(It seemed to me that Dick's question (#13 in Conv. 1225) warranted a new thread.)

The 1997 loss of tax exemption

Please keep in mind that I'm posting elderly, 1997 material. TIAA-CREF, to my knowledge, has not publicly released any studies of the actual net results (i.e. through today) of the legislation. That would highlight just how much came out of our pockets and moved to Uncle Sam's. You can't blame 'em for keeping quiet about it!

This NY Times article is an excellent summary, but can only be read by paid members or subscribers. Of course, it's available on your institution's library network if you have Proquest or Infotrac. The citation is: "Budget Deal to Cost T.I.A.A.-C.R.E.F. Its Tax Exemption", by Reed Abelson, NY Times, July 30, 1997.

Excerpts:

"Mutual of America, another not-for-profit group that provides retirement services, will also lose its tax exemption under the bill. ...

"'As we consider the implications of T.I.A.A. and C.R.E.F. becoming taxable entities, we have an opportunity to re-examine many activities which previously have been foreclosed to us because of our exempt status,' Mr. Biggs said. 'I believe that we can turn this event into a long-term advantage for all our current and future T.I.A.A.-C.R.E.F. participants."

Some points T-C made (in a very early "FAQ") were:

"What would happen if TIAA-CREF lost its tax exemption? TIAA would have to pay taxes on the funds that it sets aside in contingency reserves. And since TIAA operates on a not-for-profit basis, these taxes would directly reduce the amount of dividends that could be credited on TIAA accumulating and payout annuities.

"What would be the impact of the tax on TIAA participants? ... complex and would be subject to year-to-year variations, a rudimentary estimate of TIAA's potential tax liability based on TIAA's 1996 statutory financial statement suggests that federal income taxes would cost the equivalent of about of 1% of TIAA's assets each year. This would translate into a reduction of as much as 0.50% in TIAA's accumulating and payout dividend interest rates each. In practice TIAA would do everything that it legally could to minimize its tax bill, so that the actual cost of the tax might be considerably less. However, if we assume the % is approximately correct, long-term participants who are at the beginning of their careers could expect the compound effect of these dividend reductions to produce retirement income levels that are as much as 10% to 15% less than what they would otherwise have received. The retirement income of participants who had already accumulated substantial retirement funds before the imposition of the tax would not be impacted as much, since the reduction dividends would apply for fewer years. For example, a % reduction in the dividend interest rate for new retirees would reduce the lifetime level of monthly annuity income by about 3% to 5%. ...

"Would the loss of TIAA-CREF's tax exemption result in other changes? While the loss of TIAA-CREF's tax exemption would result in reduced dividend rates in TIAA, most other aspects of TIAA-CREF's operations would remain unchanged. ..."

To me, the most intriguing tidbit is the question of whether or not CREF is an insurance company. You would think that a company issuing variable annuities would be an insurance company. In fact, the CREF Constitution has many references to "the insurance law", "Superintendent of Insurance of the State of New York", and to "the Insurance Law of the State of New York." CREF vigorously states that it is not an insurance company, although I caught them writing (in their .pdf An Overview of T.I.A.A.'s Executive Compensation Policy, (which of course justifies paying their executives as if they worked for ... you guessed it, a big insurance company ...) "TIAA and CREF's combined assets would make the organization the third largest U.S. life insurance company".

At the time, the congressional research service produced a discussion of the topic, which TIAA-CREF posted. That link is to the Internet Way-Back Machine, which has such huge storage that response is significantly slow. But it's an invaluable resource, worth waiting 25 seconds for. I think it's an impartial look at the issue, and it's very readable.

Returning to Dick's question, it's quite interesting that both the AAUP and the ACE (which were perhaps in an adversary position to TIAA-CREF during the later 1989 settlement) wrote letters to Congress opposing the legislation. Unfortunately, their collegial, low-budget lobbying was no match for (I'm making this up...) the likes of Fidelity.

I'll post on Dick's second question later this weekend.

Tim

Originally posted in thread: 1238

Payback Time by Robert Kuttner (co-editor American Prospect)

The Republicans want to cut taxes for nearly everyone. But they've finally identified a group whose taxes they don't mind raising--retired teachers.

The House tax bill would repeal the tax exemption of the nation's largest pension plan--TIAA-CREF. The $195 billion non-profit company manages pensions for most college teachers and retirees from other non-profit organizations.

The surprise measure, unveiled at a June 9 press conference by House Ways and Means Committee Chairman Bill Archer of Texas and passed by the full House, was never the subject of hearings. It would levy $1.2-1.5 billion in taxes on TIAA-CREF over 10 years, and thereby reduce pension income for members by an estimated 3-5 percent.

Why TIAA-CREF? There are several theories. For one thing, college professors are a bunch of pointy-headed liberals. Their unions tend to support Democrats. The House bill targets two other tax benefits for educators. It would end the tax-free status of tuition scholarships for graduate students and for children of professors.

More concretely, key staffers to Archer don't like TIAA-CREF, which has been tax-exempt since 1918. In the 1986 tax reform bill, which required some non-profits to pay some tax, Congress voted to tax profits on the life insurance that TIAA-CREF sells, but to retain the tax-exemption on its core activity--annuity plans for teachers. However, Ken Kies, chief of staff to the Congressional Joint Tax Committee and a key Archer advisor, has long believed that TIAA-CREF should be taxed like a commmercial company.

Other likely culprits are TIAA-CREF's for-profit rivals. A Houston commercial insurance outfit based in Archer's home town, the Variable Annuity Life Insurance Company (VALIC), competes directly with TIAA-CREF. VALIC's chairman recently told a trade paper that ending TIAA-CREF's tax exemption was "long overdue."

VALIC's corporate parent, the American General Group, is an Archer campaign contributor and gave $115,000 in soft money to the Republican National Committee. More broadly, the organized right has lately mounted an attack on large non-profit institutions, painting them as unfair competitors to tax-paying entrepreneurs.

The irony is that TIAA-CREF efficiently serves a goal that has long eluded most working Americans and policymakers--fully portable pensions. Roughly half of U.S. workers are in some pension plan (the fraction is dropping). But pension contributions are lost if a worker frequently changes jobs.

A 1974 reform, the Employee Retirement Income Security Act (ERISA), requires that workers' pension credits be vested (locked-in) once they have five years of credit with an employer. But ERISA does not make pensions fully portable.

TIAA-CREF was created precisely to solve this problem for educators and researchers. Teachers often have itinerant careers. Thanks to TIAA-CREF, educational institutions pay into a common pool, so that all pension credits count. TIAA-CREF has long been a model for legislators seeking universally portabile pensions.

The only other Americans with truly portable pensions are workers, mostly in construction trades, who participate in common pension plans jointly controlled by companies and unions under the Taft-Hartley Act; and most state and local employees, who are typically members of an umbrella pension system within the civil service. But even Rep. Archer is not proposing to tax the pension plans of construction workers and public employees.

The Senate tax bill has no TIAA-CREF provision, and it remains to be seen which version will prevail. The Clinton administration has not made the issue a priority.

There is one other smelly aspect of this affair. For a decade or so, after the Watergate reforms, Congress conducted most business in public. In the late 1970s, committee "mark-up" sessions, where bills were drafted, were generally open.

Since the 1980s, a new custom has crept in. The committee chairman and senior staff simply write the bill in private. They unveil it all at once, and count on party discipline to carry it through.

This secretly drafted bill is pretentiously called the "Chairman's Mark", a term redolent of bourbon, smoke-filled rooms, and raw power. The proposed tax on TIAA-CREF materialized, from nowhere, in Archer's June 9 "Chairman's Mark."

It would be salutary not just to bury this sneak attack on teachers' pensions. Congress should write a rule that no measure can be approved by a committee for floor debate unless it was the subject of prior hearings. But don't hold your breath. Republicans are now the majority, and it's payback time.

Copyright 1997 by Robert Kuttner. Readers may redistribute this article to other individuals for noncommercial use, provided that the text and this notice remain intact. This article may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the author.

Originally posted in thread: 1238

I ran a couple of lines over the maximum space allowed for one message in Reply #1, so I had to edit the copyright message a little. Just to be safe I'll reproduce the original here.

Copyright 1997

by Robert Kuttner. Readers may redistribute this article to other individuals for noncommercial use, provided that the text and this notice remain intact. This article may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the author. If you have any questions about permissions, please contact The Electronic Policy Network at

query@epn.org

Originally posted in thread: 1238

Bill Archer was the representative from the 7th Congressional District of Texas from 1970 to 2001, a seat formerly held by someone named George Bush. He now is

Senior Policy Advisor to PricewaterhouseCoopers LLP

Dick

Originally posted in thread: 1238

This is an extremely complicated topic, and I can't do it justice in a newsgroup post.

The 1989 SEC Settlement

William C. Greenough's history (1) of TIAA-CREF has a chapter titled, "Mostly Loyal Opposition." He mentions some important articles in CHE and NACUBO's Business Officer in the early 80's. One of the authors, a law professor at Georgetown, called for more flexibility in "locked-in retirement accounts". This topic is called "Old Money" when discussing the ancient history of TIAA-CREF.

More recent arrivals to TIAA-CREF may find it hard to believe that there was a (long...) time that you could not take money out of TIAA Traditional, even if you agreed to wait 10 years for all of it. I found a 1989 announcement in CHE, not from TIAA-CREF, that touted a new retirement plan that "With a single 800 number, they'll be able to transfer funds on a next-day basis!"

TIAA-CREF began work on a money-market fund option in 1982. That was a reaction to high interest rate levels in 1981, and an inverted yield curve lasting 18 months. But it took until 1988 to get it going.

The creation of the CREF Money Market Fund required registering with the SEC, which took place in 1985. As part of approving the fund, the SEC allowed interested parties to comment. This brought both concerned academics and rabid competitors out of the woodwork. Faced with a full hearing at the SEC, TIAA-CREF was forced to negotiate a Settlement. I suspect that one large reason for this was to avoid extensive discussion of the tax exemption and other special treatments that served our interest, but could be made to look pretty bad by competitors. It's pretty easy to find columns or blogs that describe the Investment Company Institute (one of the parties to the Settlement) as representing wealthy mutual fund interests while sometimes disingenuously cloaking itself in the protection of small investors like you and me.

You can read much of the Settlement in two public documents I bought from Lexis-Nexis (2),(3). I understand lots of schools have a library subscription that might get these for you for free. The principal terms of the settlement cover cashability of accounts, transferrability to other carriers, election of trustees, and other governance terms.

Here are a few quotes:

"Although CREF is not an insurance company, it is a corporation formed pursuant to a special act of the New York legislature and is subject to regulation by New York's Superintendent of Insurance. The Superintendent passes on the fairness of all provisions in CREF's variable annuity contracts and certificates including their assumed earnings rates and the variety and appropriateness of payment options. Both CREF and TIAA are generally regulated as insurance companies, and the contracts they issue are subject to the same regulatory approval required of variable annuity contracts issued by other insurance companies in each jurisdiction in which the contracts are sold ..."

"CREF will not impose any restrictions on the frequency of External Transfers that are greater than the restrictions on Internal Transfers."

"Except as provided in paragraph C hereunder, CREF will withdraw its request for relief from the provisions of the 1940 Act relative to the election of trustees, and will follow the voting procedures required by the 1940 Act."

My favorite footnote in Greenough's book so far, contains these thoughts:

"I took major exception to the recommendation [in The Future Agenda, a 1987 T-C plan] that the decision as to whether to allow lump-sum distributions ... should be returned to each institution. ... It is fun to beat TIAA-CREF over the head for their 'paternalism'. ... Once the genie of cash and transferability of old and new funds ... is out of the bottle, ... it will be the colleges that are 'paternalistic'." (1, page 364.)

Note that the event chronology in this report has been inferred from newspaper reports. It should be viewed with both normal "history" and internet skepticism. I repeat that this is old material, some of it obsolete. For example, the IRS has made recent rulings that may prevent some 403(b) balance transfers to new carriers that don't have contracts with the customer's employer.

Tim

(Reference list is in next message)

Originally posted in thread: 1238

(1) Greenough, William C. "It's My Retirement Money, Take Good Care Of It, The TIAA-CREF Story", Homewood, IL, IRWIN, for Pension Research Council, Wharton School, University of Pennsylvania, 1990. ISBN 0-256-08657-5

(2) [1989 SEC LEXIS 1606]

(3) [1989 SEC LEXIS 1605]

(4) Albert B. Crenshaw "The Fight for College Pensions; SEC Decision May Touch Off Fierce Competition to Manage Retirement Funds." The Washington Post, June 25, 1989.

(5) George Anders "Managed Investing: Pension Plan For Teachers Eases Controls." Wall Street Journal, December 22, 1988.

(6) Mangan, Katherine S. "Despite Reforms, Some Critics of TIAA-CREF Plan to Push for Further Changes in Companies' Rules." The Chronicle of Higher Education, May 18, 1988, A15.

(7) Mooney, Carolyn J. "Judge Extends Deadline for Settlement on TIAA-CREF's Money-Market Fund." The Chronicle of Higher Education, July 6, 1988, A9.

(8) Mooney, Carolyn J. "Pension Companies Given a Deadline for Pact with Critics." The Chronicle of Higher Education, May 25, 1988, A19.

(9) Mooney, Carolyn J. "TIAA-CREF Gets More Time to Settle." The Chronicle of Higher Education, September 28, 1988, A18.

(10) Mooney, Carolyn J. "TIAA-CREF Is Given More Time to Work Out a Settlement with Critics." The Chronicle of Higher Education, August 10, 1988, A16.

(11) "Tentative Pact Is Reached On Pension Fund's Savings." Wall Street Journal, October 25, 1988.

Originally posted in thread: 1238

Hi Tim,

Thanks for all the information. Really appreciate it. I did not realize how much TIAA-CREF had been under attack. Have some more questions, but will give you a rest while I spend some time at the library doing a little of the homework you've assigned :-).

Dick

Originally posted in thread: 1238