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"You are employing the Sergeant Schultz defense of `I see nothing,
I hear nothing,' " - Rep. Edward J. Markey to Jeffrey K. Skilling

More Calls for SEC Congressional Hearings

New York Times – by Stephen Labaton – November 2, 2002

WASHINGTON, Nov. 1 — The political troubles of the chairman of the Securities and Exchange Commission deepened today when the senator who will become the senior Republican on the banking committee supported calls by Democrats for hearings into the selection of an overseer of the accounting profession.

The senator, Richard C. Shelby, Republican of Alabama, criticized the judgment of the S.E.C. chairman, Harvey L. Pitt. He cited Mr. Pitt's failure to tell other commissioners that William H. Webster, the man picked to lead the accounting oversight board, had headed the audit committee of a company accused of fraud.

"The process broke down somewhere," Senator Shelby said. In January, Mr. Shelby will become either the chairman or the ranking Republican — depending on which party wins control of the Senate — of the committee that has jurisdiction over the commission.

Mr. Shelby's endorsement of the hearings, which were announced on Thursday by the committee's Democratic chairman, Senator Paul S. Sarbanes of Maryland, means that they will proceed later this month, regardless of which party controls the Senate after the elections.

The White House helped recruit Mr. Webster and publicly remained supportive of the S.E.C. chairman. But privately, some officials were said to be deeply upset that Mr. Pitt had never told them about the details of Mr. Webster's ties to the company, U.S. Technologies.

Mr. Webster has said that before he was appointed by the S.E.C. commissioners last Friday, he told Mr. Pitt and the commission's chief accountant, Robert K. Herdman, that the company was facing accusations of fraud. The company and its chief executive, who had recruited Mr. Webster, are under a criminal investigation and have been sued by investors who contend that they have lost millions of dollars. The company is now virtually insolvent.

Andrew H. Card Jr., the president's chief of staff, had urged Mr. Webster to take the job but had learned about his ties to the company only when the White House received questions about it from a reporter on Wednesday afternoon, said Claire Buchan, a White House spokeswoman.

Mr. Card was "not pleased," another high administration official said. "He would have preferred to have had the information before he made the call" to Mr. Webster, the official said.

Mr. Pitt declined to discuss his handling of the selection of the oversight board.

Mr. Shelby, who is not up for re-election on Tuesday, was sharply critical of Mr. Pitt for his failure to inform the agency's other commissioners about Mr. Webster's role as head of the audit committee of U.S. Technologies. But like most other Republican lawmakers, he stopped short of calling for Mr. Pitt's resignation.

"I think it's troubling, especially in the context of restoring confidence in the capital markets, that the S.E.C. chairman, Harvey Pitt, did not divulge something that I thought was very material in the selection of Judge Webster," Mr. Shelby said in an interview this morning. "It's troubling. He's been under fire. And now he does this and fails to divulge something. All of the facts should have been on the table to help the commissioners make an informed decision."

"As it turns out, I think Webster is probably a good choice," Mr. Shelby added, noting that he and Mr. Webster are old friends. "But the process broke down somewhere. This goes to the judgment of Harvey Pitt." He said he supported hearings because "they are important to restoring confidence in the capital markets."

The Congressional hearings could be politically significant because the other investigations, which began on Thursday with the General Accounting Office and the S.E.C.'s inspector general's office, could take months.

S.E.C. officials said today that the inspector general's inquiry would expand to include a comprehensive examination of the role Mr. Webster played on the audit committee at U.S. Technologies as well as a check of the backgrounds of the four others appointed last Friday to the new board.

Mr. Webster and Mr. Pitt received support today from Representative Michael G. Oxley, the Ohio Republican who heads the House financial services committee. Mr. Oxley had objected to the choice of John H. Biggs, whose selection to head the board was derailed after criticism from some executives in the accounting profession that he was too aggressive.

"The issues surrounding Judge Webster's work on the U.S. Technologies audit committee are being addressed in a forthright and reasoned way," Mr. Oxley said in a statement issued by his office. "Civil litigation is rampant in this country and should not disqualify a public man from serving in a public position."

Republicans have begun talking about replacements to Mr. Pitt, floating names like that of former Mayor Rudolph W. Giuliani of New York and of Michael Chertoff, head of the Justice Department's criminal division. Mr. Chertoff has overseen a parade of white-collar cases involving companies like Enron, Arthur Andersen and WorldCom.

Mr. Webster was selected last Friday after the commission split 3 to 2 over his qualifications to head the new accounting board, which is supposed to discipline auditors, set standards and conduct inspections of firms. The two Democrats on the panel complained that the commission had caved in to the profession by rejecting Mr. Biggs, who has called for tougher oversight. Mr. Biggs retired this week as chairman and chief executive of TIAA-CREF, a large pension system.

In an interview taped on Thursday and broadcast on Friday on the PBS series "Now With Bill Moyers," Mr. Biggs said he thought Mr. Pitt "should certainly be considering resignation" from his post.

"I think he has lost the confidence of his commission, and I think he's lost the confidence of the American people," Mr. Biggs said. He added, "I don't know an investment person in the country that I've talked with — and I've talked with a lot — who doesn't feel that" Mr. Pitt should step down.

For Mr. Pitt and the S.E.C.'s chief accountant to conclude that Mr. Webster's circumstances were not a problem "amazes me," Mr. Biggs said. "I just don't understand how they could possibly have come to that conclusion other than they were under so much pressure to make this appointment," he said.

Possible SEC Congressional Hearings – November 1, 2002

NEW YORK (CNN/Money) - The Securities and Exchange Commission launched an investigation Thursday into the controversial selection of William Webster to head a new accounting oversight board after it was revealed that Chairman Harvey Pitt hid crucial information about Webster from other members of the SEC.

While Pitt himself made the initial call for the investigation into Webster's appointment, the news is yet another black eye for the SEC chairman, who has been charged by critics with being in the pocket of the accounting industry.

Leading Democrats renewed their calls for Pitt to resign, and Sen. Paul Sarbanes of Maryland, author of the sweeping corporate reform legislation that created the accounting board, said he plans to hold congressional hearings on the matter.

Webster, the former director of the Federal Bureau of Investigation and the CIA, was elected last Friday to head the SEC's new accounting oversight board in a divisive vote by SEC commissioners that was split along party lines.

Webster had warned Pitt before the vote that he had recently headed the audit committee of a small publicly traded company, U.S. Technologies, based in Washington, D.C., that is facing allegations of fraud, according to a person familiar with Webster's discussions with Pitt.

Pitt supported Webster's appointment, but -- according to a New York Times report Thursday -- didn't tell the other SEC commissioners what Webster had told him.

SEC spokeswoman Christi Harlan said the agency's inspector general would conduct an investigation. "It's the normal route for internal inquiries," she said. "This is simply a look at the process and it is not a review of Judge Webster."

The White House said it supported Webster's appointment and continues to stand behind Pitt, although spokesman Scott McClellan admitted that the administration did not "know the facts."

"William Webster has a long, distinguished career and is highly respected by Democrats and Republicans alike," McClellan said. Asked if the White House still had faith in Harvey Pitt, McClellan said, "Yes." He said the White House was notified of the controversy when they were called by the Times, which first reported the story.

Democrats responded by once again calling for Pitt to step down as chairman of the nation's top watchdog of the securities industry.

"His continued missteps are further damaging investor confidence at a time when the U.S. economy is weak and consumer confidence is at the lowest point in years," Sen. Carl Levin, D-Mich., said in a statement.

Sarbanes, who co-authored the Sarbanes-Oxley Act, said he was "deeply concerned" that the appointment of the head of the accounting board "has gotten so off track" and, referring to Pitt, added, "The public has lost confidence in the chairman."

He said he planned to have lawmakers "examine this matter" when Congress reconvenes.

Appearing later on Lou Dobbs Moneyline, Sarbanes said, "The real issue was Harvey Pitt's failure to tell the other commissioners" about Webster's situation. "Pitt then never passed on the information to the other commissioners."

Some critics also said Webster should step down.

"The shocking revelation that Mr. Webster headed the audit committee of a public company, U.S. Technologies, with accounting problems that he failed to fully investigate means that he must resign immediately,'' said Nancy M. Smith, former Director of the SEC's Office of Investor Education and Assistance and Director of

"Investors were looking to President Bush to throw them a life-raft in a sea of accounting fraud and abuse. Instead, the president threw them a pair of cement shoes," she said, adding Pitt should also step down.

Pitt, a Republican and an appointee of President Bush, has been under intense criticism from Democrats for his resistance earlier this year to sweeping changes in corporate accounting. Critics worry that his previous employment by the very accounting industry he's now in charge of regulating created a conflict of interest that would lead him to favor corporate concerns over investors' interests.

Democrats also are sure to use the latest SEC fiasco against Republicans in next Tuesday's general election, in which control of both houses of Congress are at stake.

"Mr. Pitt is not behaving in a trustworthy manner that will bring credibility back to the market and restore investor confidence, and I again urge President Bush to ask Harvey Pitt to step aside from his post today," House Minority Leader Richard Gephardt, D-Mo., said in a statement.

"If Republicans in the House don't call for getting rid of [Pitt] before the election, we know now what their agenda will be after the election," he said.

Corporate accounting reform became a hot topic this year after scandals at Enron, WorldCom, Global Crossing and other companies. Eventually, Congress passed the Sarbanes-Oxley Act of 2002, the most sweeping corporate reform legislation since the Great Depression.

That bill required the SEC, among other things, to set up an independent board to review corporate accounting. Democrats wanted the board to be chaired by John Biggs, a pension fund executive said to be tougher on the accounting business.

White House officials, who have spent a lot of energy defending Pitt this year, told the Times they were not informed about the details of Webster's work for U.S. Technologies.

Webster had headed the three-person auditing committee of U.S. Technologies, which along with its CEO, C. Gregory Earls, are facing suits by investors who say they were defrauded of millions of dollars, the Times said.

The suits allege the misconduct occurred in late 2001 and this year. Before that, the audit committee, led by Webster, had voted to dismiss the outside auditors in the summer of 2001 after those auditors raised concerns about internal financial controls, the Times said.

Webster also told the SEC's chief accountant, Robert Herdman, about his involvement with the company, the report said. "I told them that people are making accusations," Webster said of his conversation with Pitt, the newspaper said. "I said if this is a problem, then maybe we shouldn't go forward. I raised it because I didn't want it to become an issue."

Webster, who left U.S. Technologies' board in July, told the Times Pitt had assured him the commission's staff had looked into the issue and it would not pose a problem, the report said.

from staff and wire reports

Morro Bay Power Plant Hearing

Coastal Alliance - Press Release – October 31, 2002

(10/24/02) - After two years of studies, reports, legal briefs, workshops, public meetings and numerous delays, the final evidentiary hearing on Duke Energy's proposed replacement of the Morro Bay Power Plant with a new, larger facility is scheduled to be held Monday, Nov. 4, at the Duke plant.

The hearing is set to begin at 9 a.m. and is open to the public. Public comment is expected to be taken about 5 p.m. The hearing could extend to Tuesday, Nov. 5, if all testimony is not completed on Monday.

Just a few days after the anniversary of the filing of its application on Oct. 23, 2000, Duke will get its last chance to convince the California Energy Commission (CEC) that it should be awarded a license to build a new 1200 megawatt plant a few feet away from the site of the 47-year-old, 1000-megawatt plant, which it wants to demolish.

The focus of the hearing is "habitat enhancement," Duke's highly controversial plan that would allow a new plant to continue pumping out hundreds of millions of gallons of water a day from the Morro Bay National Estuary and killing countless fish and shellfish for another 50 years.

Duke will be faced with the formidable task of convincing the CEC that purchase and restoration of habitat will effectively compensate for the killing of fish, despite findings by the CEC staff, the California Coastal Commission staff, the California Department of Fish and Game and the National Marine Fisheries Service that it will not and should not be approved.

Duke claims that its plan would create or preserve water volume in the estuary for marine life by removing sediment and preventing additional sedimentation, thereby making up for the killing of fish by the plant.

The regulatory agencies say their analyses of the plan show there is no sound evidence that it would work to offset the depletion of the Estuary's marine life and, as Richard Ambrose, a UCLA environmental scientist and CEC consultant put it, "The literature is replete with with examples of failed restoration projects."

In its final report on the proposed Duke plan, the CEC staff said it "does not recommend the HEP (habitat enhancement plan) as currently proposed as mitigation for the significant impacts of once-through cooling" because of major flaws. Even "if the flaws in the HEP are addressed, there will remain uncertainty surrounding its success in mitigating the impacts."

The CEC staff, which earlier this year recommended against licensing the plant if it were to use estuary water for cooling, said it still recommends "dry cooling," which utilizes a bank of fans to cool the plant's generators, instead of "once-through" cooling from a constant flow of sea water from the estuary. The existing plant has used 387 million gallons of estuary water a day on average for the past five years. The new plant could use up to 475 million gallons a day.

"Staff has not changed its determination that the preferred approach is to avoid the adverse biological impacts caused by the CWIS (cooling water intake system), particularly entrainment (killing of fish)," the CEC report said. Dry cooling, as it has stressed in the past, would completely avoid such impacts, which are considered significant under both the California Environmental Quality Act and the U.S. Clean Water Act, as well as other statutes.

One of the primary reasons that Duke supports habitat enhancement is because it is considerably cheaper at $12 million proposed by Duke for buying habitat and restoring it. Cost of dry cooling has been estimated at between $40 million and $50 million by CEC staff and a consulting firm.

However, even using what the CEC staff said were Duke's inflated cost estimates for dry cooling, the Regional Water Quality Control Board staff said that cost amortized over the life of the new plant would be "relatively low compared to the potential gross revenue of the Power Plant, which could be in the range of hundreds of millions of dollars a year."

The CEC staff said Duke's figure of $12 million is unrealistically low and that a complete HEP would cost more than $37 million, which is comparable to the cost of dry cooling.

The two-member CEC committee that has been overseeing the review of the project and will conduct the hearing is expected to issue a preliminary decision on licensing in late December or early January. A final decision by the full CEC is expected several months after that.

Previous Morro Bay article:

Morro Bay Layoffs

Retirement Security Hearing

U. S. Congress – June 23, 2002

Statement of Karen D. Friedman,

Director of Policy Strategies, Pension Rights Center

Testimony Before the Subcommittee on Oversight of the House Committee on Ways and Means

Hearing on Retirement Security and Defined Benefit Pension Plans

June 20, 2002

Mr. Chairman, Members of the Subcommittee, I am Karen Friedman, Director of Policy Strategies for the Pension Rights Center, a 26-year-old consumer rights organization dedicated to promoting the retirement security of workers, retirees and their families. I am also coordinator of Center’s Conversation on Coverage, a new initiative funded by the Ford Foundation to launch a national dialogue on ways of increasing pensions and savings for American workers.

The Pension Rights Center welcomes the opportunity to testify today about defined benefit plans and their important role in providing adequate, guaranteed retirement income to millions of Americans. If there is a silver lining in the Enron crisis, it is the recognition of the importance of pensions. Retirement income issues have surfaced as a critical concern in the public consciousness, and are rising to a priority issue on the national political agenda.

Up until recently, most experts in the field contended that traditional employer-paid defined benefit plans had lost their luster, overshadowed by popular 401(k) plans. No wonder. Throughout the past decade financial columnists and CEOs alike had preached that everyone could become millionaires through their 401(k) plans. Traditional defined benefit plans seemed to be going the way of the dinosaur – heading for extinction.

But seemingly overnight attitudes have changed. In the wake of the collapse of 401(k) plans at Enron and Global Crossing, and losses at Lucent, Kmart and Polaroid, there has been a resurgence of interest on the part of experts on all sides of the issue in finding new ways of encouraging defined benefit plans. Although there may not be a unanimous vision of how to go about doing this, representatives of both business and labor appear to be genuinely committed to finding ways of maintaining and expanding these plans.

Two decades ago, most large companies routinely offered traditional employer-paid defined benefit pensions to their workers, recognizing that these retirement benefits were a critical component of a larger compensation package. The deal was that if employees remained loyal to companies, worked hard and met certain requirements, they would be rewarded with a specific monthly amount for life that was backed by a federal private pension insurance program. Employees and employers both understood the nature of the bargain: employees would get a lower salary in exchange for getting the good pension they needed to supplement their Social Security payments.

But in recent years that trend that has been reversed. While the percentage of the private sector workforce participating in employer-sponsored retirement plans has remained fairly constant,[1] the percentage of the workforce in old-style pension and profit sharing plans is shrinking rapidly as more and more companies are replacing them with savings plans. Looking just at defined benefit plans, the percentage of the private workforce covered has declined by 40 percent.[2] The switch to savings plans is most noticeable in small businesses, which have dropped their plans entirely. But there has also been a disturbing shift in large companies, which have effectively frozen their traditional plans and told their employees to save for themselves through their 401(k)s. Only among union members in these companies are defined benefit plans still strong.[3]

In fact, this type of cutback that is exactly what happened at Enron. As described in the Wall Street Journal, Enron, like so many other companies, had taken advantage of the leeway providing by accounting practices and lax federal regulation to cut back on the employees’ underlying pension plan. In 1987, Enron froze its traditional plan that offered lifetime insured benefits and used the plan's “surplus” assets to create a “floor offset” plan that primarily relied on company stock to provide benefits. Nine years later, that plan, in turn, was replaced by a barebones new type of pension plan (that significantly reduced the expected benefits of older employees), supplemented by the 401(k). All of these changes were highly technical moves that effectively allowed the company to cut future benefits, increase the pension “surplus” and, by dint of an accounting maneuver, use pension earnings to artificially inflate corporate earnings on the company's balance sheet. Of course, when the company’s paper profits went up, so did the compensation packages of corporate officials like CEO Kenneth Lay.[4]

Long before Enron collapsed, the Center issued strong warnings about the trend away from traditional pensions to less secure 401(k) plans.[5] We have been troubled that companies have been dropping good, solid, employer-paid pension plans and replacing them with do-it-yourself savings plans that put the risk and responsibility of investing on the shoulders of individuals. Employees have not complained about these "pension paycuts" because they have not understood what was happening, and have been led to believe that they could become millionaires in the stock market through their 401(k) investments. But now we see that for most employees the promises of 401(k) riches were largely an illusion. The sad truth is that even before Enron and the recent stock market downturn, half of all employees contributing to 401(k) plans had less than $12,000 in their accounts.[6]

Rather than increasing the retirement wealth of rank and file workers, the advent of 401(k)s appears to have actually reduced it. A recent study by New York University economist Edward N. Wolff, published by the Economic Policy Institute, shows that despite stock market gains and the rapid proliferation of 401(k) plans, the typical American facing retirement has had a decline in retirement wealth relative to other generations of near-retirees.[7] According to Professor Wolff, every group of near-retirees except those at the very top lost ground compared to their counterparts in 1983. He cites the contraction of defined benefit plans as a core reason for this decline in household wealth particularly among low- and moderate-income households.

The reasons for this decline are not hard to find. Unlike defined benefit plans, where employers put money in for employees at all income levels, 401(k)s only benefit those employees who can afford to put money into the plans, keep it in the plans until retirement age, and take the risks needed to get good investment returns. As Enron has shown, in many cases, these plans also offer employees an often-irresistible opportunity to gamble on a "sure thing” – their companies’ stock.

Employer organizations contend that their members have dropped or cut back on defined benefit plans because increases in government regulation over the years have made the plans too costly to maintain. But it is equally plausible that these plans have declined because of reductions in government regulation. Relaxation of rules by administrative agencies not only invited the adoption of 401(k) plans, which gave company officials an easy way to divert attention from cost-saving cutbacks in their defined benefit plans, but also permitted the expansion of "top hat" plans, which allowed these executives to provide extremely generous retirement packages for themselves outside of the defined benefit plans covering their employees.

Whatever the reasons for the decline in traditional pensions, there is a growing consensus that something should be done to try to encourage the defined benefit plans, or at least plans that incorporate certain key elements of defined benefit plans.

From an employees' perspective, the most important features of defined benefit plans are that these plans are insured, professionally managed, employer-paid, and that they provide lifetime benefits to workers at all income levels – not just those who can afford to save for themselves.

At the same time, there are shortcomings in the defined benefit system that also need to be acknowledged and addressed. For instance, traditional plans often use complicated formulas that disproportionately favor certain groups of employees over others – most commonly, higher-paid and older employees – and for that reason can be perceived as unduly complex and unfair. Also, unlike 401(k)s their benefits are not portable. If employees leave defined benefit plans early in their work lives, they usually have to wait until retirement age to collect their benefits – when the value of the benefits will have been eroded by inflation. And retirees’ fixed benefits are rarely adjusted for increases in the cost of living. Although these issues can be addressed within the current defined benefit structure, this would add costs which, up until now, employers have been unwilling to assume.

What incentives are there for employers to provide defined benefit plans when they can simply offer cheaper 401(k) plans? Why should they assume the risk and responsibility – not to mention the cost – of providing these plans, when it is much easier and cheaper simply to tell employees to save for themselves, and provide for their own retirement through "nonqualified plans"?

The principal incentive has generally been considered to be the tax breaks offered to employers to set up and contribute to plans – which, when federal, military and state government plans are added, constitute the largest of all of the nation's the federal tax subsidies.[8] For smaller businesses, the "carrot" has often been the ability to provide large retirement benefits for themselves. To a lesser extent now than in the past, another inducement to set up defined benefit plans has been that they can reward loyal, longer-service employees, and help "manage" the workforce (for example, by encouraging older employees to leave the work force at early retirement age). Where employees are represented by a union, collective bargaining can also provide an effective incentive for setting up a plan.

The question is whether these incentives are sufficient to encourage employers to set up (and continue) plans that will provide meaningful benefits for American workers. Last year's tax law, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was premised on the notion that increased tax incentives would encourage the formation of private retirement plans. The problem is that tax relief was provided not just to employers to encourage them to maintain defined benefit plans, but also to employees and employers to increase contributions to 401(k)s. Once the law is phased in, older higher-income employees will be able to reduce their taxable income by $20,000 a year (and their employers will be able to contribute an additional $20,000 as a match to the employees’ contributions).[9] The danger is that EGTRRA may have made 401(k)s so attractive to better-off employees that it will be even easier for employers to reduce costs by cutting back on defined benefit plans in favor of do-it-yourself arrangements.

The events of the last eight months and public focus on this issue have given us a unique opportunity to reexamine the nation's private retirement income policies. What can be done to enhance retirement income for working Americans? There is an urgent need to answer this question. Half of all private sector workers have no retirement plan other than Social Security, and of the 51 million workers with plans, 19 million, or roughly 37 percent, have 401(k)s as their only plan.[10] The typical American retiree without an adequate private retirement plan, will have little more than Social Security, which will provide only half of what he or she will need to maintain his or her standard of living in retirement – less than the minimum wage!

To begin the process of addressing this critical issue, last July the Pension Rights Center convened the Conversation on Coverage. With primary funding from the Ford Foundation and the W.K. Kellogg Foundation, we brought together 75 experts from business, labor, academia, financial, consumer and retiree organizations to look at new ways to deliver benefits to working Americans. The focus of the Conversation was on developing new ways of delivering benefits to employees who have no plans at all, particularly low- and moderate-income wage earners. Our goal was to spark a national dialogue by inviting representatives of all points of view to develop workable solutions in a consensus setting.

The Conversation participants reviewed an array of proposals that sought to expand coverage either through the existing employer-based system or by creating new institutions and structures. In coming months, we will be releasing a white paper, to be published by the Century Foundation, which will expand on these ideas and start the next stage of the Conversation. We thought it might be helpful to share with you a few of the proposals that were presented at the Conversation that addressed the expansion of defined benefit coverage or that included key elements of defined benefits plans. These are just a few of the many creative suggestions offered at the Conversation on Coverage.

One proposal was aimed at increasing incentives for small business owners to set up defined benefit plans by increasing the amounts they could set aside for their own retirement on a tax favored basis. This proposal provides an explicit trade off: In exchange for the "carrot" for business owners, the plan would be barred from taking advantage of current rules that allow employers to exclude workers from their plans, and pay proportionately larger benefits to higher-paid employees than rank and file workers. Also, benefits would be portable and, in one version of this proposal, insured by the Pension Benefit Guaranty Corporation. Two variations of this proposal have already been introduced into Congress. Most recently, Congressman William Coyne included the "SMART" plan (Secure Money Annuity or Retirement Trusts) as Section 402 of his Retirement Opportunities Expansion Act of 2001 (H.R. 3488). Previously, in 1997, Congresswoman Nancy Johnson and Congressman Early Pomeroy had introduced “SAFE”, The Secure Assets for Employees Plan Act (H.R. 1656).

A proposal designed to appeal to larger employers was presented by Jim Davis, Principal and Consulting Actuary for Milliman USA. The "Individual Advantage Plan" would merge traditional defined benefit concepts with newer “cash balance” ideas. Older employees would receive the insured lifetime pensions based on their final pay that they had counted on receiving, while younger employees would receive portable benefits based on contributions that would accumulate as if they had been put into individual accounts. Since neither group would get as much as under a traditional defined benefit plan or a cash balance plan, the overall cost to the employer (and the revenue loss to the Treasury) would be the same. The incentive for the employer would be that dollars would be allocated ways that would help companies attract younger workers, and retain older employees.

A very different proposal, that would take key elements of defined benefit plans and place them into a defined contribution structure, was presented by Professor Norman Stein of the University of Alabama School of Law. His approach, which had been developed by a nonpartisan group of twenty pension experts, was designed to encourage smaller employers to contribute to plans by relieving them of administrative burdens and fiduciary responsibilities, and giving them the flexibility of deciding each year whether to contribute. Like defined benefit plans, this approach, called the "Pensions 2000" proposal, would offer pooled, professional investment management, and lifetime annuities, that would be insured when employees retired. Also, like defined benefit plans, the money would be locked in until retirement age.

Unlike defined benefit plans, and unlike the SAFE/SMART and Individual Advantage Plan approaches, the Pension 2000 design envisions that employees, as well as employers, would be able to make tax deferred contributions to the plans, which would be administered by financial institutions. These contributions would be structured as a "reverse 401(k)": The employees' contributions would "match" the employer contributions. Those employees who could afford to put money in the plan would be able contribute up to $2 for each $1 contributed by their employer. The others, who could not afford to contribute, would at least be assured of getting the employers' contributions.

There were a variety of other proposals presented at the Conversation, including the development of new kinds of multiemployer plans for unrelated employers as well a number of proposals that built on the low-income tax credit included in last year's tax bill. A one-page summary of each of these proposals can be found on the Conversation's website In addition, participants at the Conversation suggested the need to develop new concepts, such as insurance for 401(k) plans – an idea that has generated particular interest since Enron's collapse.

To say the obvious, there are no easy solutions when it comes to retirement security. At this point in our political history, we as a nation are unwilling either to increase the government's role in providing retirement security, or to set individuals completely adrift on their own individual savings “ice floes”. That means that we will have to work extremely hard to figure out how achieve the right mix of incentives and regulation within our voluntary employer-sponsored private retirement system. The challenge will be to find approaches that will "do the job" efficiently and effectively by striking a balance between burdens and costs to employers and fairness and adequacy for employees. The Pension Rights Center looks forward to working with the Members of this Subcommittee as we move into the second stage of the Conversation on Coverage.

Thank you for inviting us to appear here today. I would be happy to answer any questions you may have.

[1] Alicia H. Munnell and Annika Sundén, “Private Pensions: Coverage and Benefit Trends,” Center for Retirement Research, 2001, p. 6.
[2] U.S. Department of Labor Pension and Welfare Benefits Administration, Private Pension Plan Bulletin: Abstract of 1998 Form 5500 Annual Reports, Number 11, Winter 2001-2002, p. 68, Table E4b.
[3] 70 percent of union workers have defined benefit retirement coverage, compared with 16 percent of nonunion workers. “The Retirement Double Standard,” from the AFL-CIO web site,
[4] Ellen E. Schultz and Theo Francis, “Enron Pensions Had More Room at the Top,” Wall Street Journal, January 23, 2002. Ken Lay will receive a lifetime pension of $475,042 a year, plus a company-paid $12 million insurance policy. In contrast, long-service Enron employees have been left with almost nothing. One 25-year employee told USA Today that he would receive a $221 per month benefit from the original defined benefit pension plan, nothing from the “floor offset plan,” and a total of $15,000 from the new cash balance pension plan.. Christine Dugas, “Enron’s Dive Destroys Workers’ Pensions”, USA Today, February 6, 2002.
[5] Karen W. Ferguson, “How 401(k)s Hurt Lower-Paid Workers, The New York Times, April 17, 1986, p.F2
[6] Patrick J. Purcell, Retirement Savings and Household Wealth in 1998: Analysis of Census Bureau Data, Congressional Research Service, 2002, p. 13.
[7] For the typical (median) household headed by a person age 47-64 retirement wealth declined by 11 percent between 1983 and 1998. Edward N. Wolff, Retirement Insecurity: The Income Shortfalls Awaiting the Soon-to-Retire, Economic Policy Institute, 2002, p.25, pp. 22-23, Table 8.
[8] The Joint Committee on Taxation estimates the revenue loss for employer contributions to retirement plans to be $84 billion this year, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2001-2002, p.22, Table 1.
[9] The President’s Budget for fiscal year 2003 estimates that the revenue loss from 401(k)s will be $60 billion next year. "Analytical Perspective Fiscal Year 2003", U.S. Budget for Fiscal Year 2003, Vol. 4, p. 107, Table 6-3.
[10] Private Pension Plan Bulletin: Abstract of 1998 Form 5500 Annual Reports, U.S. Department of Labor Pension and Welfare Benefits Administration, Number 11, Winter 2001-2002, p. 68, Table E4b.

Wellstone Pension Hearing – February 24, 2002

ST. PAUL — Two busloads of workers from Minnesota's Iron Range — who face the loss of much of their retirement income — packed a U.S. Senate hearing Thursday at the state Capitol on pension reform.

“Protecting America's Pensions: Lessons from the Enron Debacle” was the theme of the hearing held by the U.S. Senate Subcommittee on Employment, Safety and Training, which is chaired by Senator Paul Wellstone, D-Minn. Wellstone has introduced the Retirement Security Protection Act of 2002, which would institute improved disclosure requirements, new rules to promote plan diversification, and tougher accountability rules.

The reforms are needed to prevent catastrophes such as those that have occurred at Enron and LTV, the Steelworkers and others testified at the hearing. Former Enron employee Roger Boyce told Wellstone that he lost $2 million in retirement income because of the collapse in the value of the company's stock and its resulting effects on the employees' 401(k) retirement plan.

Steelworkers District 11 Director Dave Foster testified that thousands of LTV retirees face the loss of half of their pensions because of the company's bankruptcy. After operating a taconite mine on the Iron Range for decades, LTV shut down the operation last year.

Loss of pensions, health insurance

These retirees also face the loss of their retiree health insurance, Foster said. “Nor is LTV Steel alone,” he added. “Virtually every American integrated steel company is facing the same situation. So are half of the nation's mini-mill companies. It is literally only a matter of months until a majority of the 600,000 steelworker retirees in the country will be facing the similar devastating loss of retiree health insurance.” Foster and several others testified that Congress needs to act to protect retiree pensions and health insurance.

“Millions of older Americans are praying that somehow, some way, you and your colleagues can help us,” Dick Johnson, a retiree of Northwestern Bell/U.S. West, told Wellstone. Johnson, who also recently retired as president of the Minneapolis Central Labor Union Council, spoke on behalf of thousands of telephone company retirees. He said Qwest (formerly Northwestern Bell and U.S. West) has granted only one cost-of-living increase to retirees in the last 13 years, despite a huge surplus in the pension fund.

Boyce, the Enron retiree, said he agreed with many of the features in Wellstone's pension bill, but was concerned about its effect on small business. “A careful balance must be struck between protection for the employee and restrictions that will discourage companies from participating and maximizing their contributions to the 401(k) plans,” he noted.

Other people at the hearing testified that pension problems are not unique to Enron and LTV. A worker from Global Crossings, the bankrupt fiberoptics company, said management had misled workers about the value of the firm. Many had too much company stock in their retirement plan and have lost everything, he said.

A worker from IBM voiced her concerns that the company was using income from the pension fund to improve its bottom line, while not boosting payments to retirees.

Pension experts also presented detailed testimony about retirement plans and proposals for reform. University of Alabama Professor Norman Stein said companies have moved from offering defined benefit pension plans — managed by professional financial administrators — to 401(k) plans in which employees have a great deal of control over investments.

ERISA, the federal law regulating pensions, does not address problems that can occur in 401(k) plans, he said. “ERISA is in my view due for a major retooling,” Stein said. He also said the increasing prevalence of 401(k) plans creates the need to educate employees about investing.

In addition to workers and retirees, several groups of high school students attended the hearing. Jerry Fallos, president of Steelworkers Local 4108, which represents the LTV workers, said he was glad people had made the trip from the Iron Range “to put some kind of face to all the facts and figures.”

Wellstone said the testimony will useful in pushing reform legislation through Congress. “There is nothing symbolic about this hearing,” he said. “It all will be translated into legislation.”

Contradictory Enron Testimony

New York Times – by S. Labaton, R. Oppel – February 9, 2002

WASHINGTON, Feb. 7 — Lawmakers heard sharply conflicting testimony today from Enron's former chief executive, Jeffrey K. Skilling, who portrayed himself as ignorant of the company's questionable practices, and other executives who said Mr. Skilling received numerous and specific warnings that Enron's off-the-books partnerships were improper.

Mr. Skilling's testimony, met by hostile questioning and harsh skepticism from lawmakers, followed a parade of current and former Enron executives who invoked their Fifth Amendment rights against compelled self-incrimination rather than explain the partnerships at the center of the company's collapse in December.

The refusal to testify by Andrew S. Fastow, Enron's former chief financial officer, and three other executives opened a hearing before the oversight subcommittee of the House Energy and Commerce Committee that provided a rich tableau of the far-reaching consequences of Enron's collapse. The room was packed with angry former employees in search of answers, battalions of newly retained criminal defense lawyers with their white-collar clients, scores of reporters and photographers and an aggressive panel of Republican and Democratic lawmakers.

Democrats and Republicans alike said they found Mr. Skilling's testimony hard to believe, and they confronted him in one of the most pointed and memorable exchanges since eight top tobacco executives were questioned in April 1994.

Mr. Skilling said, for instance, that he had no recollection of a meeting described by two directors who said that Mr. Fastow told the company's board that Mr. Skilling would approve the partnership deals. He also disputed the accounts of others who said they had warned him about the propriety of the partnerships. "On the day I left, on Aug. 14, I believed the company was in strong financial condition," Mr. Skilling said. "I wasn't there when it came unstuck."

"This was a very large corporation," he said at another point. "It would be impossible" to know everything going on.

No one on the committee seemed to believe the testimony.

"You are employing the Sergeant Schultz defense of `I see nothing, I hear nothing,' " said Representative Edward J. Markey, Democrat of Massachusetts, referring to a character in the 1960's television series "Hogan's Heroes."

Representative Clifford B. Stearns, Republican of Florida, recited conflicting evidence and testimony and then glared at Mr. Skilling as he said, "You are practicing plausible deniability."

Representative Bart Stupak, Democrat of Michigan, said: "Earlier witnesses put it that you were intense, hands on. From what I've heard from your testimony today, you don't know what was going on."

Mr. Fastow ultimately made $30 million from the partnerships, which investigators say were used to conceal debt and unprofitable investments from Enron's shareholders. He has emerged as a major figure in investigations by the Justice Department and Securities and Exchange Commission. They are examining whether executives committed fraud or engaged in illegal insider-trading when they sold millions of shares of stock as the company crumbled.

Jeffrey McMahon, Enron's new president, and Jordan Mintz, a senior Enron lawyer, described a corporate climate in which anyone who tried to challenge Mr. Fastow's deal-making faced the prospect of being reassigned or losing a bonus.

Mr. McMahon described several occasions in which, while serving as Enron's treasurer, he challenged the partnerships only to incur sharp criticism from his boss, Mr. Fastow.

In one episode, Mr. McMahon said that after he warned executives at Merrill Lynch that it would be a conflict of interest for them to invest in Mr. Fastow's partnerships, Mr. Fastow confronted him.

"He told me that I was jeopardizing the LJM2 fund-raising exercise," Mr. McMahon said, referring to one of the partnerships.

In another incident, Mr. McMahon testified that he had warned Mr. Skilling as early as March 2000 that one partnership involved self-dealing and conflicts of interest and needed to be changed. According to talking points he prepared for the March meeting, Mr. McMahon was concerned that "Mr. Fastow wears two hats."

"I find myself negotiating with Andy on Enron matters and am pressured to do a deal that I do not believe is in the best interests of the shareholders," he wrote in the talking points.

At the March meeting, Mr. McMahon said, he told Mr. Skilling that the "situation had gotten to basically a point that was just untenable." He said Mr. Skilling replied that he "understood my concerns and he would remedy the situation."

Two weeks after the meeting, Mr. McMahon said, Mr. Fastow summoned him into his office.

"He indicated that he was unsure at this point in time whether we could continue to work together because he said that `you should assume everything you say to Mr. Skilling gets to me,' " Mr. McMahon recalled.

A short time later, Mr. McMahon was replaced as treasurer by Ben F. Glisan Jr. According to an investigation by Enron's board, Mr. Glisan put $5,800 in one of the partnerships organized by Mr. Fastow and two months later was given $1 million.

"The message was, Go get another job because you can't work with us, you're messing our deals," said Representative Billy Tauzin, the Louisiana Republican who heads the Energy and Commerce Committee. Mr. Skilling recalled the March 2000 meeting differently. He said Mr. McMahon was primarily concerned about whether his compensation would be affected by the tension with Mr. Fastow.

Mr. Mintz said that when he raised questions about the partnerships last year, Richard B. Buy, the chief risk officer and Richard A. Causey, the chief accounting officer, warned him that Mr. Skilling would be unlikely to challenge Mr. Fastow's deals.

"Both Ricks shared with me that Jeff was very fond of Andy, don't go there," Mr. Mintz said.

Mr. Buy and Mr. Causey refused to answer the questions of the lawmakers, citing their Fifth Amendment rights. The fourth witness to refuse to testify was Michael J. Kopper, who worked closely with Mr. Fastow and drew at least $10 million from the partnerships. All four men invoked their Fifth Amendment rights in response to questions by Representative James C. Greenwood, the Pennsylvania Republican who heads the subcommittee.

Two company directors who did testify, Robert K. Jaedicke, and Herbert S. Winokur Jr., said they had been told that Mr. Skilling reviewed the transactions of some partnerships.

Mr. Skilling, the chief executive for six months until last August, repeatedly denied that. He and two board members maintained that they were unaware of the details of the partnership deals.

Mr. Skilling described a board meeting in October 2000 in Palm Beach, Fla. Minutes of the meeting show that Mr. Fastow said Mr. Skilling approved partnership deals. Mr. Skilling said he had no recollection of the comments and had been distracted because the power had gone out.

"The room was dark, quite frankly, and people were walking in and out of the meeting," Mr. Skilling said.

"You never heard Mr. Fastow say that you would approve all these transactions?" Mr. Tauzin asked.

Mr. Skilling said, "I don't recall."

Mr. Tauzin persisted, saying, "You just don't recall?"

Mr. Skilling said, "I do not recall."

Mr. Skilling said that he thought Mr. Fastow would earn only as much as $5 million over five years from his dealings with the partnerships and that he had no knowledge of the actual amount Mr. Fastow ultimately made.

In this, Mr. Skilling's account drew support from testimony by Mr. Mintz, who said Mr. Fastow told him "if Jeff ever knew how much he made" from one of the larger transactions, "he'd have no choice but to shut down LJM."

Mr. Tauzin also suggested that Congressional investigators might soon begin examining the role of some Wall Street firms in Enron's rise. He said he found it interesting that some firms, notably Merrill Lynch and First Union, were given underwriting business from Enron in exchange for investing in some of the partnerships.

In one of the hearing's poignant moments, Mr. Skilling said he had spent three hours with J. Clifford Baxter a few days before he died. Mr. Baxter, a former Enron vice chairman, died three weeks ago. The authorities say he committed suicide.

In an opening statement, Mr. Skilling described Mr. Baxter as his best friend.

Pressed gingerly by Representative Stearns to describe what they discussed in their final meeting, Mr. Skilling paused and then slowly went on. He said Mr. Baxter was depressed about the lawsuits he and Enron faced from investors and the press accounts that Mr. Skilling said were only "one-third" accurate. "He was angry at the plaintiffs' lawyers who were coming after him," Mr. Skilling said. "He said: `Jeff, the thing that really gets me is it's like this. It's a beautiful day in Houston, Texas. You've got a hose. You're out watering your lawn. All your neighbors are outside talking. And suddenly the guy that lives next to you crashes out the door and he says, "I hear you're a child molester." And then he turns back to his house and walks inside.' "

"He said, `They're calling us child molesters,' " Mr. Skilling said. "He said, `That will never wash off.' " But some lawmakers skeptical of that account asked Mr. Skilling about other comments attributed to Mr. Baxter long before he died — when he had questioned the partnerships.

And Mr. Mintz offered a different account of Mr. Baxter's troubles. Mr. Mintz said he had lunch with Mr. Baxter about a month before Mr. Baxter resigned from Enron last May.

"He expressed bewilderment about why the board was allowing this to happen and why they were allowing Andy to do it," Mr. Mintz said.

Retirement Health Benefits Hearing

Duke Energy Employee Advocate - - November 10, 2001

The Subcommittee on Employer-Employee Relations held a hearing on November 1, 2001: "Retirement Security for the American Worker: Opportunities and Challenges." Many employees are realizing that greedy corporation have doomed their retirement more by broken medical care promises than by the devastating broken pension promises. Many employees and retirees have suffered injuries from both of these take-aways.

Be sure to let Congress know your feeling about the health care deceptions every chance you get. Change will occur only if enough employees complain.

The link below is to a government website:

Hearing: Retirement Security for the American Worker

Hearings - Page One