Pension funding relief is supposed to help defined benefit plan sponsors, but for the Girl Scouts of the USA, it has turned into a case of “be careful what you wish for.”
The 101-year-old organization is now asking Congress to rescind an exemption it fought for in 2010. What seemed like a good idea at the time now is causing the organization's pension funding demands to outstrip those of other non-profit or corporate plans.
After passage of the Pension Protection Act in 2006, GSUSA officials sought an exemption from the new law, which created a shorter timeframe to fully fund defined benefit plans and a more conservative interest rate for calculating pension liabilities. Girl Scouts officials said the provisions would be too hard on the New York-based National Girl Scout Council Retirement Plan, which relies on contributions from 101 non-profit local Girl Scout councils.
In 2010, Congress agreed, passing an amendment that allowed the few charity plans with multiple entities such as the Girl Scouts to follow pre-PPA pension funding rules until 2017.
But later that year the Girls Scouts were forced to freeze the pension plan as investment losses suffered during the 2007-"09 recession and low discount rates caused the funding level to plummet to 63%, according to Florence Corsello, senior vice president and chief financial officer.
It was a painful decision for an organization with a proud history of pension plan overfunding, including a 2007 funding level of 146%.
“We felt very comfortable that we were so overfunded. Our portfolio was well diversified and we had really strong performance,” said Ms. Corsello.
Today, the plan has $433 million in assets and $819 million in liabilities.
Rules even tougher
Events leading up to the decision to freeze were bad enough, but the freeze subjected the organization to funding rules for frozen plans even tougher than what the PPA would have dictated.
The worst: As a frozen plan, the funding amortization schedule collapsed to five years from 20. A contribution — required to start whittling down the unfunded liability — that would have been $31 million under PPA formulas would swell to $42 million in 2014 and $55 million in 2015.
Indeed, over the next three years, the local councils will have to contribute $145 million toward the deficit in the frozen pension fund, which is $36 million more than a similarly situated corporate plan covered by PPA would have.
Historically low interest rates for calculating the discount rate to value liabilities didn't help either, and since the Girl Scouts were not covered by PPA because of the 2010 exemption, they could not take advantage of relief passed last year.
By 2010, local Girl Scout councils' pension contributions that previouslyhad represented 3% of localcouncils' payroll had tripled. This year, they are expected to increase to 15% of payroll.
The Girl Scouts of Middle Tennessee filed suit in June 2012 in U.S. District Court in Nashvilleagainst the national office over the contribution hike, arguing a council consolidation that shrunk the number of local councils, completed in 2010, increased pension costs dramatically by adding new participants and early retirement incentives.
“We want the court to say that the additional participants and early retirements are (GSUSA's) responsibility,” said James Bristol, a lawyer with the Nashville law firm of Waller Lansden Dortch & Davis LLP, who represents the Girl Scouts of Middle Tennessee. Officials at GSUSA officials filed a motion to dismiss the case and declined to comment on pending litigation.
Before that $42 million payment comes due in 2014, Girl Scouts officials are asking Congress to put theim back under PPA rules.
“So far, many offices in Congress have been very receptive to our concerns,” said Sally Schaefer, director of public policy in the Girls Scouts' Washington office. “In over 30 meetings with Hill offices on both sides of the aisle, no one has objected to our request.”
Girls Scouts CEO Anna Maria Chavez also has been reaching out to legislators, arguing that restoring PPA rules is better than the staff layoffs and program cuts that some local councils are now considering. Still, as Capitol Hill deals with pressing budget problems of its own, “it is unclear if there will be any opportunity to address pension issues this year,” said Ms. Schaefer. “With our local councils as partners, we're pursuing all options.”
Without commenting specifically on the Girl Scouts' case, Allison Preiss, spokeswoman for Sen. Tom Harkin, D-Iowa, said the chairman of the Senate Health Education Labor and Pensions Committee is sympathetic to the difficulties that unpredictable funding levels cause employers, particularly in the non-profit sector. “Sen. Harkin is committed to making it easier for every employer to offer a pension plan.”
Without that change, “we can't make ground,” on the unfunded liability, said Ms. Corsello. “There really isn't much you can do. There is no way you are going to invest your way out of it.”
That is particularly true since 2011, when the Girl Scouts embraced a liability-driven investment approach for its frozen plan. “It was to better match the duration of assets to liabilities, and to better reduce the volatility,” said Ms. Corsello, who works with investment consultant Rocaton Investment Advisors in Norwalk, Conn., and a roster of external managers.
The plan now has 49% of assets in long-duration bonds, with another 10% in other fixed-income strategies including high yield and emerging markets. The rest of the portfolio includes 22% in equities plus investments in hedge funds, private equity and real estate.
While the Girl Scouts are carrying the flag to rectify their miscalculation in 2010, undoing the exemption could also provide a funding option for similar charities with affiliates, such as universities and non-profit hospitals. n
This article originally appeared in the April 29, 2013 print issue as, "Girl Scouts ask Congress for a do-over on plan exemption".