[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
____
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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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