1. ARIZONA SUPREME COURT DECLARES SUSPENDED COLAS UNCONSTITUTIONAL: An Arizona statute established a formula for calculating pension plan benefits for retired members of the Elected Officials’ Retirement Plan. In 2011, the legislature modified that formula. Because the statute diminished and impaired the retired members’ benefits, the Supreme Court of Arizona held that it violated the Pension Clause of the Arizona Constitution. The Elected Officials’ Retirement Plan was established in 1985 to provide pension benefits for elected officials, including judges. Upon retirement, plan members were to receive monthly benefits based on 4% of their salary for each year worked, up to a maximum of 80% of their average yearly salary. The benefit increase formula is similar to a cost-of-living adjustment. But, unlike a cost-of-living adjustment, which is generally tied to inflation, the benefit increase was not tied to inflation, but instead to the plan’s return on investments. A benefit increase is determined by multiplying the amount by which the yearly total investment return exceeds 9%, times the actuarial present value of pensions in payment status, subject to a statutory cap of 4%. Any return in excess of the amount necessary to pay for the benefit increase in any given year was to be placed in a reserve fund to be used for future benefit increases, including years in which the return itself was not sufficient to provide an increase. When the plan was created, no statutory mechanism for awarding post-retirement benefit increases existed; instead, the legislature passed ad hoc increases. In 1990, the legislature created the first statutory mechanism for calculating increases. (The 2011 formula applied to those who became plan members after January 1, 2012. Those members received monthly benefits based on 3% of their salary per year, up to a maximum of 75% of average yearly salary.) The Court disagreed with the state’s and pension board’s argument that the statute prescribed only a formula for benefit increases rather than a liquidated amount, and that formula is not protected by the Pension Clause. Note, that although no party asked for their recusal, the presently sitting justices of the Supreme Court conceded the obvious fact that they will be eligible for the subject benefit increases upon their eventual retirement. Fields v. The Elected Officials’ Retirement Plan, Case No. CV-13-0005-T-AP (AZ February 20, 2014).
2. PUBLIC SECTOR PLANS -- OBJECTIVES AND PRINCIPLES FOR FUNDING: The American Academy of Actuaries notes that funding a pension plan involves determining appropriate contribution amounts at specific points in time and determining how to invest assets of the plan until benefits are paid. In the private sector, minimum contribution requirements are set by the Employee Retirement Income Security Act of 1974. In the public sector, each state sets its own contribution requirements, and each local governing body (county, city, district) sets its own contribution levels within whatever requirements, if any, the state may have established for local jurisdictions. Decisions about what to contribute and when are usually made by a retirement board or plan sponsor within boundaries of the contribution requirements noted above. The decision-making entity typically is advised by an actuary. In reality, there is wide variation in policies adopted by different local governing bodies to fund their pension plans, reflecting a complex interplay between local legal or policy requirements, objectives, and other constraints or competing priorities. In recent years, there has been a great deal of public discussion about whether current policies are appropriate or prudent. Since the Government Accounting Standards Board issued Statements 25 and 27 in 1994, many governing bodies, rating agencies, and other stakeholders have used parameters in those pronouncements for determining the Annual Required Contribution as a benchmark for contribution requirements. In 2012, GASB issued Statements 67 and 68, replacing Statements 25 and 27 for fiscal years beginning after June 15, 2013 and 2014, respectively, and eliminated the Annual Required Contribution and clearly avoided providing guidance that might serve as a benchmark for contribution requirements. Certain Actuarial Standards of Practice, promulgated by the Actuarial Standards Board, identify what actuaries should consider, document, and disclose when performing an actuarial assignment, including, but not limited to, measuring pension obligations, selecting assumptions, and selecting methods to determine pension plan contributions. The guidance for selecting methods to determine pension contributions, however, is limited, focusing largely on ensuring there are adequate assets to pay benefits when due. Recognizing there are other objectives and issues in the public sector, the Pension Practice Council of the American Academy of Actuaries believes that a discussion of the fundamental objectives and principles for funding public sector pension plans can inform actuaries practicing in the public sector, the decision-makers who set policies to fund pension plans, and the public at large, as to some of the issues to consider in developing a funding policy. Actuaries typically provide input with respect to the contribution allocation procedure and assumptions used in that procedure to fund the pension plan. A contribution allocation procedure primarily consists of:
- An actuarial cost method that allocates the projected pension obligation among past, current, and future periods of service.
- An asset smoothing method that recognizes gains and losses over a period of time.
- An amortization method that allocates the cost of benefit changes, assumption changes, and gains/losses over future years.
Although a plan’s investment policy will affect the risks associated with a contribution allocation procedure, the investment policy itself is generally not considered a component of the contribution allocation procedure. In establishing policies used to fund a public sector pension plan, three primary objectives need to be balanced:
- Benefit Security
- Contribution Stability and Predictability
- Generational Equity
Here is a summary of key points:
- Policies used to establish funding for a public pension plan should be formulated to maintain an appropriate balance among competing objectives of benefit security, generational equity, and contribution stability.
- Policymakers should communicate how these objectives have been balanced, and how, when and whether or not all identified costs are expected to be met via the contribution allocation procedure.
- The contribution allocation procedure should include a funding target based on accumulating the present value of benefits for members by the time they retire, and a plan to make up for any variations in actual assets from the funding target within a reasonable time period.
- Any risks that could make it difficult to achieve the objectives should be identified, anticipated, and communicated, and the results of the contribution allocation procedure should be monitored and adjustments made as necessary.
- Contributions determined by the contribution allocation procedure should actually be contributed to the plan by the sponsor on a consistent basis.
Issue Brief (February 2014).
3. STATES WITH MOST MINIMUM-WAGE WORKERS: President Obama reignited the minimum-wage issue in his State of the Union address, calling on lawmakers to raise the federal wage that has remained frozen at $7.25 an hour since 2009. In some states, according to Governing, federal minimum-wage hike could boost pay for hundreds of thousands of workers. In others where wages are already higher, the ramifications would not be as great. About 7.4% of Tennessee’s hourly workforce took home wages at or less than the federal rate. That share topped all other states, followed by Idaho (7.1%), Alabama (6.8%) and Arkansas (6.8%). Regions without state minimum-wage laws, particularly in the South, tend to employ the greatest concentrations of minimum-wage workers. Nationwide, an estimated 3.3 million Americans earned wages at or below the federal rate last year, accounting for 4.3% of the hourly workforce. The presence of any state minimum-wage law remains the overriding factor driving the number of employees at or below the federal rate. Of states where the share of workers earning at or below minimum-wage pay exceeded the national average of 4.3%, all but four lacked higher state minimum-wage laws last year. At the beginning of this year, 13 states raised their wage requirements, either through legislation, ballot initiatives or annual inflation adjustments. About half of states mandate wages higher than federal rate for most employers. At the opposite end of the spectrum, less than 2% of hourly workers earned average wages of $7.25 or less in Oregon, California and Washington last year. With 181,000 at or below minimum wage, Florida trails only Pennsylvania (189,000). Median hourly earnings in Florida is $12.01.
4. IF BITCOIN CANNOT BE BANNED, SHOULD IT BE REGULATED?: Verdict reports that Bitcoin, a so-called virtual peer-to-peer currency, is in headlines around the globe. (See C & C Newsletter for December 12, 2013, Item 4 and Item 5). China claims it has banned Bitcoin. Germany has declared that Bitcoin is not legal tender. In the United States, the federal and state governments have not tried to ban Bitcoin. The U.S. Treasury Department has, however, informed parties that issue or exchange Bitcoins that they are subject to federal laws dealing with money laundering, and may need to register as money transmitters and comply with reporting requirements regarding suspicious financial transactions. Why is there so much fuss about Bitcoin? For two reasons. First, it is a substitute for official government currency. People are willing to trade in their government-issued money to obtain Bitcoins -- hence posing some challenges to the global banking system. Second, and perhaps primarily, is that Bitcoins are not widely regulated or under government scrutiny, and may be used for illegal purposes. In January 2014, the Chief Investment Officer of Bitcoin exchange BitInstant was arrested for money laundering. Law enforcement is trying to stop use of Bitcoin on such sites, where people can buy drugs, guns, and pornography. The author believes attempts to extend legal recognition to Bitcoin is a good thing. While it may be good to clarify that legitimate businesses and consumers may use Bitcoin, it may be too early to determine, what, if any, further measures are needed to provide consumers with safety of their Bitcoins. The US Treasury Rules, and other attempts, at the state level, to clarify that Bitcoin may be used for lawful purchases, and that it is subject to regular money-laundering laws, taken together, are likely a prudent approach to the Bitcoin problem at present.
5. PROTECT SENIORS.ORG SURVEYS RETIREES:ProtectSeniors.org has released results of its survey for retirees as to issues facing them. Here are some of the results:
- Please rank, in order of most important (1) to least important (4), the issues facing you as a retiree:
1 2 3 4
Security of your pension or
retirement savings 51.3% 26.5% 14.4% 7.9%
Loss of retiree healthcare
coverage 33.0% 46.7% 12.8% 7.5%
Amount of your Social Security
benefits 5.9% 17.9% 51.3% 24.9%
Adequacy of your pension or
retirement savings to meet
your future needs 9.9% 9.0% 21.6% 59.5%
- Do you fear losing your retiree health benefits at some point in the future?
Yes – 83.2%, No – 5.5%
- Would you support an effort to pass legislation providing protections to retirees whose pensions have been stripped?
Yes – 98.1%, and No – 1.9%
- If Social Security income were higher, how would you use that money?
Pay for essentials - 70.3%
- Are you in favor of eliminating the dollar ceiling of percentage of earned income payable to the Social Security Trust Fund?
Yes - 65.9%, No - 34.1%
We understand the survey was conducted in conjunction with former Chairman of the Richmond Federal Reserve Bank and former White House Employee Income Security Act adviser, Dr. Thomas J. Mackell, Jr. Having known Tom for many years, we can say that he is definitely one the “good guys.”
6. THE 2013 DIRTY DOZEN TAX SCAMS: Education is the best way to avoid pitfalls of these “to good to be true” tax scams. The following are the Dirty Dozen Tax Scams for 2013:
- Identity Theft. Tax fraud through use of identity theft tops the Dirty Dozen list. Identity theft occurs when someone uses your information such as your name, Social Security number or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity fraudulently to file a tax return and claim a refund.
- Phishing. Phishing is a scam typically carried out with help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
- Return Preparer Fraud. About 60% of taxpayers will use tax professionals this year to prepare tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
- Hiding Income Offshore. Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose. IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as banks and bankers suspected of helping clients hide their assets overseas.
- “Free Money” from IRS and Tax Scams Involving Social Security. Flyers and advertisements for free money from IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally do not have a tax filing requirement, and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.
- Impersonation of Charitable Organizations. Another long-standing type of abuse or fraud is scams that occur in wake of significant natural disasters. Following major disasters, it is common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims, and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
- False/Inflated Income and Expenses. Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits could have serious repercussions.
- False Form 1099 Refund Claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens, and that taxpayers can gain access to the accounts by issuing 1099-OID forms to IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount, to justify a false refund claim on a corresponding tax return.
- Frivolous Arguments. Promoters of frivolous schemes to encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
- Falsely Claiming Zero Wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
- Disguised Corporate Ownership. Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.
- Misuse of Trusts. For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised, and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
7. STRANGEST TAX DEDUCTIONS: Speaking of Internal Revenue Service, onwallstreet.com brings us the following Strangest Tax Deductions:
- A fur coat worn to promote a cleaning business. As one tax filer learned, you will never outfox the IRS. And we cannot help but wonder, what Fox News would say.
- A wedding ring. A diamond is forever, and so is a taxpayer’s inability to deduct the cost of a wedding ring.
- 101 dog deductions. Expenses for dogs, dogs as guard dogs, a small dog as a “burglar alarm,” dog adoption costs, and even a dog as a dependent. CPAs heard it all this year. That’s 101 “uh-uhs” from CPAs and the IRS.
- An ATV as a medical deduction for stress relief. No doubt, it is fun to go out and let ‘er rip on the trails. But, the CPA and the IRS were not buying the ATV as a medical deduction in this case.
- Placing a business sign on a personal automobile, and writing off the car as an advertising expense. The CPA had to put this message in bright lights: “Not deductible.”
- A family vacation. Ahh, the crystal clear emerald water, the exquisite sand beaches, the cool ocean breeze. We hope the family enjoyed the vacation more than the tax filer enjoyed hearing the news that it was not deductible.
- A $1 million dollar deduction for a contribution of land without an appraisal. Beauty may be in the eye of the beholder, but this generous donor learned the hard way that property value is not.
- Infant “employee.” Sure, you can bring your children into the family business and count them as employees. But, as one business owner discovered, children who cannot yet walk or talk rarely qualify. Plus, they want everything handed to them!
- A large charitable deduction for a gift not given. One taxpayer thought that everyone could deduct a certain percentage of his income as a charitable deduction. Good news: They can. Bad news: They actually need to make the donation.
- School lunches as a business expense. As one business owner learned, unless her child is closing business deals with other first-graders at the school, these lunches are not deductible.
- Botox and tanning. One poor filer could not even furrow her brow upon learning that these expenses were not deductible. [Editor’s note: IRS better catch up with the medically substantiated use of Botox for migraine headaches.]
8. DATING ADS FOR SENIORS: MEMORIES: I can usually remember Monday through Thursday. If you can remember Friday, Saturday and Sunday, let's put our two heads together.
9. ADULT TRUTHS: I cannot remember the last time I was not at least kind-of tired.
10. TODAY IN HISTORY: In 2005, Benjamin Henry Kaplan arrived in to this world.
11. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
12. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm.