1. BY AND LARGE, PUBLIC RETIREES GETTING BY, NOT LIVING LARGE: As states and localities grapple with reforming their pension plans in the face of escalating costs, experts say one of the biggest misconceptions about the system is that pensions are making retirees rich. Since the 1980s, we as a nation have begun to view retirement plans as a wealth creation vehicle. But we need to get back to viewing retirement plans as retirement insurance, according to Keith Brainard, research director for the National Association of State Retirement Administrators, who spoke at Governing’s Outlook in the States & Localities Conference. In truth, a few well-compensated retirees have stolen the spotlight from the masses. There is a story about the resident who heard that over 2,000 people in his state were receiving pension benefits of $200,000 or more annually. When the numbers were actually checked, the total was two people, not 2,000! States and localities must take into account the heavy cuts into retiree plans could end up straining the social welfare system if those people cannot reasonably sustain themselves in retirement. Already today, more public sector employees are not retiring when they hit their pension age. The new word for retirement is “work.” Nearly every state has tweaked its pension plan in recent years, and more serious reform is likely on the way. However, the gamble for elected officials is that the effects of such long-term reform will only be revealed, well, in the long-term. By then, it may to late to turn back.
2. LOCALLY-ADMINISTERED PENSION PLANS (2007 TO 2011): Center for State of Local Government Excellence has released a new issue brief comparing locally-administered pension plans to state-administered plans. Most attention in the wake of the financial crisis and ensuing recession has focused on state-administered pension plans. But cities often administer their own plans, and stories circulate about perils facing Chicago, Philadelphia, Providence and others. To assess the status of locally-administered plans, the brief reports on a survey of 128 locally-administered plans in 43 states. Samples are limited to local entities with plans of their own, because the goal is to compare the effect of local versus state administration. Such focus, however, leaves out an important component of the local story. For example, the sample includes no city or town in Mississippi, Montana or Nevada, because cities and towns in those states do not sponsor their own plans but rather participate in state plans. In fact, for the nation as a whole, only 42 percent of local pension contributions go to locally-administered plans, while 58 percent go to state-administered plans. Thus, an equally, or perhaps more, important question is the burden of local pension contributions -- to both local and state plans -- on local budgets. Because of the many dimensions of the local story, the brief, which reports just on localities with pension plans, is the first of three that will assess pensions from a local perspective. The second brief will analyze the burden of pensions on localities by doubling the sample to include localities without plans and calculating the impact of pension contributions on local budgets. The third brief will explore bankruptcies that have occurred at the local level, and see whether it is possible to identify the role of pensions among other common contributing factors. The subject brief proceeds as follows. The first section describes the sample. The second section compares the funded status of local plans to that of state plans, and reveals a puzzle: sponsors of locally-administered plans pay a higher percentage of the annual required contributions, but these plans are less well funded than state-administered plans. The third section uses regression analysis to untangle this seeming-conundrum. An equation explaining percent of ARC paid confirms that, even after controlling for a number of factors that could affect contribution behavior, state-administered plans pay less. A second equation explaining the relationship between funded levels, percent of ARC paid and other factors suggests an answer: investment returns. Indeed, for mature plans with substantial assets that receive most of their income from investments, the higher returns historically earned by state-administered plans explain their higher funded levels. A closer look at returns also suggests why the funded level of local plans declined by less than that for state plans since the economic crisis -- they held less in equities and other risky assets, and therefore suffered less from the collapse of the stock market. The final section concludes that the locally-administered plans in the sample, which includes plans from the problem cities named above, are slightly less funded than state-administered plans, but have been closing the gap in recent years (72% versus 76%.) In Florida, the sample included Tallahassee General Employees (103.7% funded), Tampa Fire and Police (91.5%), Miami Fire and Police (76.4%), Jacksonville General Employees (71.3%) and Pensacola General Employees (68.5%).
3. HOW RARE ARE MUNICIPAL BANKRUPTCIES, ANYWAY:? With all the talk surrounding municipal bankruptcy in recent years, governing.com says some might view Chapter 9 as an increasingly common path for cash-strapped local governments. A few high-profile cases of cities seeking bankruptcy protection have garnered national attention, with some media reports suggesting an impeding wave of Chapter 9 filings. In actuality, though, Chapter 9 filings have been few and far between. In all, only 13 localities have sought bankruptcy protection since 2008. A number of sanitation authorities and other lesser-known special districts also filed, but the totals remain low, given the number of municipalities across the country. In order to determine how rare the event is, it is necessary to determine how many local governments are eligible to file. The Census Bureau classifies local governments as either “general purpose,” including cities and counties, or special-purpose, which comprise school districts, water authorities and other narrowly-defined municipalities. For the purpose of this analysis, the authors looked at general-purpose local governments since laws pertaining to special districts are less uniform. Federal law permits all local governments to file for Chapter 9, but only if a municipality’s state government allows for it. (Florida is in the category of nine states that authorize filing upon conditions met and further action of state, officials another entity.) The 2012 Census of Governments counted 38,917 general-purpose governments throughout the country, 21,683 of which were located in states with laws permitting Chapter 9 filings. Considering the handful that filed in the last five years, only one of every 1,700 eligible localities filed for bankruptcy protection. If filings later dismissed are excluded, then only one of every 2,700 localities successfully filed. To put these numbers in perspective, there were 390,000 commercial bankruptcy filings over the same time period. Cities exploring bankruptcy protection can be dissuaded by a litany of potentially negative consequences accompanying a Chapter 9 filing. For one, credit ratings would likely take a hit. Second, municipal bankruptcy is a lengthy and costly process, with long-term implications impeding an area's future economic growth. Short-term benefits of bankruptcy protection, such as temporary cash flow relief, typically dissipate within a few years. Filing a Chapter 9 petition -- no matter the reason -- sets in motion a process with damaging consequences to a municipality's fiscal and economic prospects. Most would not argue that quite a few local governments are struggling to balance budgets and pay off debts. But, if recent years are any indication, very few of them will end up pursuing bankruptcy protection as a last resort.
4. PENSION PLAN PARTICIPANTS ALLEGING ERISA VIOLATIONS IN DB PLAN LACKED STANDING TO SUE: David was named representative of a putative class of retirement participants in plans sponsored by Bank of America Corporation. He brought a civil action under the Employee Retirement Income Security Act of 1974, alleging that the bank and its corporate benefits committee engaged in prohibited transactions, breached their fiduciary duties by selecting and maintaining bank-affiliated mutual funds in the investment menu for the defined benefit pension plan. The federal district court dismissed all claims related to the pension plan for lack of Article III standing. United States Court of Appeals for the Fourth Circuit affirmed. The participants lacked constitutional standing to pursue the pension plan claims because they failed to plead any cognizable injury-in-fact likely to be redressed by a favorable outcome in this litigation. In short, the participants have suffered no injury that supports Article III standing to bring ERISA claims on behalf of a DB Plan where the plan is over funded when the claims were filed and any surplus funding will revert to the plan. (Perhaps if the case were one where the plan is underfunded it might have received a more favorable reception.) David v. Alphin, Case No. 11-2181 (U.S. 4th Cir. January 14, 2013).
5. TITLE II OF ADA MAY REQUIRE STATE TO VIOLATE ITS LAWS AS A “REASONABLE MODIFICATION”: Mary Jo C. appealed a federal court judgment dismissing her claims upon a conclusion that Title II of the Americans with Disabilities Act does not require state actors to violate state laws as a “reasonable modification” under the Act, and that Title II does not apply to employment discrimination. The appellate court found that Title II does, in some circumstances, require reasonable departures from standards established by state laws. The appellate court also concluded, based on the structure of the ADA, that Title II does not apply to employment discrimination. Thus, the court vacated the first ruling and affirmed the second. Mary Jo C. alleged that her job as a librarian was terminated because of behavior symptomatic of her chronic mental illness. Although she alleged that she would have been eligible for disability retirement benefits under New York State law, her mental illness interfered with her ability to comply with New York State law’s strictly enforced filing deadline for those benefits. When the New York State and Local Retirement System rejected her request to waive the deadline, and when the library rejected her request to assist her in applying or extending the deadline by reclassifying her termination as a leave of absence, she was denied those benefits. On remand, she will be allowed to allege facts supporting her claim that she was disabled, and to attempt to state a claim invoking the rule in a 1908 U.S. Supreme Court case. Mary Jo C. v. New York State and Local Retirement System, Docket No. 11-2215 (U.S. 2d Cir. January 29, 2013).
6. IRS ISSUES FINAL REGULATION ON FATCA REPORTING REQUIREMENTS FOR FOREIGN RETIREMENT PLANS: The Internal Revenue Service has issued final regulations relating to information reporting by Foreign Financial Institutions with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities. In response to comments received, the final regulations contain several modifications regarding retirement plans, according to IFEBP.org. For example:
- The final regulations expand the scope of retirement funds that are considered exempt beneficial owners, the income of which is not subject to chapter 4 withholding. The final regulations provide that a financial account does not include a non-investment linked, non-transferable, immediate annuity purchased by the account holder in connection with an exempt retirement or pension account.
- For retirement and pension accounts excepted category is revised to eliminate the requirements that all contributions to the account be government, employer, or employee contributions, and that the contributions be limited to earned income. In addition, the limitation on contributions is liberalized to allow plans to either have an account contribution limit of $50,000 or less or a maximum lifetime contribution limit of $1,000,000 or less to be deemed compliant.
- The final regulations permit investors that are retirement plans and non-profit organizations to be included in the deemed-compliant category for qualified collective investment vehicles.
The regulations are effective January 28, 2013.
7. DEFINITIONS: SMILE: A curve that can set a lot of things straight!
8. QUOTE OF THE WEEK: The test for whether or not you can hold a job should not be the arrangement of your chromosomes. Bella Abzug
9. ON THIS DAY IN HISTORY: In 1962, President Kennedy begins blockade of Cuba.
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