    Board, rail labor, and management.
        Before yielding to my distinguished Ranking Member Ms.
    Brown, I want to ask unanimous consent to allow 30 days for
    members to revise and extend their remarks and to permit the
    submission of additional statements and materials by members
    and also witnesses. Without objection, so ordered.
        It is now my pleasure to yield to Corrine Brown of Florida,
    our distinguished Ranking Member, for any observations she
    would choose to make.
        Ms. Brown. Thank you, Mr. Chairman, for hosting this
    meeting. It is nice to have a hearing where all of the
    witnesses have good news for us. Thank you.
        I believe that the Railroad Retirement and Survivors'
    Improvement Act of 2001 was a resounding success. It improved
    benefits to men and women who work on our Nation's railroads
    and the 634,000 retirees and survivors of Retired Railroad
    Workers. It significantly reduced Tier II taxes for railroad
    and for railroad workers for the first time in 2005 from 4.9
    percent to 4.4 percent.
        The Act also created the National Railroad Retirement
    Investment Trust which has been a tremendous success. The net
    value of the trust management assets have soared up to $28.9
    billion as of March, 2006, representing an increase of over $10
    billion, that is with a B, above the net book value of assets
    transferred to the trust for investment in 2001.
        In other words, the 2001 Railroad Retirement Reform Law was
    a win/win situation for everyone: for the railroad, for the
    railroad workers, for the railroad retirees and survivors, and
    for former and current members of this Subcommittee who worked
    so hard to create this program.
        I welcome the witnesses here today and look forward to
    hearing more about the implementation of the 2001 Reform Act.
    Thank you, Mr. Chairman.
        Mr. LaTourette. I thank the gentlelady very much.
        Mr. Boswell, any remarks you would like to make?
        Mr. Boswell. No, thank you, Mr. Chairman.
        Mr. LaTourette. OK.
        With that, it is my pleasure to welcome the first panel
    today. The first panel, despite its appearance, actually
    contains one witness and a lot of friends. So we are pleased to
    have today with us the Honorable Michael Schwartz who is the
    Chairman of the Railroad Retirement Board. He is accompanied
    today by Mr. V.M. Speakman who is the Labor Member for the
    Railroad Retirement Board, Mr. Jerome Kever who is a Management
    Member of the Railroad Retirement Board, Steven Bartholow who
    is the General Counsel for the Railroad Retirement Board, Mr.
    Kenneth Boehne who is the Chief Financial Officer for the
    Railroad Retirement Board, and Mr. Frank Buzzi who is the Chief
    Actuary for the Railroad Retirement Board.
        Chairman Schwartz, we thank you for coming. We thank you
    for bringing all your friends with you today. We look very much
    forward to your testimony.

       TESTIMONY OF HON. MICHAEL S. SCHWARTZ, CHAIRMAN, RAILROAD
    RETIREMENT BOARD, ACCOMPANIED BY: V.M. SPEAKMAN, LABOR MEMBER,
      RAILROAD RETIREMENT BOARD; JEROME KEVER, MANAGEMENT MEMBER,
     RAILROAD RETIREMENT BOARD; STEVEN BARTHOLOW, GENERAL COUNSEL,
      RAILROAD RETIREMENT BOARD; KENNETH BOEHNE, CHIEF FINANCIAL
    OFFICER, RAILROAD RETIREMENT BOARD; FRANK BUZZI, CHIEF ACTUARY,
                       RAILROAD RETIREMENT BOARD

        Mr. Schwartz. Thank you. Good afternoon, Chairman
    LaTourette, Ranking Member Brown, and distinguished members of
    the Committee. I am Michael Schwartz, and I am the Chairman of
    the Railroad Retirement Board. It is indeed a pleasure to
    appear before you today to testify on behalf of the Railroad
    Retirement Board concerning our experience under the Railroad
    Retirement and Survivors' Improvement Act. I request that my
    statement be inserted in the record.
        As you know, the Railroad Retirement and Survivors'
    Improvement Act of 2001 originated in this Committee, and it
    made a number of changes in railroad retirement benefits and in
    the financing of the railroad retirement program. The Railroad
    Retirement and Survivors' Improvement Act of 2001 was a product
    of an agreement between rail labor and rail management.
        On the benefit side, the 2001 Act reduced the minimum
    retirement age for full benefits for employees with 30 years of
    service from age 62 to age 60. Another change was the
    elimination of the so-called railroad retirement maximum, which
    had imposed a cap on the combined benefits of an employee and
    the employee's spouse. The Act added a new minimum initial
    benefit amount for widow and widowers, so that the amount of
    the benefit payable when a widow's or widower's annuity is
    awarded is equal to what the employee received prior to his or
    her death. Another change on the benefit side was a reduction
    in the number of years needed to be eligible for Tier II
    railroad retirement benefits. Tier II benefits are now
    available to employees who have five years of railroad service
    after 1995. These changes are all fully operational.
        In addition to the benefit changes I just mentioned, the
    Railroad Retirement and Survivors' Improvement Act made
    significant and far reaching changes in the financing of
    railroad retirement benefits. The Act called for the creation
    of a new entity, the National Railroad Retirement Investment
    Trust, to handle investment of railroad retirement funds. The
    Trust is not a Federal Agency or instrumentality; it is
    separate and apart from the Railroad Retirement Board.
        Prior to the 2001 legislation, railroad retirement funds
    were invested only in Government securities or certain
    Government-backed securities. The 2001 law changed this by
    authorizing the Trust to invest railroad retirement funds in a
    wide array of investments including stocks and bonds as well as
    Government securities.
        In addition to the investment changes, the Railroad
    Retirement and Survivors' Improvement Act of 2001 substituted
    for the flat tax rates in prior law, a new tax ratchet
    mechanism for setting the Tier II tax rate for employees and
    employers. Under the tax ratchet, Tier II tax rates for
    employers and employees can increase or decrease depending on
    the account benefits ratio. The account benefits ratio is
    determined by comparing the market value of railroad retirement
    assets to benefit payments. Thus, the tax rate is adjustable to
    meet financing needs of the railroad retirement system.
        Almost immediately after President Bush signed the Railroad
    Retirement and Survivors' Improvement Act into law, steps were
    initiated to form the National Railroad Retirement Investment
    Trust. The Trust is comprised of seven trustees. Three trustees
    represent the interest of rail management; three represent the
    interest of rail employees; the seventh is an independent
    member of the Board of Trustees and is selected by a majority
    of the other six trustees. Trustees representing railroad
    employees and railroad management were appointed and first met
    on February 1st, 2002. The original trustees, as well as the
    trustees who have been appointed after the Trust was formed,
    all have had strong backgrounds in investment and pension plan
    management as required by the statute.
        The first transfer for the investment occurred in
    September, 2002. For several months thereafter, additional
    transfers of significant amounts were made until a total of
    $21.3 billion had been transferred to the Trust. Initially, the
    Trust limited its investments to index funds, but as the
    Trust's staff has grown, the Trust has moved funds into a
    combination of index funds and actively managed investments
    handled by an increasing number of investment managers. Today
    the Board of Trustees and the Trust's professional staff are
    responsible for the investment of $28.9 billion.
        Although the Railroad Retirement and Survivors' Improvement
    Act makes it clear the Railroad Retirement Board and the
    National Railroad Retirement Investment Trust are separate
    entities, the responsibilities of the two organizations are
    such that the Board and the Trust must work together in order
    to serve the needs of the plan participants and stakeholders.
    Today, I am pleased to report that the Board and the Trust have
    worked closely from the inception of the Trust and that we are
    accomplishing our respective responsibilities under the Act.
        The three members of the Railroad Retirement Board meet at
    least twice a year with the Trust, and the Railroad Retirement
    Board's General Counsel meets on a frequent basis with the
    Counsel to the Trust and the Trust Chief Investment Officer to
    discuss issues of mutual concern.
        The Railroad Retirement Board, the Trust, the Office of
    Management and Budget, and the Department of the Treasury are
    all parties to a Memorandum of Understanding under which the
    Board receives monthly reports from the Trust showing the
    market valuation of the Trust portfolio. Moreover, the Trust
    provides the Board with copies of its annual management report
    to Congress showing details of the Trust's operations for the
    previous fiscal year. The Railroad Retirement Board receives
    quarterly updates of the annual report from the Trust.
    Information about the Trust, including an annual management
    report and quarterly updates, is posted to the Railroad
    Retirement Board's web site and is available for public review.
        Since the inception of the Trust, the market value of the
    Trust's portfolio has increased significantly. As I noted
    earlier, the Railroad Retirement Tax Act was amended by the
    2001 law to provide a tax ratchet mechanism for setting Tier II
    tax rates for employers and employees. Before the tax ratchet
    became effective in 2004, the 2001 Act had already reduced the
    Tier II tax rate on employers from 16.1 percent in 2001 to 15.6
    percent and 14.2 percent in 2002 and 2003, respectively.
        When the tax ratchet took effect in 2004, the employer tax
    rate was further reduced to 13.1 percent, and in 2005, both the
    employer and the employee Tier II tax rates were reduced. In
    2005, the employer tax rate declined to 12.6 percent and the
    employee tax rate declined from 4.9 to 4.4 percent. Tax rates
    for 2006 are the same as 2005. These reductions in the Tier II
    tax rates for both employers and employees were almost entirely
    the result of good investment performance over the past few
    years.
        In closing, I am pleased to say that, in view of the
    Railroad Retirement Board, the Railroad Retirement and
    Survivors' Improvement Act has been very successful and that
    the goals sought by the legislation are being achieved. We
    would be happy to answer any questions at this time.
        Mr. LaTourette. Well, Chairman Schwartz, thank you very
    much. As Ms. Brown said, it is rare that we have a hearing
    where it is all good news all the time. Certainly, your
    testimony and your report today is good news.
        Just a housekeeping matter, we have a Majority Leader here.
    His name is Boehner. I think, Mr. Boehne, I said your name was
    Boehne, and I have been told that it is Boehne. And so, I
    apologize for that. I just took the R off of Boehner and made
    you Mr. Boehne. But, just so the record is clear, welcome.
        Again, Chairman Schwartz, thank you for your testimony and
    bringing everybody with you today.
        I want to begin where you ended, I guess, and that is the
    tax rate and commend you and the Board for continuing to reduce
    the tax rate on both the employer and the employee. As you sort
    of pull out your crystal ball, do you see that as being a trend
    that you can continue, thanks to the good management skills
    that you are exercising over this Trust?
        Mr. Schwartz. Yes, and that is the way the ratchet system
    was set up. As long as the investments continue to be strong,
    we will be able to lower the rate.
        Mr. LaTourette. Great. There was a big discussion and a
    little dust up here last year and the year before over social
    security, and everybody becomes concerned about the impact of
    the pending retirement of the baby boomers on our middle class
    entitlement programs.
        Mr. Schwartz. Sure.
        Mr. LaTourette. I am just wondering if, after the 2001
    legislation, have you and your actuaries have taken a look at
    what the retirement of the baby boomer generation does to what
    you are currently doing?
        Mr. Schwartz. Yes, we have a 75 year projection. That is
    all we get, just 75 years out. We see no cash flow problems in
    the next 75 years because of these good investments and because
    of the employment.
        Mr. LaTourette. That is unbelievable.
        Earlier this year, this Committee, I think with the support
    of the Board or at least the Board was supportive, reported
    H.R. 5074 which was legislation that went back and took a look
    at the 2001 Act and put the Treasury back in charge of the
    payment of Tier II benefits. That was, at the time, I think it
    was one of those that everybody thought it would be a good idea
    and was going to save money, I think. I don't have my notes in
    front of me from that hearing, but it seemed to me that it was
    costing $13 million more than we anticipated it costing.
        I assume that the Board continues to be supportive of the
    legislation, one; and two, at this moment in time, are there
    any other items like that, that you think the Board needs to
    bring before this Committee for fine tuning the 2001
    legislation?
        Mr. Schwartz. First of all, we would like to thank the
    Committee for doing that and thank you for your help. There is
    nothing at this time, other than that, that we need.
        Mr. LaTourette. That is excellent. That makes our work a
    lot easier.
        [Laughter.]
        Mr. LaTourette. I think my last question to you is, in your
    latest management report to Congress, could you outline sort of
    the major issues that you brought up in that report? Again, I
    heard you just say that you look out over 75 years. Is your
    prognosis for this year to be a good year, and if not, do you
    have any significant issues or concerns that you think are on
    the horizon in the short term?
        Mr. Schwartz. Well, it is kind of interesting that in March
    of 2002, the employment in the railroad industry was 229,000
    people. The actives are now 237,000 people. There has been
    hiring. We think we do anticipate through the years for there
    to be somewhat of a decline, but I can tell you that our
    actuary is telling me that he is looking at those numbers, and
    he may be even adjusting those hiring numbers a little bit to
    maybe show a little less of a decline in hiring than there has
    been projected in the future.
        So I would say that, as long as the hiring stays around
    where it is or drops just a little bit each year, as long as
    our investments continue to bring in a good return like they
    are, we don't see any problem with the fund for the next 75
    years.
        Mr. LaTourette. Again, I apologize; I should know this, the
    mix. When you took the 2001 Act and went away from solely low
    yield Federal securities, what is the current mix of your
    portfolio?
        Mr. Schwartz. I think we would need the Trust to testify on
    that exactly at this point. When the Trust first went into it,
    of course, they had U.S. equities, non-U.S. equities, fixed,
    private, and I think the current mix, I would prefer them to
    testify on that.
        Mr. LaTourette. OK, well, I thank you very much. Again, I
    thank you and the Board and everybody associated with the Board
    for this good news. I think if all of the pieces of legislation
    that we have passed around here bore the same good fruits that
    you have put into effect, it would be a much happier place.
        Mr. Schwartz. Great, thank you.
        Mr. LaTourette. Thank you very much.
        Ms. Brown?
        Ms. Brown. Thank you.
        Many members on this Subcommittee have heard from widows in
    their Congressional District about a serious problem with how
    their railroad retirement pensions interact with their social
    security benefits. From what I understand, these widows are not
    getting cost of living increases in their railroad retirement
    pensions, even though the cost of living continues to escalate
    each year. Why is this and what can be done to resolve this
    situation?
        Mr. Schwartz. Frank, do you want to talk on that?
        Ms. Brown. Anyone else can feel like they can participate.
        Mr. Buzzi. The minimum widow's benefit establishes an
    initial benefit level, and that level is fixed and does not
    have cost of living increases. However, the benefit under the
    old law is still calculated as it was previously. Then the
    widow receives the larger of those two. So, in effect, for
    several years, the widow will receive no cost of living
    increase, and thereafter, as the benefit under the old law
    exceeds the guarantee, she will, he or she will.
        Ms. Brown. OK, now do that again because I didn't quite get
    it.
        Mr. Buzzi. The widow's benefit is comprised of a Tier I and
    Tier II portion. The Tier I portion is equal to 100 percent of
    the employee's Tier I. The Tier II portion is 50 percent of the
    employee's Tier II. However, the guaranteed amount is 100
    percent of the employee's Tier II. The 100 percent of Tier I
    plus 100 percent of Tier II is the guarantee amount that the
    widow is guaranteed to receive.
        The old law benefit was 100 percent of Tier I plus 50
    percent of Tier II. The old law amounts received cost of living
    increases. The guarantee amount does not. So the widow receives
    the larger of the two, the initially calculated guaranteed
    amount based on 100 percent of Tier II or the old law amount,
    whichever is greater. So, in effect, the widow will receive no
    cost of living increases for several years under total annuity.
    But thereafter, as the old law amount exceeds the guarantee
    amount, the widow will receive cost of living increases.
        Ms. Brown. OK, but the widow is getting more under this.
        Mr. Schwartz. Yes.
        Mr. Buzzi. Yes, absolutely.
        Ms. Brown. Just one other follow-up: What recourse does a
    retiree have if the Railroad Retirement Board staff misinforms
    him or her about the qualification requirement to obtain full
    pension and survivor benefits, and it is a mistake on the part
    of the staffer? I hope that was in writing because, basically,
    if it is not you have just one person's word over another.
        Mr. Bartholow. Unfortunately, mistakes are made but not all
    that often by our people. We have a very, very good work force.
    As you can see, most of us have been around a while, and we
    know the program. There are mistakes occasionally made,
    however. We do, obviously, look into situations, but if there
    is a mistake that is made and bad information is given,
    unfortunately, we can't change the law. The law does, in fact,
    control the amount of the benefit, and that is the amount
    payable.
        As I said, it is unfortunate, but those things do happen,
    and they happen not only in our program but they happen in
    other programs. That is the law that is applicable under all
    Government pension programs.
        Ms. Brown. OK, well, thank you, Mr. Chairman.
        Mr. LaTourette. I thank the gentlelady very much. I just
    have one more question, and then if the gentlelady has another
    question, I will yield back to her.
        Something I forgot to ask earlier, as members of Congress,
    as Federal employees, we have something called the thrift
    savings plan that we can participate in. Given the great record
    that you have accumulated since the passage of the 2001 Act, is
    it possible for an employee to take advantage of this great
    performance by contributing more than the minimum amount at
    this moment in time to receive additional benefits at the end?
        Mr. Schwartz. They are set. It is set in statute that is
    what it would be. It would be the Tier II would be 4.4 percent
    for an employee.
        Mr. LaTourette. So they don't. If an employee said, you
    know what, boy, I would really like to put in some more dough,
    he does not at this moment in time have the opportunity to do
    that.
        Mr. Schwartz. Right, that is correct.
        Mr. LaTourette. Let me ask you this. Do you think that it
    is a good idea if we looked at that since you are doing such a
    bang-up job, if we made that an option for railroad employees
    in the future?
        Mr. Schwartz. Well, the way I look at it is if this
    Committee wants to look at something, we certainly would take a
    look at that as well.
        Mr. LaTourette. Good, thank you. Do you have any more
    questions?
        Well, Chairman Schwartz, I want to thank you and your
    fellow Board members and everyone else associated from the
    Board for not only coming and sharing your story and testimony
    today but also letting us share in your success. Thank you very
    much.
        Mr. Schwartz. Thank you.
        Mr. LaTourette. Thank you.
        It is now our pleasure to welcome our second panel this
    afternoon. We are going to be joined by Mr. James Hixon who is
    a trustee with the National Retirement Investment Trust, Mr.
    Joel Parker, another trustee with the National Railroad
    Retirement Investment Trust, Mr. Robert Scardelletti who is the
    President of the Transportation Communications International
    Union, and for a return engagement, Mr. Edward Hamberger who is
    the President of the Association of American Railroads.
        I want to thank all of you for coming today, and we look
    forward to hearing from you.
        Mr. Hixon, you are first.

        TESTIMONY OF JAMES A. HIXON, TRUSTEE, NATIONAL RAILROAD
      RETIREMENT INVESTMENT TRUST; JOEL PARKER, TRUSTEE, NATIONAL
      RAILROAD RETIREMENT INVESTMENT TRUST; ROBERT SCARDELLETTI,
     PRESIDENT, TRANSPORTATION COMMUNICATIONS INTERNATIONAL UNION;
     EDWARD HAMBERGER, PRESIDENT, ASSOCIATION OF AMERICAN RAILROADS

        Mr. Hixon. Mr. Chairman and members of the Subcommittee, my
    name is Jim Hixon. I am the Executive Vice President Law and
    Corporate Relations of the Norfolk Southern Corporation as well
    as a member of the Board of Trustees of the National Railroad
    Retirement Investment Trust. I am pleased to be here today and
    would like to thank the Subcommittee for giving me this
    opportunity to testify about the Trust's operational experience
    since its inception a few years ago.
        In December of 2001, years of collaboration between rail
    management, rail labor, and Congress resulted in the enactment
    of legislation forming the National Railroad Retirement
    Investment Trust, and on the day it was officially established,
    the $20 billion Trust fund became one of the largest pension
    investment trusts in the United States.
        This very successful collaboration has continued as we have
    worked to build this statutory concept into an actual
    institution, and the need for collaborative effort has been
    magnified because of the Trust's very unique status as a
    public-private partnership. As a result, transforming the Trust
    into an entity that could effectively and efficiently manage
    and invest railroad retirement assets for the benefit of
    beneficiaries has presented many challenges in the Trust's
    formative years.
        In the 41 days between enactment and the Trust's
    establishment date of February 1st, 2002, a labor-management
    implementation task force worked almost around the clock to
    create this new entity. The group included representatives of
    all major railroads and several railway labor unions and called
    on the expertise of a variety of senior executives from
    industry to provide advice on legal, investment, treasury
    functions, insurance, and human resources issues.
        The task force also met and coordinated closely with
    representatives of the Railroad Retirement Board on various
    start-up issues and ultimately provided recommendations
    regarding the outline of a basic organizational structure to be
    considered by the new Board of Trustees when it first convened.
        The National Railroad Retirement Investment Trust Board of
    Trustees met for the first time on February 1st, 2002, with
    participation of three appointees selected by rail management
    and three appointees selected by rail labor. Many of the
    initial challenges were organizational, including acceptance by
    the trustees of their positions and notification to the
    Railroad Retirement Board, selection of a chair, adoption of
    bylaws, retention of counsel, and the acquisition of insurance
    and bonding coverages.
        During the initial months, the Board approved and adopted
    internal policies on administrative issues including a
    conflicts of interest policy and a disclosure of investment
    information policy. The Board also was successful, after
    conducting two nationwide searches, in selecting a statutorily
    mandated independent trustee and hiring its first full time
    employee, the Chief Investment Officer.
        With these key individuals in place and the broad outline
    of an entity beginning to take shape, the Board began the
    process of developing an investment structure to enable the
    receipt and management of railroad retirement assets for
    investment. In doing so, the Board turned its attention to
    fundamental investment issues including the development of
    investment guidelines. As part of this process, the trustees
    and industry experts met with senior investment professionals
    from some of the country's largest corporate pension plans and
    Taft Hartley plans to explore a variety of investment and
    organizational issues.
        Among the advice received from these plans was the
    importance of hiring a dedicated staff, including specialized
    directors and advisors in various asset classes that would have
    the primary responsibility for making investment
    recommendations to the Board of Trustees rather than having the
    Board rely on outside investment advisors for such
    recommendations. My fellow trustee, Joel Parker will discuss
    these and other investment related issues in greater detail.
        Early on, the Board of Trustees evaluated proposals from
    all of the major accounting firms and selected Deloitte and
    Touche as its independent auditor.
        We also formed an Audit Committee to aid in the development
    of internal accounting procedures and administrative controls.
    The committee has continually reviewed key aspects of the
    Trust's auditing, financial reporting, internal accounting, and
    internal controls processes as it has grown, and through its
    relationship with the Trust staff and the Trust custodial bank
    and independent auditor, the committee has developed effective
    controls and reporting processes. As part of its ongoing review
    of new statutory and regulatory developments in the areas of
    internal accounting and controls contained in the Sarbanes
    Oxley Act and pronouncements by various regulatory agencies,
    the Audit Committee has also implemented various best practices
    recommendations appropriate for application to the Trust.
        Development of the Trust has also required a great deal of
    coordination with Federal Government Agencies, and the Trust
    has maintained regular communications with the Railroad
    Retirement Board and the Department of the Treasury. As a
    result of discussions with these agencies, the Trust became a
    party to a four way Memorandum of Understanding which outlines
    the budgetary, transfer, accounting, and financial reporting
    responsibilities with respect to assets held by the Trust and
    assets held within the Treasury for the Trust.
        Monthly Trust information reports submitted pursuant to the
    MOU, together with quarterly reports transmitted to the
    Congressional committees of jurisdiction and the annual
    management report that the Trust is required to submit to
    Congress and the Executive Branch have provided the means to
    communicate the status of Trust activities to interested
    parties.
        We have worked closely with the Railroad Retirement Board
    to develop a strong partnership while maintaining the
    investment independence mandated by Congress. We recognize that
    the Congressional rationale for this separation was rooted in
    the fact that, although the Trust is responsible for the
    management and investment of Federal Government assets, there
    was a concern about the implications of the Federal Government
    itself investing in and thereby influencing the financial
    markets. Thus, while the Trust was established by Federal
    statute and the reporting requirements and fiduciary standards
    applicable to it are set forth in the statute, Congress made
    clear that the Trust is not a department, agency or
    instrumentality of the Government of the United States.
        This unique status, as a non-Governmental entity that is
    responsible for the management and investment of Government
    assets, has presented some challenges in the Trust's first four
    plus years. Among those challenges has been coordinating the
    audit of the Trust's year-end financial statement with that of
    the Railroad Retirement Board so the Trust's audited statement
    can be included in the RRB's own financial statement and
    Statement of Social Insurance for eventual inclusion in the
    Financial Report of the United States Government.
        The Trust's unique status has also been recognized by the
    Internal Revenue Service, which has modified our IRS reporting
    requirements in light of the statutorily mandated annual
    management report. On a related matter, the Trust is preparing
    to submit a ruling request to the Service to clarify the
    application of other tax rules to the Trust.
        In addition, we have worked with Congress to secure various
    technical corrections to address issues not anticipated in the
    original legislation.
        Challenges like these are inevitable, given the quasi-
    governmental nature of the Trust. However, they have been and
    will continue to be successfully resolved because of the
    continued cooperative relationship that exists between the
    Trust, the RRB, and other Government Agencies.
        Mr. Chairman, there are a number of ways to measure
    success, and in my opinion, the National Railroad Retirement
    Investment Trust has been a categorical success by any of
    these. A little over four years ago, six trustees were seeking
    a seventh trustee and the Trust's first employee. Just last
    month, the Trust's newly hired Chief Accounting Officer brought
    to 12 the number of full time professionals employed by the
    Trust. Trustees have transitioned on and off of the Board, but
    the spirit of cooperation that brought about railroad
    retirement reform is just as strong today as it was four years
    ago.
        On behalf of my fellow trustees, I again thank you for the
    opportunity to appear before you today and would be happy to
    respond to any questions you may have.
        Mr. LaTourette. Mr. Hixon, thank you very much.
        Mr. Parker, welcome, we look forward to hearing from you.
        Mr. Parker. Thank you. Good afternoon, Mr. Chairman and
    members of the Subcommittee. My name is Joel Parker. I am
    Special Assistant to the President and International Vice
    President of the Transportation Communications International
    Union, as well as an original member of the Board of Trustees
    of the National Railroad Retirement Investment Trust.
        I appreciate the opportunity to discuss with you the
    progress of the Trust. I will focus on the Trust's investment
    strategy and performance--good news.
        The Railroad Retirement and Survivors' Improvement Act of
    2001 has provided for the transfer of approximately $21 billion
    in railroad retirement system funds to the Trust for investment
    in a diversified portfolio similar to other large U.S. pension
    plans.
        As a first priority, the Trust conducted a detailed asset-
    liability study of the railroad retirement system to assess the
    Trust's projected funding obligations and alternative
    approaches to asset allocation. Based on the asset-liability
    study, the Trust developed, and in August of 2002, adopted a
    set of investment guidelines. We recognized that it would not
    be possible to immediately diversify the Trust's assets into
    the full array of asset classes set forth in the guidelines. As
    a result, we adopted an initial strategy of placing the assets
    in indexed accounts in three broad classes: domestic equities,
    international equities, and fixed income.
        To answer the Chairman's question to the previous panel,
    the asset allocation, which we adopted then and still have
    today, was 45 percent in domestic equities of which 5 percent
    could go to private equity, 20 percent in international
    equities, and 35 percent in fixed income.
        Indexation allowed us to diversify the Trust's investment
    exposure quickly and cost effectively as we received railroad
    retirement system funds. With these arrangements in place at
    the end of Fiscal Year 2002, our first fiscal year, the process
    of moving railroad retirement system assets to the Trust and
    investing them could begin. Working with the Railroad
    Retirement Board and the Treasury Department, we developed a
    schedule for transferring railroad retirement system assets
    held by the Treasury over a period of approximately six months
    beginning late in Fiscal Year 2002. When the final scheduled
    transfer took place in mid-March of 2003, the Trust had
    received a total of $19.3 billion of railroad retirement system
    assets.
        During 2003, the Trust undertook a major planning process
    to develop a plan to move the investment portfolio beyond
    indexed only investments. In the course of this process, the
    Trust reviewed a variety of investment strategies and
    methodologies to determine how active management could add
    value to expected returns at reasonable levels of risk, and I
    emphasize the latter, the reasonable levels of risk.
        The product of this effort was an investment plan. The
    investment plan includes a target for the level of the Trust's
    diversification within each asset class between indexed and
    actively managed assets based on an assessment of the potential
    for active management to add value to expected returns at
    reasonable levels of risk.
        Investment performance for the Trust's major asset classes
    was positive for Fiscal Year 2003, our first full year of
    investment activity. The Trust achieved overall performance
    returns of 19.9 percent compared to the target index return of
    18.8 percent. In Fiscal Year 2003, the full year performance
    return resulted in an increase of $2.7 billion in the Trust-
    managed portfolio.
        In U.S. equity, the Trust's goals are a portfolio that
    combines indexation and active management in order to achieve
    performance in excess of the market at reasonable levels of
    risk. Execution of the U.S. equity portion of our investment
    plan focused primarily on large cap enhanced indexation
    strategies whose performance tracks relatively closely with
    that of their benchmark index while adding modest value. In
    Fiscal Year 2004, the Trust hired active managers both in
    domestic large cap strategies and in large cap value
    strategies.
        For fixed income assets, the Trust hired three enhanced
    index bond managers. As in equity, these managers take small
    and carefully calculated deviations from the index portfolios,
    aiming to add modest performance over the index without
    incurring significant risk.
        In addition, under the investment guidelines and our
    investment plan, 5 percent of the overall Trust portfolio,
    which is funded from the 45 percent U.S. equity allocation, was
    designated for private equity investments. In Fiscal Year 2004,
    the first private equity commitments were made.
        Also during Fiscal year 2004, we performed another multi-
    phased asset allocation study to reexamine assumptions about
    return and risk in different asset classes in order to see
    whether the Trust asset allocation policy should be updated to
    improve returns and portfolio diversification. As a result of
    this study, the trustees authorized the investment staff to
    examine strategies in three new asset classes: real estate,
    commodities, and hedge funds. Work continues in these areas,
    but no funds have yet been allocated to these asset classes.
        For the 12 months of Fiscal Year 2004, the investment
    return on all Trust-managed assets was 13.3 percent. This
    compared favorably with the Trust's composite benchmark which
    returned 12.7 percent. At the end of Fiscal Year 2004, assets
    overseen by NRRIT totaled $25 billion, and the total value of
    railroad retirement system assets, including those held in the
    RRB accounts at the Treasury, was $26.4 billion.
        During Fiscal Year 2005, continued diversification away
    from indexation in most major asset classes resulted in
    retaining 21 new managers during the fiscal year. At year end,
    and that is the last fiscal year, at the end of the last fiscal
    year, 34 percent of the Trust investments were actively managed
    by more than 40 investment managers.
        With respect to U.S. equities, the Trust focused primarily
    on active large cap strategies, adding managers in several
    segments of that asset class. During that year, we continued to
    manage our non-U.S. equity investments through investments in
    index funds, but during this period, we adopted the non-U.S.
    equity portion of our investment plan and we took steps to
    begin adding enhanced index strategy. We also continued moving
    beyond indexation in fixed income assets during Fiscal Year
    2005, and in private equity, the trustees approved investments
    in nine additional private equity limited partnerships.
        For Fiscal Year 2005, the investment return on Trust-
    managed assets was 14.0 percent. This compared favorably with
    the composite benchmark which returned 13 percent. At fiscal
    year end, the net asset value of assets overseen by the Trust
    totaled $27.7 billion, and the total value of railroad
    retirement system assets, including those held at the Treasury,
    totaled $29 billion.
        In conclusion, from its inception in February, 2002, to
    September 30th, 2005, the Trust received $21.3 billion from the
    Treasury, and we have transferred $2.7 billion back to the
    Treasury. The net book value of funds received from the
    Treasury since inception, therefore, is $18.6 billion. Those
    assets were invested in a diversified multi-asset class
    portfolio in accordance with our investment policy. This
    diversification of assets has allowed the Trust's assets to
    grow significantly beyond their original book value. As of
    September 30th, 2005, the net asset value of the Trust-managed
    assets totaled $27.7 billion, representing an increase of $9.1
    billion above the net book value of assets transferred to the
    Trust for investment.
        At the end of the most recent quarter, March 31st, 2006,
    the net asset value of assets overseen by the Trust totaled
    $28.9 billion. The total value of railroad retirement system
    assets stood at $30.3 billion, about $10 billion more than the
    total value of assets held by the system at the time the Trust
    began. This $10 billion increase is net of an additional $3.2
    billion transferred from the Trust to the Treasury for benefit
    payments during this period.
        Mr. Chairman, we believe the Trust has provided the kind of
    value to the railroad retirement system and its beneficiaries
    that was envisioned by the authors of the legislation that
    created this new and unique structure. We appreciate that the
    early years have been good ones for the financial markets and
    the Trust. We also recognize that markets have their cycles.
    Our goal has been to establish a solid professional
    organization, to develop a prudent investment plan that
    provides for a broad diversification of assets, and to take
    steps to judicially implement this plan. We believe this three-
    pronged approach will serve us well in strong markets and also
    help to maintain stability in more challenging times.
        Thank you very much.
        Mr. LaTourette. I thank you, Mr. Parker, very much.
        Mr. Scardelletti, welcome to you, and we look forward to
    hearing from you.
        Mr. Scardelletti. Thank you, Mr. Chairman.
        Mr. Chairman and Ranking Member, my name is Robert
    Scardelletti. I am the International President of the
    Transportation Communications International Union. I deeply
    appreciate the opportunity to appear before you today to
    discuss the National Railroad Retirement Investment Trust on
    behalf of rail labor.
        Mr. Chairman, I was part of the rail labor team that worked
    with rail management to develop the initial outlines of the
    proposal for improving the railroad retirement system that
    ultimately became the Railroad Retirement and Survivors'
    Improvement Act of 2001. While the measure was under
    consideration by Congress, I had the privilege of working with
    members of this Committee as you improved and perfected the
    proposal that rail labor and management brought to you. The
    record shows that these collaborations between labor and
    management and between the combined forces of labor,
    management, and forward-looking members of this Committee have
    borne fruit.
        First, the Act provided better railroad retirement benefits
    for rail workers, their dependents, and survivors. Surviving
    spouses of deceased retirees now inherit the full Tier II
    annuity of the retiree rather than no more than 50 percent of
    the annuity which was previously allowed under law. The age at
    which a worker with 30 years of service may retire was reduced
    from 62 to 60. And the vesting period for Tier I and Tier II
    benefits was cut in half from 10 to 5 years.
        Second, the financial security of the railroad retirement
    system has been strengthened. The total assets of the system
    now stand at $30.3 billion, about $10 billion more than when
    the Trust first began its investment activities in the Fall of
    2002, which is a 50 percent increase.
        Third, the cost of the system to employers and employees
    has declined. For calendar year 2006, the Tier II rate on
    employees is 4.4 percent, down from 4.9 percent prior to the
    Act, and the employer tax has dropped from 16.1 percent to
    12.6.
        The structure of the Trust has worked well. The balance of
    three labor and three management members of the Board of
    Trustees along with one independent trustee, has produced a
    cooperative team-oriented approach to meeting a common goal:
    protecting and growing the assets held by the Trust for the
    benefit of current and future railroad retirees and their
    dependents, spouses, and survivors. I am not aware of a single
    instance to date in which Trust decisions have been discussed
    or decided based on a labor or a management affiliation.
        The success to date of the Trust is testimony not only to
    the trustees and staff who are directly responsible for its
    operation but also to the leadership of this Committee and the
    Congress in passing the legislation in 2001. In addition, the
    cooperation and assistance of the Railroad Retirement Board has
    been vital to the start-up and smooth functioning of the Trust.
    Likewise, the Treasury Department has played a key role in
    developing new policies and procedures to facilitate the work
    of this unique organization and its special mission.
        One issue of concern to active workers and retirees,
    especially in light of the favorable position of the Trust
    Fund, is that future appropriations for the Railroad Retirement
    Board may not be adequate to maintain the level of service the
    railroad community expects and deserves. We would ask for your
    assistance in monitoring this situation.
        Mr. Chairman, we in the rail labor movement keep a close
    eye on the activities of the Trust. After all, our members have
    much to gain or lose from its success or failure. And so far,
    we are very satisfied with what we see.
        I appreciate the opportunity to speak to you on this
    important subject and would be pleased to answer any questions.
    Thank you.
        Mr. LaTourette. Thank you, Mr. Scardelletti.
        Mr. Hamberger, thank you for coming. We look forward to
    hearing from you.
        Mr. Hamberger. Mr. Chairman, thank you, Congresswoman,
    Brown, thank you for the opportunity to be here. I am last in
    the line here, so I will make five quick points.
        Point number one, thank you for your wisdom and leadership
    on this Committee, this Subcommittee, and Congress in general
    for enacting the Railroad Retirement and Survivors' Improvement
    Act of 2001. Now, you probably expected me to say that, but
    those are not empty words. I have a personal memory of a
    hearing scheduled September 17th, 1998, a mere two months after
    I got this job and the first time I was testifying before this
    Subcommittee. You can imagine how pleased I was that the first
    hearing was on the interaction of Tier I and Tier II, and
    widows' and survivors' benefits, and the supplemental annuity
    tax and how it interacted with the social security tax.
        Notwithstanding my apprehension, the hearing was a major
    success, and my counterpart at that time, Clarence Monin, I
    believe with the BLE, and I, under the urging of this
    Subcommittee, agreed that management and labor should sit down
    and see whether they could come up with an agreed upon
    approach.
        Just to give it further proof, a contemporaneous written
    statement, we put out a press release dated September 28th, in
    which the AAR thanked and applauded the Subcommittee for
    providing the catalyst for talks on railroad retirement reform.
    We hope to schedule meetings with rail labor in the very near
    future. We did schedule those meetings, and because of that
    hearing in September, 1998, we are able to hold this today,
    almost eight years later. If this could be submitted for the
    record, I would appreciate it.
        Second point, it shows how well management and labor can
    work together and when we do, how successful we can be. The
    personal respect I have for Mr. Scardelletti, Mr. Parker, and
    others in rail labor that was developed over this long fight
    still survives today, and I look at them as partners in many
    ways.
        Number three, clearly, the legislation has worked. You have
    heard about how well it has worked.
        Let me focus point number four on how well it has worked
    for the railroads. Over the course of the last four years, rail
    taxes on management have gone down by a total of $1.5 billion.
    We talked about this at the last hearing two weeks ago. What
    happened to that money? Well, we increased our spending on
    capital and maintenance over those same four years by $5.8
    billion; we hired 10,000 new employees since 2003; and we have
    dealt with a fuel situation where in 2001, the average price of
    diesel fuel was 85 cents a gallon, and as of March 31, 2006, it
    has more than doubled to $1.89. So we have taken that money and
    turned it back into the industry, and we continue to do that.
        As I testified two weeks ago, $8.3 billion is going to be
    spent on capital expenditures in 2006 alone, and just this
    week, two of our members, Burlington Northern Santa Fe and
    Union Pacific announced an additional $100 million to be spent
    over the next several years to triple track more than 40 miles
    of right of way into the Southern Powder River Basin. When we
    have the opportunity to invest, we take that opportunity.
        Number five, I will end as I began, thanking you for your
    leadership, this time for reporting out H.R. 5074 which would
    continue to have the Treasury be the dispersing agent for the
    railroad retirement checks. As you know, that is important for
    at least two reasons. One, it is much cheaper; I believe it is
    about $2 a check versus 18 cents a check, the cheaper coming
    out of the Department of the Treasury. And second, it means
    that we do not have to turn over massive amounts of personal
    information to an outside private vendor.
        So thank you for your work on railroad retirement reform
    and thank you for your work on H.R. 5074.
        Mr. LaTourette. Mr. Hamberger, thank you. I notice a theme
    between your testimony last time and this time. You always seem
    to have five points, and that makes it easier for those of us
    up here to follow.
        Thank you all for testifying today. I appreciate it very
    much.
        Mr. Hixon, just by way of education, I would be interested
    in knowing how the fund works and who selects the products in
    the portfolio? Whether it is the Board, or it is the fund
    managers, and I assume it is not the individual employee, but
    who makes the selection as to what stocks are in the portfolio
    of the Trust?
        Mr. Hixon. The selection of what is in the portfolio is
    made by the investment manager that the Trust has retained to
    make those decisions. We have a very stringent process where
    the employees of the Trust review various candidates for an
    investment opportunity they have. It is a very qualitative and
    quantitative process, a lot of due diligence. It takes about
    six months to make a choice. But once the staff recommends the
    investment manager to the Board, the Board must approve the
    investment manager, then that investment manager is the one
    that actually makes the investment decisions within the
    portfolio.
        Mr. LaTourette. How is that reviewed by the trustees? Does
    the fund manager then come and say, here is what we have done,
    and what do you all think, or no?
        Mr. Hixon. The trust staff actually has several visits a
    year with the investment managers, onsite visits, to review
    their performance. They have monthly reviews on their
    performance as well. They have investment guidelines they have
    to comply with. Then each year, the trustees actually get an
    in-depth annual review on their performance. Like the U.S.
    equity side, we get an annual review on what has happened with
    the investment managers on the U.S. equity side, a detailed
    review, and each month we get a review of the performance of
    each of our investment managers.
        Mr. LaTourette. Can you describe for us what safeguards are
    in place to prevent things like conflicts of interest, insider
    trading, things like that on behalf of the fund managers?
        Mr. Hixon. We have our custodian bank. Northern Trust has
    our investment guidelines, and they monitor the investments
    made by the investment managers. For example, we have set up a
    rule that the investment managers could not invest in railroad
    stocks, and after the way stocks of our industry have performed
    over the last couple years, several of them have bemoaned the
    fact that we restrict them from investing in railroads.
        But nevertheless, the custodian then reviews each of their
    investments to make sure they meet the criteria that we have
    set for that investment manager. In the event they have
    invested in any railroad or invested outside of what they were
    allowed to invest in, then we make them give up that
    investment.
        Mr. LaTourette. Also in your testimony, you mentioned that,
    given I guess we can call it the quasi-governmental nature of
    the Trust, some issues have been created with the IRS and other
    Agencies. Have those issues been resolved, or do you think that
    you are going to be coming to the Committee in the future for
    additional technical corrections?
        Mr. Hixon. I think a lot of those issues have been
    resolved. I think it was the nature of the start-up, where a
    lot of people didn't know what we were doing or how we were set
    up. I think over the last couple of years, we have been able to
    get that settled, and I think at this point we don't anticipate
    coming to the Committee with any other corrections, but as
    always if we see a need, we will come to you.
        Mr. LaTourette. Thank you.
        Mr. Parker, I just want to elaborate on part of your
    testimony. You mentioned in 2004 that three enhanced index bond
    managers were hired as well as managers for large cap
    strategies and domestic capitalization strategies. You also
    indicated that you are expanding the use of the fund manager
    for major asset classes. At this point, are most of the Trust
    assets managed primarily by outside managers, or do you still
    have a real strong in-house management as well?
        Mr. Parker. We don't have any in-house management. The
    staff selects managers. All the assets are externally managed.
    Maybe the confusion was that we indexed at first wholly, and we
    are gradually moving toward an active strategy depending on
    asset class. The amount of active management will vary across
    different asset classes based on the asset allocation plan.
        Mr. LaTourette. When the Trust makes or retains a new
    outside manager, who makes that selection, and can you just
    briefly describe for us how the selection process works?
        Mr. Parker. I think Jim, Mr. Hixon, went through it fairly
    well. We have a very rigorous review process conducted by our
    in-house staff. We don't have any external staff. We have
    external managers, but our staff is totally in-house. We have
    an open door policy that any manager can approach the staff.
    You don't have to jump through hoops.
        They will have a meeting, and then they will conduct a
    review that generally takes up to six months. That includes a
    winnowing process where the manager has to fit within our
    overall asset allocation strategy. So, if a manager approached
    us who was in a sector that we were not ready or prepared to go
    into, let us say large cap growth to just use an example, we
    wouldn't pursue that manager at that time, but we would put
    them on the shelf and look at them when we were ready because a
    diversification plan is very methodical. Our goal is to
    diversify, diversify, diversify, but very carefully, very
    prudently, very conservatively.
        The ultimate recommendation of the manager, to get back to
    your question, is made by the staff. They have to come to us,
    to the trustees, with their final recommendation. They present
    to us a very in-depth recommendation, a relative analysis of
    the manager versus all the other managers they looked at, a due
    diligence book that generally is a volume this thick, very
    thick, with all the interviews and analyses they have made of
    that particular manager.
        As Mr. Hixon said, that doesn't end it. There is a
    continual monitoring process of all the managers by the in-
    house staff.
        Mr. LaTourette. Then in my last question for you, Mr.
    Parker, I just want to focus on the 5 percent private equity.
    Does that mean that the Trust is investing in IPOs?
        Mr. Parker. We are investing in limited partnerships, I
    want to say exclusively at this point. Well, with private
    equity, some of the private equities, the investment manager
    with a general partner who is doing the investments may be
    investing in IPOS and buyouts and things like that.
        Mr.Hixon. What we do is we look at the performance of their
    funds, and they take our contribution to those funds. Then they
    allocate them as they see fit, and we monitor their
    performance. Some of them may be doing it, but it is not
    something we get involved in. We are not involved in those
    decisions.
        Mr. LaTourette. So, just to be clear, you make the
    investments with the limited partnership. The limited
    partnership, as part of their work, may invest in an IPO, but
    you don't say we are going to invest in an IPO.
        Mr. Parker. That is correct.
        Mr. LaTourette. OK, so there is a step in between.
        Mr. Hamberger, I just want to ask you one question. There
    was some talk recently about Amtrak perhaps suggesting that
    they wanted to remove their employees from the railroad
    retirement system and place them into social security. I would
    just like to solicit your thoughts on whether that is a good
    idea or a bad idea.
        Mr. Hamberger. Bad idea.
        Mr. LaTourette. Right. Am I correct, to Mr. Parker and Mr.
    Hixon, it has been a while since I have seen the figures, but
    that Amtrak employee contributions and Amtrak contributions to
    the Trust are about 10 percent of receipts? Is that fair?
        Mr. Hixon. I think that is fair. It may be slightly less
    now but about that.
        Mr. LaTourette. About 10 percent, OK.
        Mr. Scardelletti, I asked Chairman Schwartz this question.
    We had sort of crunch, a financial crunch in 1983, I think
    after the passage of the bill, and in 2001 we saw additional
    retirements. Can you, from your standpoint, sort of give us the
    forecast based upon where you think employment is going and
    whether or not we are going to see an additional strain on the
    railroad retirement system as a result of the retirement of the
    baby boomers?
        Mr. Scardelletti. Well, I think, as the Board testified,
    the actuaries have gone through those numbers quite
    extensively, and all indications are the fund can handle all
    the people that are intending to retire without any problem. As
    far as the railroads hiring, of course, that is under their
    control, but as Mr. Hamberger just said, they have hired 10,000
    and they are talking about hiring a number of other people. So
    I think the fund is in excellent shape to handle the situation.
        Mr. LaTourette. We had a hearing a couple of weeks ago that
    Mr. Hamberger alluded to on rail capacity. Clearly, what came
    out of that hearing, at least in my mind, is that there are
    choke points and part of the choke points, some of it is
    infrastructure and some of it is train crews, quite frankly.
    Just for my own edification, if a railroad employee is retired,
    does he or she have the ability to come back and help alleviate
    some of that difficulty if all parties are willing, or does
    that screw up their ability to continue to receive retirement
    benefits?
        Mr. Scardelletti. No. Once you retire, you have to resign
    from the railroad when you retire, and once you get your
    pension, you are not allowed to work for your former employer.
        Mr. LaTourette. OK, thank you very much.
        Ms. Brown?
        Ms. Brown. Mr. Hamberger, you stated that the Act partially
    encouraged the retirement of a number of railroad workers, so
    that the industry had a significant increase in its hiring
    requirements. How many workers has the railroad industry hired
    since enactment of the Act, and how many would you say are the
    results of the Act directly?
        Mr. Hamberger. I really can't say how many are a result of
    the Act directly, but in my written testimony, we do have a
    chart that shows the number, if I can just refer you to that. I
    believe it was at 163,000 it looks like in 2001. We are now up
    to about 165,000. It fell from 2001 to 2003, hitting about
    153,000. So about 10,000 retirees over that two year period,
    and then between 2003 and 2005, rehiring those 10,000 plus
    about another 2,000.
        Ms. Brown. Mr. Scardelletti, I know that you are concerned
    for ensuring future appropriations for the Railroad Retirement
    Board, and I will be happy to send a letter with the Chairman
    to the Committee. Have you heard of any problems your members
    are experiencing with the retirement program, or is everything
    going real well, as you said, from the beginning?
        Mr. Scardelletti. Right now, I think it is going well, but
    the Railroad Retirement Board is considering cutting the number
    of field offices which then will be a problem. That is what we
    are talking about, and we think money should be allocated for
    that, to keep those offices there, so people have ready access
    like they have had forever. We would be very happy to provide
    the Committee with details on this. Rail labor would be happy
    to do that. I am sure our people have already discussed it,
    though, individually, but we will provide something in writing
    that goes right to the crux of what we are saying.
        Ms. Brown. That is pretty much it. You know everything is
    going very well, it seems, excellent performance and
    relationships with other pension plans. I guess just keep up
    the good work.
        Any other comments that you want to make to the Committee,
    Mr. Hixon?
        Mr. Hixon. No, but thank you for all your assistance.
        Ms. Brown. We don't usually have a Committee meeting this
    pleasant.
        Mr. LaTourette. Well, I thank the gentlelady very much, and
    I hope this is the first of many such happy meetings.
        I want to thank all of you for your testimony today. I
    think that, as we said with the first panel, a growth of 50
    percent, taking assets and increasing it by $10 billion in a
    short period of time is remarkable. Our counsel, Mr. Scammel,
    in commenting on your report at the close of 2005, said that if
    everything was as clear as that, the Federal Government would
    be running a lot better. So you certainly deserve
    congratulations on the good work that you are doing. I think
    maybe after the hearing, Ms. Brown and I would like to talk to
    you about managing our retirement portfolios as well.
        Again, thank you all for this excellent report. Thank you
    for coming today, and you go with our thanks.
        [Whereupon, at 3:15 p.m., the subcommittee was adjourned.]

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