Kohl legislation follows allegations against past director over strategic partner selection
Sen. Herb Kohl, D-Wis., is planning to introduce legislation later this month that would bar future directors of the Pension Benefit Guaranty Corp. from getting involved in the agency's hiring of money managers.
The legislation, which also would beef up the PBGC's board oversight, could gain some traction, because it follows allegations that Charles E.F. Millard, the agency"s former director, was inappropriately involved with the hiring of strategic partners to manage $2.5 billion of real estate and private equity investments.
”The (Senate Special Committee on Aging) has grave concerns about the agency's viability,” Mr. Kohl, the committee's chairman, said during a May 20 hearing looking into the allegations against Mr. Millard.
The PBGC's deficit rose to an all-time high of $33.5 billion as of March 31, the agency's acting director, Vince Snowbarger, told the committee. Mr. Snowbarger's testimony sparked fears that taxpayers might have to bail out the agency.
The deficit, for the first half of fiscal year 2009 ending Sept. 30, is up more than 200% — or $22.5 billion — from Sept. 30, 2008.
Mr. Snowbarger said $11 billion of the deficit comes from completed and probable pension plan terminations, about $7 billion from a decrease in the interest factor used to value liabilities, about $3 billion in investment losses and about $2 billion in actuarial charges.
Automotive-sector pension plans are underfunded by about $77 billion — and about $42 billion of that underfunding would be guaranteed by the PBGC if the plans were terminated, a PBGC release said.
The May 20 hearing was not short on drama.
Mr. Millard — summoned to testify under subpoena about the allegations during the May 20 hearing — refused to answer questions, invoking the Fifth Amendment right against self-incrimination.
Also at the hearing, Mr. Kohl released a copy of a May 19 letter from Labor Secretary Hilda Solis, who chairs the PBGC board, stating the board was considering a recommendation by Mr. Snowbarger that the strategic partnership contracts be canceled with Goldman Sachs Asset Management, JPMorgan Asset Management and BlackRock (BLK) Inc. (BLK)
“The board is evaluating this recommendation to determine whether additional action may be necessary,” Ms. Solis wrote in her letter to Mr. Kohl. “At the same time, the board is reviewing the PBGC's investment policy and determining what actions to take with regard to its implementation.”
Goldman Sachs spokeswoman Andrea Raphael said company officials had no comment on the matter. BlackRock officials also had no comment, according to Bobbie Collins, a company spokeswoman. JPMorgan officials also declined comment, said Kristen Batteria, spokeswoman.
Later the same day, a bipartisan coalition of six senators announced that it had referred the allegations against Mr. Millard — originally included in a report by Rebecca Anne Batts, the PBGC's inspector general — to the Justice Department.
The senators signing the letter were Edward M. Kennedy, D-Mass., and Michael Enzi, R-Wyo., chairman and ranking minority member of the Senate Health, Education, Labor and Pensions Committee, respectively; Max Baucus, D-Mont., and Charles Grassley, R-Iowa, chairman and ranking minority member of the Senate Finance Committee, respectively; and Barbara Mikulski, D-Md., and Richard Burr, R-N.C., Senate HELP Committee members.
'Transparent and ethical'
Mr. Millard, through attorney Stanley Brand of the Brand Law Group, Washington, has maintained that he acted “in a transparent and ethical manner” in the agency's hiring of the strategic investment partners.
“This is Congress trying to coerce somebody else into doing an investigation, because the first one turned up nothing,” Mr. Brand said in response to the lawmakers' request for a Justice Department investigation.
According to Mr. Kohl, the allegations against Mr. Millard add to the argument for putting the PBGC on a tighter leash.
“The role of the PBGC is too crucial to allow its governance to slip through the cracks,” said Mr. Kohl at the hearing.
But some former PBGC executives questioned the need for Mr. Kohl's legislation.
“I don't think the problems PBGC is facing need a legislative solution,” said James Keightley, a partner with Keightley & Ashner LLP, Washington, and a former PBGC general counsel. “Stronger management could solve most of the problems.”
Particularly controversial is Mr. Kohl's proposal to bar future PBGC directors from the agency's procurement process.
“The legislation could have unintended consequences because it appears to apply to all procurements,” said Nell Hennessy, president and CEO of Washington-based Fiduciary Counselors Inc., and a former deputy executive director and chief negotiator for the PBGC.
“The head of the agency should have some sort of oversight for how the agency spends its money,” Ms. Hennessy said.
According to Mr. Keightley, one of the dangers of this legislation is that it could unnecessarily hamstring the ability of the PBGC director to react to plan bankruptcies and other pressing issues.
“It's a tough balance in designing a management structure for the PBGC which provides the director with independence and authority to deal with fast-moving financial transactions and bankruptcies and dealing with less time-sensitive issues such as investment policy and hiring investment managers,” Mr. Keightley said.
During the hearing, Mr. Kohl said his key concern about the PBGC's existing board — comprising Ms. Solis, Treasury Secretary Timothy Geithner and Commerce Secretary Gary Locke — is that it meets infrequently and pays insufficient attention to the PBGC.
The full board has yet to meet this year, while the Bush administration's board last met in February 2008, according to Jeffrey Speicher, a PBGC spokesman.
According to a Senate Special Aging Committee draft document, Mr. Kohl's legislation would expand the PBGC's board to seven members and stagger the terms.
In addition, the legislation would require future PBGC directors to recuse themselves from “potential conflicts of interest,” according to the draft committee document.