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WASHINGTON D.C. (LoanSafe.org) – This week, the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises heard from various investors and issuer advocates during a hearing on corporate governance and shareholder empowerment. The House of Representatives passed a reform bill in December that includes an annual “say on pay” mandate and authorization for the SEC to issue a proxy access rule, but that measure doesn’t require majority voting.
The April 21 hearing focused on three bills–H.R. 2861, H.R. 3272, and H.R. 3351–which were introduced last year by Reps. Gary Peters of Michigan, Keith Ellison of Minnesota, and Mary Jo Kilroy of Ohio, respectively.
Peters’ bill, H.R. 2861, the “Shareholder Empowerment Act of 2009,” includes provisions to mandate a majority voting standard in uncontested elections and independent board chairs. Ellison’s bill, H.R. 3272, the “Corporate Governance Reform Act of 2009,” calls for independent board chairs and risk management committees, and would direct the SEC to study whether corporate directors should be certified by the commission. Kilroy’s bill calls for shareholder votes on annual pay practices and severance pay, and would require large institutional investment managers to disclose their votes on those agenda items.
The subcommittee has not scheduled a mark-up on any of the bills, but the House may eventually have to decide whether to support majority voting and other governance provisions that were not in the House bill if the Senate approves Senator Christopher Dodd’s financial reform legislation.
In discussing his bill, Peters stressed the role that governance failures played in the financial crisis. “The balance of power must change,” Peters said. “Shareholders should have the power to hold management and corporate boards accountable.”
The Republicans on the panel disagreed. Rep. Scott Garrett of New Jersey said he wasn’t convinced that the reforms in Peters’ bill would have prevented the financial crisis or would be a “net positive” in the future. Garrett said he didn’t want to overturn 150 years of state law precedent, and asked why new governance rules should be imposed on non-financial firms.
Likewise, Rep. Jeb Hensarling of Texas said, “I’m not sure the federal government is qualified to determine the best practices of corporate governance,” recalling the collapse of Fannie Mae, a federally chartered mortgage firm.
In response, Peters said: “It’s not about a federal government takeover. It’s about empowering the people who actually own these companies.”
Three of the investor representatives at the hearing–Brandon Rees, deputy director of the AFL-CIO’s Office of Investment; Gregory Smith, general counsel of the Public Employees’ Retirement Association of Colorado; and James Allen, head of capital markets policy at the CFA Institute–all endorsed proxy access, majority voting, and greater disclosure of proxy voting. However, Allen said the CFA Institute didn’t support a requirement for independent board chairs, saying “such matters should be left to the boards to decide.”
Republican lawmakers and corporate advocates also opposed a mandate for companies to appoint a independent chairman. Garrett recalled that Warren Buffett, Bill Gates, and Sam Walton all held both the CEO and chairman titles. Buffett continues to hold both roles at Berkshire Hathaway, Gates now serves as Microsoft’schairman, and a Walton family member chairs the board at Wal-Mart Stores.
Rees responded by noting that most CEOs are “no Bill Gates.” Smith observed that Gates, as a CEO, would have worked well with an independent board chair, and said, “nothing would have tied his hands” while running Microsoft.
Rep. Paul Kanjorski, the Pennsylvania Democrat who chairs the subcommittee, said an independent board chair “is an appealing idea,” but said, “we must explore the impact on small companies.”
Rep. John Campbell, a Republican from California, said he supported proxy access and majority voting and observed that they would eliminate the need to mandate other reforms. However, Campbell said he objected to the provisions in the House and Senate bills that would let the SEC set the ownership thresholds for nominating directors. He said the thresholds (1, 3, or 5 percent, depending on a firm’s market cap) in the SEC’s draft rule are too low and should be raised to 5, 10, and 20 percent. Smith responded by noting that the 10 largest U.S. public pension funds collectively own less than 1 percent of most companies, with their largest stake amounting to just 2.6 percent.
Most Democrats voiced support for the concept of majority voting, but Rep. Melissa Bean of Illinois expressed concern about imposing a mandate on investors who voted against shareholder proposals seeking that reform. In response, Rees said majority voting will make elections “more meaningful,” and said minimum federal standards are needed because of supermajority requirements, dual-class structures, and other barriers to shareholder action that some firms have.
Alexander Cutler, CEO and chairman of Eaton Corp., and Robert E. Smith, deputy general counsel at NiSource, both testified against the bills. Cutler and Smith said there had been a “sea change” among boards, and that the perception that most directors are docile and don’t question management is no longer accurate. They also noted the various governance reforms–such as majority voting–that many issuers had adopted voluntarily.
Gregory Smith of Colorado PERA said the fact that some companies have adopted reforms shouldn’t be used to “shield” those firms that haven’t acted. “To suggest that this relieves the need for federal legislation would be a travesty,” he said.
WORSE THAN BERNIE MADOFF – COLORADO’S 2010 PENSION THEFT.
What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.
We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.
If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?
The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.
Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.
PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.
Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.
The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.
Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)
Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):
Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
Senator Spence said “The bill places an unfair burden on retirees.”
Senator Scheffel said “We are breaching our promises to existing retirees.”
Senator Lundberg said “This bill is a deal that was cut before this body met.”
The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.
So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.
The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.
Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.
It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.
Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.
PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.”
Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.
Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.
There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.
Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.
The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)
PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.
While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).
The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.”
Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.
Algernon Moncrief(Quote) (Reply)
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