1. ALASKA BUCKS TREND, CONSIDERS TRADITIONAL PENSIONS: A bill before the Alaska Legislature would put defined benefits for state employees back in play after pension reform in the state eliminated the option. Governing.com reports that a bill introduced into the Alaska Senate would give public employees a choice between a traditional pension or sticking with the 401(k) style defined contribution program that Alaska switched to in 2005. Also, most employees will have to be eligible for Medicare before the system helps pay for retiree benefits health care, and they will always pay a share of those insurance premiums. Currently, new employees give 8 percent of their paychecks to their 401(k) style plans. Under the bill, they could choose to give 8 percent of their salary to a defined benefit plan instead. The introducing-senator believes the proposal would save the state $40 million in the first five years because it splits the risk of rising health care costs between the employer and the employee so the new plan never costs more than the current defined contribution system. (Meanwhile, in Florida, not satisfied with the Supreme Court victory that upheld state-mandated employee contributions to DB plans, a legislator has taken the opposite route, and submitted a bill to do away with traditional pensions for new employees.)
2. NON-TAXABLE PENSION AMOUNTS UNDER INTERNAL REVENUE CODE § 72(d): Gabriel Roeder Smith & Company has updated an earlier report regarding non-taxable pension amounts under Internal Revenue Code §72(d). Generally, annuity payments from tax-qualified retirement plans are taxed by the federal government as ordinary income when the payments are received. However, a portion of the payment, representing the recipient's "investment in contract," is excludable from taxation. In a public-sector retirement plan, the investment in contract is usually the principal amount of a member's after-tax contributions. (Note, investment in contract does not include contributions “picked-up” by the employer.) Under IRC § 72(d), the non-taxable portion of periodic payments for a single-life annuity from a tax-qualified retirement plan is calculated by dividing the investment in contract by a fixed number of anticipated payments based on the age of the recipient at the annuity starting date. Caveat: we are only talking about periodic annuity payments from a tax-qualified retirement plan. Non-periodic payments (such as full or partial lump sum distributions) are subject to different rules. IRC § 72(d) makes a distinction between single life annuities and annuities payable over more than one lifetime. Although the memorandum deals with both single life annuities and annuities paid over multiple lives, and contains tables for both, we will deal with a simple example. Suppose a member single, age 62 as of the annuity starting date, made after-tax contributions totaling $26,000 to a qualified retirement plan and is receiving an annual annuity of $14,400 for life. The non-taxable portion of the single life annuity is calculated by dividing the investment in contract ($26,000) by the appropriate number of anticipated payments from the table (here, 260), equaling $100 per month ($26,000 / 260). To determine the non-taxable amount for the year, the monthly amount is $100 multiplied by the number of months in which the current year's payments are made. For example, the year in which the payee receives 12 payments, he may exclude $1,200. Once he has excluded a total of $26,000, any further annuity payments are fully taxable. If he dies prior to excluding the full $26,000, an itemized deduction for the remaining excludable amount may be taken on his final tax return. For a better understanding, read the entire the GRS Research Memorandum (December 20, 2012), or if you really want to impress your friends, just master IRS Publication 575.
3. PEW REPORT ON CITIES’ FUNDING FOR PENSIONS: The Pew Charitable Trust has issued its latest report dealing with the subject of pensions. As the Great Recession ended, 61 key cities across America -- the most populous one in each state plus all others with more than 500,000 people -- emerged with a gap of $99 billion between what they had promised their workers in pensions and what they had saved to pay that bill. (In Florida, only Jacksonville made the cut.) While states have a much larger shortfall, cities face the same challenges posed by liabilities for their public sector retirement benefits. Despite the gap, together, the cities had enough money to cover 74 percent of their pension obligations, compared with 78 percent for states. Incomplete data for fiscal year 2010 portend another increase in unfunded pension liabilities. For a number of America's largest cities, the bill for public sector retirement benefits has already strained budgets. While the Great Recession exposed serious vulnerabilities in some cities' retirement systems, it also has spurred policy makers across the country to consider reforms. The fixes are not necessarily simple, either fiscally or politically. But a growing number of cities are making meaningful changes to put their pension plans -- and city budgets -- on more solid financial footing. Quite frankly, we are tired a little tired of hearing the blame being placed on employees and retirees. Considering what this world and this country have been through, we think that most states and local government plans are pretty darn well funded, and we will take 74 percent any day of the week.
4. MICHIGAN GOVERNOR ASKS STATE SUPREME COURT TO RULE ON RIGHT TO WORK: Detroitnews.com reports that Michigan Governor Rick Snyder has taken the rare step of asking the Michigan Supreme Court to consider the constitutionality of the new public and private sector right-to-work laws. Snyder asked the high court to decide whether the public sector right-to-work law applies to the 35,000 unionized state workers, because of the Michigan Civil Service Commission's autonomy to negotiate wages, benefits and working conditions with labor unions. He also asked the court to consider whether the private and public sector right-to-work laws violate the 14th Amendment equal protection clause of the United States Constitution, because the legislation does not apply to all employees in public or private sector bargaining units. Republican lawmakers exempted the Michigan State Police and unionized police and firefighters, citing their special binding arbitration rights and concerns that making union membership optional would fracture police squads and firehouses. Since Snyder and GOP legislatures rushed right-to-work bills through the lame-duck legislature in six days, legal questions have been raised about whether the law can force the Civil Service Commission to remove union security contract clauses requiring financial support of a union as a condition of employment. Right-to-work outlaws such provisions. Snyder said he wants a Supreme Court advisory opinion before the issue is tied up in protracted court battles the new law goes into effect March 27, 2013, and the state's current collective bargaining contract expires Dec. 31, 2013.
5. NEW YORK COMPTROLLER GOES AFTER GOVERNOR’S PLAN TO CUT PENSION COSTS: New York Governor Andrew Cuomo’s plan to allow municipalities to defer more of their pension costs came under fire from state comptroller Thomas DiNapoli. According to a New York Times report, DiNapoli has serious concerns about the plan, in part, because of its potential impact on the funding level of the state pension system and the balance sheets of local governments. The Governor has proposed allowing municipal governments to defer a portion of their pension costs by choosing a fixed contribution rate below the current one. The plan comes on top of another pension-deferment plan approved in 2010 -- and backed by Mr. DiNapoli -- that allows municipalities to borrow from the pension fund to pay their pension costs. Mr. DiNapoli’s criticism could doom the plan, as he is the sole trustee of the state’s $150 billion pension fund, and his support is needed for the plan to proceed. Di Napoli is also concerned about a risk to the credit ratings of municipalities if they carry the additional liability of deferred pension obligations on their books.
6. CALIFORNIA BILL EXEMPTS THOUSANDS OF PUBLIC EMPLOYEES FROM PENSION OVERHAUL: After California lawmakers enacted public pension rollbacks, a new measure has surfaced that would exempt thousands of public transportation workers from the law. The bill's author says it is a necessary, narrow and reasonable tweak to the pension statute, which will keep billions of federal dollars flowing into California, reports the Sacramento Bee.The Bill, which would exclude 20,000 local and regional mass transit workers statewide from the higher pension contributions and lower retirement benefits passed last year. Another provision would exempt multiemployer pension funds, which are union-sponsored pension plans regulated by federal standards.
7. CALLAN PERIODIC TABLE OF INVESTMENT RETURNS: Callan Associates Inc. annually publishes its Table of Investment Returns, showing annual returns for key indices, ranked in order of performance over the past twenty years (see C&C Newsletter for February 23, 2012, Item 1). Here are the numbers for 2012, in which all nine categories are in positive territory:
MSCI EMERGING MARKETS 18.63%
RUSSELL 2000 VALUE 18.05%
S&P 500 VALUE 17.68%
MSCI EAFE 17.32%
RUSSELL 2000 16.35%
S&P 500 16.00%
S&P 500 GROWTH 14.61%
RUSSELL 2000 GROWTH 14.59%
BARCLAYS AGG 4.21%
Some other observations:
- The table highlights the uncertainty inherent in all capital markets. Ratings change every year. Also noteworthy is the difference between absolute and relative performance. For example, witness the variability of returns for large cap growth, when it ranked second from the last for the six years from 2001 to 2006, or the variability in the ranking for fixed income over the last 10 years while returns remained bound in a relatively narrow range.
- Stock markets around the world rebounded smartly in 2012, after suffering through incredible volatility in 2011. Global economic growth remained subdued in policy uncertainty persisted in Europe and the U.S., unnerving investors. Nevertheless, equity markets broadly outperformed long-term averages and notched solid gains in the 15% to 20% range. The U.S. stock market generated 16%, with much of the gain recoded in a strong third quarter, and the developed markets oversea did even better (17.32%). Emerging markets notched the highest return (18.63%) among all asset classes displayed on the table during 2012, after suffering the worst loss in 2011 (-18.17%). After underperforming in four of the previous five years, large cap value (17.68%) led the way in the U.S. large cap market, outperforming growth (14.61%) by 3.07%.
- Reverting to long-term trends, small cap (16.35%) beat large cap (16.00%) stocks in 2012, the 11th time in the past 14 years. Small cap value (18.05) bested small cap growth (14.59%) for the first time in 4 years.
- Fixed income (4.21%) generated the lowest return among asset classes in 2012, after leading the pack in 2011.
8. FEDERAL APPEALS COURT UPHOLDS WISCONSIN’S UNION LAW: The U.S. Seventh Circuit Court of Appeals has upheld Wisconsin's law that repealed most collective bargaining for a majority of public employees, according to jsonline.com. Parts of the collective bargaining law, known as Act 10, remain on hold because of a state judge's ruling in a separate case (See C & C Newsletter for June 2, 2011, Item 4). Last year, a U.S. District Court Judge largely upheld the legislation but struck down parts of Act 10 dealing with prohibitions on government employers withholding union dues from workers' paychecks, as well as a section requiring labor unions to vote to recertify yearly. (See C & C Newsletter for April 5, 2012, Item 7). The appellate order reversed that lower court and upheld the law in its entirety. Ironically, 1959, Wisconsin became the first state to recognize the right of public employees to bargain collectively.
9. FLORIDA STATUTE SETTING FORTH PROCEDURE FOR INVESTIGATING COMPLAINTS AGAINST LAW ENFORCEMENT OFFICERS NOT EXCLUSIVE: Section 112.533(1), Florida Statutes, provides that every law enforcement agency shall establish and put into operation a system for the investigation of complaints received by such agency for any person, which shall be the procedure for investigating a complaint against a law enforcement officer, not withstanding any other law or ordinance to the contrary. The City of Miami created by ordinance a civilian investigative panel to oversee the sworn police department. On cross motions for summary judgment, a trial judge granted motions filed by the City and the CIP and denied one filed by the Fraternal Order of Police. The FOP contended that the statute provided exclusive means to investigate allegations of police misconduct, and the City of Miami Ordinance creating a Civilian Investigative Panel to oversee the sworn police department directly conflicted with the statute, and therefore must fall. The appellate court agreed with the City and the CIP. The court remained quite comfortable with the observation made not long ago by another panel of the same court, relating to the same issue, mainly that Chapter 112, Florida Statutes, concerns internal investigations conducted by a police department of its own officers and the police officers’ bill of rights sets forth procedures to be followed by the police department for interrogation of law enforcement officers under investigation by the police department. Hence, the CIP provides the distinct function that is not prohibited by the rights and restrictions set forth in Chapter 112, Florida Statutes. D'Agastino v. City of Miami, 38 Fla. L. Weekly D167 (Fla. 3d DCA January 23, 2013).
10. DEFINITIONS: MISER: A person who lives poor so that he can die RICH!
11. QUOTE OF THE WEEK: Addresses are given to us to conceal our whereabouts. Saki
12. ON THIS DAY IN HISTORY: In 1995, Superbowl XXIX: SF 49ers beat San Diego Chargers, 49-26 in Miami.
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