Issues in the 2007 Budget
March 2006
Overview
The Administration’s FY 2007 budget proposal — a detailed budget request for the coming federal fiscal year — was submitted to Congress in early February. This budget request tells Congress what the President believes overall federal fiscal policy should be and lays out the President's relative priorities for federal programs such as defense, agriculture, education, health, and so on. The President’s budget also signals to Congress what spending and tax policy changes the President recommends. It is the tax policy portion of the budget that ICMA-RC focuses on and will briefly discuss. The following are the key retirement and savings issues in the budget proposal:
- Permanent Extension of provisions contained in the Economic Growth & Tax Relief Reconciliation Act of 2001 (EGTRRA)
- Retirement & Savings Initiatives (LSAs, RSAs, and ERSAs)
- Tax-free withdrawals from IRAs for charitable contributions
- Modification in Defined Benefit Funding Rules
- Individual Development Accounts (IDA)
Some of the proposals listed above were included in budget requests for previous fiscal years and also are included in the pension bills currently under consideration in Congress. (see Outlook for Pension Reforms in 2006).
ICMA-RC is working behind the scenes and with state and local groups in supporting permanency for the retirement and savings provisions of EGTRRA; we also are part of coalition that is educating members and staff on the design flaws in the Retirement and Savings Initiatives — in particular, ERSAs.
Retirement & Savings Initiatives
The savings and retirement initiatives proposed first in the Administration’s 2003 budget — Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) and Employee Retirement Savings Accounts (ERSAs) — also are in the most recent budget proposal from the Administration. ICMA-RC analyzed the proposals when first released and paid particularly close attention to the effect that ERSAs would have on government employees and plans. The Administration's proposal would mandate consolidation of all employee retirement savings arrangements, including 457(b) plans, into a single arrangement called an ERSA. Employers would be required to either convert existing retirement plans into an ERSA or freeze existing arrangements and start new plans. Clearly the ERSA proposal would have significant ramifications for state and local government (457) employers.
While the President did not reference the savings and retirement initiatives in his State of the Union Address (as he has in the past) the proposals now have Congressional supporters and similar provisions were adopted by the President’s Tax Reform Commission in its report last fall. Both plans recommended by the Commission call for restructured tax-preferred savings accounts. Specifically, they suggest two similar employer-based retirement savings vehicles — one invests pre-tax contributions with taxed withdrawals and the other after-tax contributions with tax-free withdrawals. Both initiatives look much like the ERSA but are called “Save at Work” savings plans.
Recent ICMA-RC Legislative Affairs Activities on ERSAs
Background
Of the three savings and retirement initiatives, ICMA-RC has been most focused on ERSAs. The proposal was introduced in both the House and Senate. The bill’s Senate sponsor, Senator Craig Thomas, made a recent move to have ERSAs included in the Senate pension bill. For that reason, ICMA-RC has been closely monitoring the ERSA bill that was introduced in the House and Senate last year. And when the President's Tax Reform panel made recommendations to rename the initiatives and limit the flexibility on the LSAs, we watched to see if the bill's sponsors would reintroduce their bills to reflect a change. They did not.
ERSAs would consolidate all existing employer-sponsored retirement plans into one single plan that most resembles a 401(k) plan. The ERSA would have a particularly negative effect on governmental plans because it would eliminate many of the special provisions and flexibility of existing 457 (b), including exemption from the 10 percent penalty for pre-59 ½ withdrawals, and 401(a) plans.
ERSA Coalition
We recently joined the “ERSA — Save at Work” coalition that is made up of industry groups, state and local associations and other retirement companies. The coalition’s strategy on ERSAs is to educate senior staff of the tax-writing committee members on unique benefits of plans designed for state and local government employees. The Administration and Congressional sponsors are promoting ERSAs as a necessary step in the direction of simplification. Our goal is to make a distinction between simplification (for the sake of simplification) and retirement plans that are complex because they are specifically designed to meet the needs of state and local government employees.
There is a provision in the Senate pension bill that permits state and local governments to open new 401(k) plans for the first time since 1986. It is important to note that there was an effort to insert an ERSA provision by Senator Larry Craig (R-ID) during the Finance committee consideration of the bill. Instead, he settled for the provision that permits 401(k) plans.
Outlook
ICMA-RC expects the effort to consolidate all employer-provided plans into a universal 401(k) type plan will continue. If the final version of the pension bill includes the 401(k) provision it will be the first step toward an ERSA. ICMA-RC will continue our efforts to educate policy makers on the unique benefits of governmental plans.