SETTING THE RECORD STRAIGHT -- AGAIN & AGAIN!

June 12, 2000

SPECIAL ALERT

WHAT THE RAILROAD RETIREMENT BOARD SAYS

("This letter was written by the Transportation Communication Union and is published here for your information.")

On May 9, 2000, TCU International President Robert Scardelletti distributed a letter to all TCU local and district chairpersons setting the record straight on a number of distortions and erroneous charges that were being circulated by the Brotherhood of Maintenance of Way Employees (BMWE).

BMWE recently began distributing an "editorial" by its International President that allegedly "rebuts" the information contained in President Scardelletti's letter. Once again, BMWE simply ignores the facts.

In BMWE's new version of history, it says that it always opposed the investment of the SSEB fund balance in equities. It now claims, "When BMWE was involved in the negotiations, the only portion of Railroad Retirement funds considered for investment purposes were those contained in Tier II (the private pension-like component of Railroad Retirement)."

Yet, by every expert account, failure to invest the SSEB fund balance would mean that the railroad retirement fund couldn't afford any significant improvements, let alone the changes BMWE says it wants. In its editorial, BMWE pretends that it did not commission an independent study by KPMG Associates that clearly called for the investment of the SSEB fund balance.

In yet another attempt to set the record straight, TCU President Scardelletti wrote the Railroad Retirement Board on May 30 and posed the following question to the Board Actuary:

"From the outset of labor/management negotiations on railroad retirement, you have furnished numerous actuarial analyses to the parties, including many in response to queries directed to the Board by BMWE alone. Is it your recollection that your initial and ongoing projections for the labor/management negotiations on railroad retirement were based on the assumption that only tier 2 funds would be invested in private securities?"

On June 5, the Board Actuary responded as follows:

"The projections made for the labor/management negotiations assumed an 8% rate of return for both the Railroad Retirement and the Social Security Equivalent Benefit Accounts. This assumption was requested by the parties based on proposed expanded investment authority for the combined account assets."

In other words, every request that BMWE made to the Railroad Retirement Board for analyses of the cost of lowering the retirement age assumed that the combined assets of the SSEB Account fund balance and the Tier II Account would be invested in equities.

In its newest broadside, BMWE also claims that the Railroad Retirement fund could afford to finance the improvement in the survivor's benefit without any investment in equities. Yet, in February, 1999, TCU raised this issue with the Railroad Retirement Board at a joint union negotiating session, and was told that to do so at the current expected rate of return would bring the fund to the brink of insolvency. So, again, President Scardelletti posed the following question to the Railroad Retirement Board on May 30:

"What would be the impact of enacting the survivor benefit provision of the current agreement with no other change? Projections done in February 1999 seem to indicate that under employment assumption 2, and assuming a 6% return on investments, the railroad retirement accounts balance to benefit ratio would fall to less than 1. That projection was based on a prospective-only survivor benefit, which would have been less costly than the survivor benefit improvement ultimately agreed to."

The Board Actuary responded on June 5 as follows:

"The projections done in February 1999 were based on employment assumption 2 of the 1998 actuarial report, which showed the balance to benefit ratio would fall under 1. Employment assumption 2 reflects our intermediate employment assumption and has generally been used as the basis for cost estimates. Recent projections for the labor/management negotiations have been requested by the parties to be based on employment assumption 1. This request was based on the assumption that rail employment will continue to exceed our intermediate employment assumption as has occurred in the recent past. The confidence of the parties in assuming favorable future employment is demonstrated by the willingness to accept automatic tax increases if actual experience falls short of expectations."

{Copies of President Scardelletti's letter click here and the Actuary's response (pdf format , click here.}

To understand the Actuary's response, one has to know that the Actuary projects fund balances into the future based on three different assumptions about future employment. Assumption 1 is the most optimistic, Assumption 2 is intermediate, and Assumption 3 is the most pessimistic. Traditionally, the Actuary relied on Assumption 2 as the safest predictor of future fund balances. So did all of rail labor, including BMWE. Given technology, mergers, and contracting out, the rail unions would not agree to increase benefits today if doing so potentially meant throwing the fund into crisis tomorrow. The cost of the survivors' benefit under employment Assumption 2 would result in the fund dropping to less than one year's fund balance to pay benefits, a crisis scenario similar to the early 80's. Rail labor would not agree to that. Nor would the Railroad Retirement Board.

Then why, as the Actuary says, can we now agree to rely on employment Assumption 1? Only because in the negotiated agreement, the carriers have agreed to have their taxes unilaterally and automatically increased to make sure the fund balance never falls below four years worth of benefits. With that guarantee, the unions and the Board are comfortable using Assumption 1. If employment assumptions do not match expectations, it is the carriers alone who will have to keep the fund solvent by having their taxes raised. For the BMWE to suggest that the improvement be legislated without the carrier tax guarantee amounts to gambling with the solvency of the fund.

Finally, BMWE claims that the bill has been held up because of concern by the Republican leadership of the House Committee on Ways and Means about combining the SSEB fund balance and the Tier 2 account for investment purposes. Again, that is just not the case. The Ways and Means leadership has other concerns. (Click here for our June 8 Update on that subject.) Discussions continue, and hopefully a compromise will be reached that will result in passage of legislation this year.