‘G-fees,’ pension smoothing on the table for infrastructure offsets

Bipartisan negotiators consider going back to well of familiar 'pay-fors'

Sen. Mark Warner, D-Va., says pension relief provisions are in play. (Tom Williams/CQ Roll Call)
Sen. Mark Warner, D-Va., says pension relief provisions are in play. (Tom Williams/CQ Roll Call)
Posted July 23, 2021 at 8:12pm

Coming up with last-minute offsets for pricey legislation is often compared unfavorably with the game of whack-a-mole. And that's exactly what the Senate's bipartisan infrastructure negotiators are playing as they head into tense weekend talks to try and iron out a $579 billion package that can be ready by early next week.

New items that have emerged as others have fallen away include several health care provisions like a ban on "spread pricing" and drugmaker refunds to Medicare for unused portions of medication in single-dose vials. But negotiators are also looking outside the health care arena by going back to a well they've tapped before — or tried to — on infrastructure bills in past years.

One of those would let employers use more generous interest rate assumptions in calculating how much they need to contribute to tax-deductible pension plans, which would free up cash flow for companies and tax revenue for the Treasury.

That popular move — derided as a "gimmick" by some budget purists — has been included in 2012 and 2014 surface transportation laws, as well as a 2015 budget caps deal and again in the latest pandemic relief package.

Another proposal is less popular: extending higher fees charged to lenders by the giant government-sponsored mortgage enterprises Fannie Mae and Freddie Mac that expire in October. Some of the top housing and real estate industry trade groups have already come out swinging against that option, arguing it would price out lower-income and first-time homebuyers by making mortgages more expensive.

Sources familiar with the negotiations say congressional staff have shared broad concepts being discussed but have not offered specifics. Negotiations were ongoing Friday and expected to run through the weekend, with negotiators hoping to be able to announce they'd iron out the last remaining differences by Monday morning.

It’s not yet clear how much money some of the items would raise, or whether the Congressional Budget Office will give them any credit. For instance, options like recouping funds for unused unemployment benefits and paid leave tax credits might not actually “score” since they weren’t going to be spent anyway.

One proposal, labeled “Sell unused IP addresses,” may refer to Internet Protocol version 4 addresses held by the Pentagon; in 2019, the CBO estimated a defense authorization bill provision to require such sales would raise $100 million.

Not a 'piggybank'

Others on the list could raise substantial sums, based on past estimates. But at least one, extending the fees assessed by Fannie Mae and Freddie Mac, is already facing a major lobbying battle.

In 2011, Congress imposed an additional 0.1 percent fee on mortgages bought by Fannie and Freddie that are bundled into mortgage-backed securities and sold to investors. To cushion against losses, Fannie and Freddie charge lenders a guarantee fee, or “g-fee,” to insure against default. That additional fee expires on Oct. 1 unless the Federal Housing Finance Agency extends or changes it, or if Congress acts to renew it.

The Trump administration, which tried to extend and double the fee, estimated last year it would end up delivering $31 billion into the federal Treasury over a decade. But Congress has continually ignored proposals to renew or increase the fees in recent years; it became a “pay-for” option in 2015 when lawmakers were debating the last multiyear surface transportation bill but was ultimately dropped.

On Thursday, a laundry list of powerful trade groups such as the American Bankers Association, Mortgage Bankers Association, National Association of Realtors and more wrote to top infrastructure negotiators urging them to drop the idea of extending the fees as an offset. They told Sens. Kyrsten Sinema, D-Ariz., and Rob Portman, D-Ohio, that the fees make buying homes more expensive since they are “included in the cost structure of all mortgages, including those for first-time homebuyers, veterans, and rural communities.”

The housing industry groups said they're particularly galled by the idea that Congress would use the money from g-fees to cover costs unrelated to housing programs. Whenever they've threatened to do so, the groups wrote, "our organizations have united to emphatically let lawmakers know that homeowners cannot, and must not, be used as the nation’s 'piggybank.'"

Similarly, a former top Obama administration housing official said lawmakers ought not use the Fannie and Freddie money for unrelated purposes.

"That certainly is their prerogative, but I'd hope they end up keeping the dollars for affordable housing, and expanding the role of Fannie and Freddie in reducing the racial homeownership gap," said Michael Stegman, former Treasury Department counselor for housing finance policy and White House senior housing policy adviser.

Oldie but goodie

Another potential offset, labeled “pension smoothing” on the circulated list, refers to an oft-used provision that lets employers with traditional defined benefit pension plans use higher interest rates to value their plan liabilities. Given a persistently low interest rate environment, which has dipped even further due to the pandemic, employers would otherwise have to sock away much more cash to fund their pensions because of an assumption of lower future investment returns.

Sen. Mark Warner, D-Va., one of his party's top infrastructure negotiators, cited pension smoothing as a potential offset in a Clubhouse interview Thursday with "Politics+Media 101."

Letting companies use a “smoothed” or narrower interest rate band based on a 25-year average guards against wide fluctuations and gives companies some predictability in making plan contributions. Lower payments to tax-deductible pensions also creates more taxable income for the employer, which generates revenue for the Treasury.

The March pandemic relief package’s pension smoothing language, in conjunction with a longer amortization period for plan shortfalls, was estimated to bring in $23 billion over a decade. Extending more generous interest rate assumptions further out into the budget window would presumably bring in additional funds, but it wasn't immediately clear how much.

Big companies that have reported lobbying on pension smoothing relief over the past year include American Airlines; Verizon Communications Inc.; Raytheon Technologies Corp.; Fiat Chrysler Automobiles; General Motors Co.; Anheuser-Busch; and electric utilities Dominion Energy Inc. and Entergy Corp.

Lynn Dudley of the American Benefits Council, which represents large employers, said what's on the table has broad support on Capitol Hill and is a known quantity given pension smoothing has been used multiple times. "It's not an impractical thing to do, and most people are comfortable with it," she said. "It doesn't hurt anyone."

Lauren Clason, Paul M. Krawzak, Jessica Wehrman and Daniel Peake contributed to this report.