Negotiations on legislation overhauling the U.S. pension system stumbled early this morning after lawmakers couldn't agree on whether to include $35 billion in tax breaks.
House Republicans boycotted a meeting last night, and Senate Finance Committee Chairman Charles Grassley accused them of avoiding a public vote on their plan to strip the popular tax breaks, including renewal of a research credit for businesses, from the legislation.
The House Republicans were risking the pension security of millions of Americans to push a "very chancy" plan to reduce the estate tax on multimillion-dollar estates, said Grassley, an Iowa Republican.
House leaders and Senate Majority Leader Bill Frist want to combine the tax breaks, which have bi-partisan support, in a separate measure with the controversial estate tax provision as a way to lure votes for it.
"I just wonder why you wouldn't have guts enough to come forth and cast a vote and be transparent and get things done," Grassley said as last night's session began.
The pension measure would force more than 30,000 U.S. companies to put additional money into pension funds they provide for some 44 million workers. Companies underfunded their plans last year by $450 billion, according to the Labor Department, and the Pension Benefit Guaranty Corp., the quasi-governmental agency that insures U.S. defined-benefit pensions, reported a $22.8 billion deficit this year.
Many lawmakers say a multibillion dollar taxpayer bailout may be needed if nothing is done.
Lower Earnings
Grassley, and Senator Max Baucus, a Montana Democrat, contend that the tax breaks may fail if coupled with the estate tax exemption. They want to keep them on the pensions measure, which passed the Senate 97-2 last year. The research credit expired Dec. 31, and Baucus said he is concerned that many of the 16,000 companies that claim it will be forced to report lower earnings because of a higher tax rate.
After House Ways and Means Committee Chairman Bill Thomas, a California Republican and other House Republicans didn't appear for a negotiating session in a Senate office building last night, Grassley, Baucus and four other senators walked to the Capitol to meet with Thomas.
When the lawmakers emerged just before 1 a.m. today, Kennedy said they made some progress, "But we're not there."
Grassley Annoyed
In the earlier session, Grassley accused Thomas of putting a "knife in the back" by reneging on promises in May to put the tax breaks in the pension measure. Thomas avoided reporters at the later meeting. His aide, Ianthe Jackson, didn't respond to a request for a comment.
Kevin Smith, a spokesman for House Majority Leader John Boehner, an Ohio Republican who wasn't at the meeting, said in an e-mail that Boehner "believes we ought to get back to working together in a constructive fashion."
Tax breaks in the measure include a federal deduction for state and local sales taxes, breaks for college tuition, and incentives for employers to hire former welfare recipients. The package extends a deduction for teachers who buy their own classroom supplies, a $5,000 credit for people who buy a home in the District of Columbia for the first time, and a tax credit for people who buy certain types of electric vehicles.
Try Again
Negotiators said they will try again this morning and, if an agreement is reached, a vote may occur in the House later today. The Senate is scheduled to remain in session until Aug. 4.
The government now considers 90 percent the full funding level of a pension plan. The House-Senate agreement, as it stands now, would give companies a three-year phase-in period to replenish their pension funds. After that, they must reach 100 percent funding in seven years or face penalties.
Companies would have to use a lower interest rate to calculate the return on their funding investments. That would force them to put more money into the plans because future returns would be lower.
Older companies that have more retirees than workers would also have to pay more into their plans using varying interest rates—higher rates for young workers and lower rates for older workers—instead of a uniform rate used now.
Double Test
The proposed agreement provides a double test for determining which companies are most likely to fall short of their pension obligations and have to put more money into their funds. A company would have to fail both tests to be designated "at risk."
A company whose pension plan is funded at less than 70 percent of its liabilities in a worst-case scenario in which every employee retires early at maximum benefits would flunk the first test. A plan funded at less than 80 percent of liabilities using standard retirement calculations would fail the second test.
A company that failed both tests would have a year to accelerate payments to pass both tests. The 80 percent test would be phased in over three years, starting at 65 percent in 2008.
General Motors Corp., based in Detroit, won a victory when a Senate provision that classified companies with below-investment- grade credit ratings as "at risk," was removed from the measure. GM's bonds were cut to junk in May 2005.
Largest Plan
GM, which has the largest private defined-benefit pension plan in the world, lost a battle to be able to count its credit balances, or money paid into pension plans early, when calculating how well funded its plan is.
Only companies that are above 80 percent funded will be able to count those balances toward quarterly pension payments. The rule will help avoid cases like that of U.S. Airways, which made no real payments into one of its plans for more than four years. The airline's plans were more than $2.3 billion underfunded when they were transferred to the PBGC.
Senator Mike Enzi, chairman of the House-Senate negotiations said the agreement would allow companies such as New York-based Goldman Sachs Group Inc. and Boston-based Fidelity Investments to directly advise employers and employees about 401(k) and IRA retirement accounts that they manage. Lawmakers argued over whether this would be a conflict of interest for the investment companies. They compromised by requiring advisers to use a computer model that calculates the best plans for employees based on their age and income.
Legal Assurance
Another contentious point was whether to provide legal assurance for the more than 1,800 companies that have switched to hybrid defined-benefit plans, which combine the federally backed traditional plans with a more portable 401(k)-type plan. Several companies that made the switch, such as Armonk, New York-based International Business Machines Corp. and Charlotte, North Carolina-based Bank of America Corp., were sued by plan participants. In at least one case the courts ruled that the plans discriminate against older workers.
Some companies wanted a retroactive liability shield for companies that have already been sued for switching to hybrid plans. The agreement doesn't go that far, though it clarifies the law so that companies can offer the hybrid plans in the future without fear of lawsuits, Enzi said.
The conferees also plan to give special pension aid to four airlines: AMR Corp.'s American Airlines, based in Fort Worth, Texas; Delta Air Lines Inc., based in Atlanta; Continental Airlines Inc. based in Houston, and Northwest Airlines Corp., based in Eagan, Minnesota.
Need More Time
Delta and Northwest, operating in bankruptcy, say they need additional time to pay underfunded pensions to avoid having to terminate the plans. American and Continental, which aren't bankrupt, say they need similar assistance to stay competitive.
Enzi said conferees have agreed that Delta and Northwest should get longer than American and Continental to pay pension obligations.
Negotiators removed a provision that would have allowed employers and health insurers to claim money from employees who received compensation from a third party for an illness or accident. Democrats opposed the measure and threatened to vote against the legislation in the Senate.
To contact the reporter on this story: Jay Newton-Small in Washington at (1)(202) 624-1871 or jnewtonsmallbloomberg.net; Ryan J. Donmoyer in Washington at (1) (202) 624-1887 or rdonmoyerbloomberg.net
To contact the editor responsible for this story: Ken Fireman in Washington at (1)(202) 624-1978 or Kfireman1bloomberg.net.