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Cypen & Cypen
May 3, 2018

Stephen H. Cypen, Esq., Editor

The New York Times ran a piece about the growing burden of paying public pensions.Naturally it features a few examples of very high pensions, but the overall gist is that the cost of pensions is getting so high that it is crowding out spending on other things. Dean Baker comments:

Workers sign contracts that specify compensation. Most of it is in direct pay, but benefits like pensions are often part of the contract. Taking back pensions for which people worked is like taking back a portion of their pay after the fact. As far as the claim that public employees are overpaid, most research shows that they are actually paid less than their private sector counterparts, when controlling for education and experience. While the piece implies that public employees typically get generous pensions, this is not true. The Detroit pension system, which is referenced in the piece, pays an average annual benefit of $20,000 a year, or less than $1,700 a month. Most other public pension systems provide comparable benefits to typical employees as opposed to highly paid doctors and football coaches. For the most part, public pensions are fairly ordinary. The biggest exceptions are police officers and firefighters, who are often allowed to retire after only 20 years; are allowed to spike their pensions; are able to take part in special semi-retirement programs that boost their pensions even more; frequently take disability pensions; and just generally have pensions that pay them a high percentage of their working salaries. But put that aside. If they can negotiate all that stuff, then bully for them. The real issue, as everyone knows, is not so much the size of public pensions as the fact that they are almost never fully funded. Politicians, who mostly work on time frames no further out than the next election, are simply more willing to negotiate generous pensions than they are to negotiate higher salaries that might require tax hikes on their watch. It is like Wall Street’s IBGYBG: “I will be gone, you will be gone.” And sure enough, now that the pension bills are coming due, all the politicians who passed the buck—literally—are safely out of office. The real answer all along has been simple: negotiate any pension you want, but you have to fund it fully with no wild-ass investment return assumptions. Done properly, an extra $1,000 in pension income would cost about the same as a $1,000 salary increase, so politicians would have no special incentive to prefer one over the other. It is a little late for that, of course, and although lots of cities and states would love to take back a chunk of worker pensions, they cannot do it. It is all specified in a contract, after all, and courts will enforce those contracts. One way or the other, paying out old pensions is probably going to require an average increase in state and local taxes of about 5-10 percent or so. Maybe more, depending on where you live. The sooner everyone owns up to this, the better off we will all be.
Rebecca Moore reports that a global survey of 300 pension funds explores the commonalities and differences between corporate and public sector defined benefit (DB) plans, and finds corporate plans are winding down as public plans are strengthening themselves for the long run. The survey, which was conducted for BlackRock by the Economist Intelligence Unit, reveals nine out of ten public DB plans in the study are open to new members, but only about one in ten corporate plans is. In addition, nearly three-quarters of corporate plans overall say they are de-risking, but the proportion rises above 80% for U.S. plans. Among public DB plans, size is correlated with change on several important fronts, with larger plans (those with more than $25 billion in AUM) more likely to have added staff and revised board and staff roles than plans with less than $10 billion in assets under management (AUM). According to the survey report, change is a major focus as both types of pension funds strengthen governance and investment policies. Nearly three-quarters of the pension funds have created or revised risk appetite and investment belief statements in the last three years, and while these best-practice tools are not new, their prevalence and prominence appear to have increased. More than 70% of respondents say they have enhanced risk analytics, and nearly as many have sought to improve their measurement of investment performance. Monitoring fees is another major focus. The study finds many plans would take more such steps if they could, but the biggest barrier to governance and investment policy improvements, especially on the public side, is a lack of financial resources, cited by 69% of public plan respondents. Both types of pensions are rethinking the respective roles of index-based, factor-based and alpha-seeking strategies. According to the survey results, use of factor-based strategies is cited by about three-quarters of respondents, while use of index strategies is also widespread and continuing to increase. Alpha-seeking strategies are still valued but are being applied with greater selectivity and attention to where they may be most effective. Both types of pensions expect a greater role for hybrid approaches that combine DB and defined contribution (DC) elements. Already adopted by 20 U.S. state plans, hybrids look likely to spread. Around three-quarters of global public DB plans expect to offer a DC plan to beneficiaries in the medium term. A slightly smaller proportion of corporate plan respondents expect that over the medium term, their DC plans will be able to employ more of the strategies available to their DB plans. Many corporate DB plans are de-risking, and runoff on the balance sheet is the likeliest endgame, according to the survey. Nearly three-quarters overall say they are de-risking, with respondents in the UK and U.S. most likely to be doing so. Of the de-risking corporate plans, 51% see immunization and runoff on the balance sheet as the likeliest endgame and 41% anticipate a pension risk transfer (PRT). Public plans are relying more on private assets and enhancing their ability to invest in them. Nearly three-quarters say they have improved risk analytics to facilitate investments in private assets. More than half say they have added investment professionals to focus on such assets and support their pursuit of potential premiums for bearing illiquidity and complexity risk. Multinational corporate DB plans are coordinating national plans—and in some cases pooling assets—to benefit from scale. Among corporates, nearly 40% are employing common investment strategies or managers for different national schemes, with 26% reporting a common strategic asset allocation and 11% saying they have consolidated some assets. However, only a few public plans have completed a consolidation, and fewer than one-fifth are currently consolidating or have plans to do so. At the same time, large funds are doing more than small ones to strengthen their organizations and add the resources needed in a more challenging climate. “Drivers of change have been building since the turn of the century. From the setbacks dealt by the post-2000 and post-2007 downturns to the current swirl of demographic, financial and political challenges, the need for funds to adapt and adjust has steadily grown,” says Edwin Conway, global head of BlackRock’s Institutional Client Business. “These forces have pushed DB pensions down two diverging paths. More and more corporate DB sponsors have chosen to wind down their DB plans, while many non-corporate plans are shoring up their models better to serve their participants over the long haul. These basic storylines are playing out around the world, albeit with plenty of local variation resulting from regulatory, cultural and other factors.”
Report from Rebecca Moore says that the estimated aggregate funding status of pension plans sponsored by S&P 1500 companies decreased by 1% in March to 87% at the end of the month, as a result of losses in the equity markets, according to Mercer. As of March 31, the estimated aggregate deficit of $286 billion increased by $24 billion as compared to the $262 billion measured at the end of February. The aggregate funded ratio for U.S. corporate pension plans decreased by 1.6 percentage points to end the month of March at 86.8%, yet remains up 3.6 percentage points over the trailing twelve months, according to Wilshire Consulting. The monthly change in funding resulted from the combination of a 1.1% increase in liability values and a 0.8% decrease in asset values. Despite March’s decline, the aggregate funded ratio is up 2.2 and 3.6 percentage points year-to-date and over the trailing twelve months, respectively. “March was the second consecutive month that saw funded ratios driven lower by negative total asset returns,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “March’s 1.6 percentage point decrease in funding was the largest drop in 21 months. The retracement in funding was led by a decline in global equities and a rise in liability values that resulted from a nearly 10 basis points decrease in the bond yields used to value pension liabilities.” According to Northern Trust Asset Management, during the month of March, the average funded ratio for corporate pension plans decreased from 85.7% to 84.5%. Global equity markets were down more than 2% during the month, and average discount rate decreased from 3.94% to 3.89% during the month. Both model pension plans October Three tracks lost ground last month. Traditional Plan A lost 2% while the more conservative Plan B lost less than 1%. For the year, Plan A remains almost 3% ahead, while Plan B is up less than 1%. October Three explains that after a strong January, during which stocks and interest rates rose, capital markets reversed course last month and pension sponsors have given back much of the early gains. Still, at the end of the first quarter, most plans are in somewhat better shape than at the close of 2017 on the strength of lower liabilities. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. Conning’s pension funded status tracker model follows the funded status of the average corporate pension plan in the Russell 3000 universe, and found that in March, funded status of the average Russell 3000 pension plan fell by 1%, from 86% in February to 85%. Year-to-date, the funded status is still up by 2%.
Only 11% of Americans say they have excellent financial health, a survey by Morning Consult found, and Lee Barney reported. Another 32% said good, 32% said fair, 14% said poor and 7% said bad. While 49% of Americans are saving for retirement, only 16% are very confident that they will have enough saved for retirement. Another 29% are somewhat confident, 23% are not too confident, and 21% are not confident at all. Only 49% said they have sufficient tools or resources to save for retirement; 33% said they are lacking such tools and resources. Sixty percent do not know how much money they need to save to retire comfortably. This is particularly high among Gen Z (69%), Millennials (64%) and Gen X (66%). Only Baby Boomers fall below the national average (54%). Asked whether they have funds set aside for various scenarios, 44% each said they do not have enough saved in the event of unemployment, in the event of a health emergency or should they want to take a vacation. Seventy-one percent of Americans know their credit score. Among Boomers, this jumps to 80%, and among Millennials, it falls to 67%. Asked how often they check their credit score, 15% said never, 10% said once a year or less, 9% said once a year, 22% said a few times a year, 27% monthly, 9% weekly and 3% daily. Morning Consult’s findings are based on a survey of 2,021 adults conducted between March 30 and April 1, 2018.
A Netflix shareholder has filed a federal lawsuit accusing the streaming giant of awarding lavish bonuses to top executives, Gene Maddaus reports. The suit, brought by the City of Birmingham Relief and Retirement System, alleges that Netflix violated tax law by giving “multi-million dollar windfalls” to executives including Ted Sarandos based on performance targets the company knew it was almost certain to achieve. “Through their conduct, Defendants rigged the compensation process, guaranteeing Netflix officer’s huge cash payments while misleading investors into believing that these payments were justified by attainment of real performance goals,” the suit alleges. Public companies are allowed to deduct salaries for top executives up to $1 million. Above that threshold, compensation may only be deducted if it is based on performance goals. The law requires that the goals be “substantially uncertain” at the time they are set. The Netflix bonuses were based on streaming revenues, which the pension fund alleges were highly predictable once the company knew how many subscribers it had in a given quarter. The pension fund alleges that four Netflix executives reaped millions of dollars from the improper bonuses. Ted Sarandos, the chief content officer, is accused of taking $10.5 million. Neil Hunt, the former chief product officer, is alleged to have gotten $12.6 million. Greg Peters, the current chief product officer, is accused of taking $3.2 million. David Hyman, the general counsel, is alleged to have received $800,000. The lawsuit echoes a 2017 article in the Financial Times, which noted the “uncanny accuracy” of Netflix’s projected bonus payments. The article noted that the company established a bonus pool of $18.75 million for three of its executives in 2016. According to regulatory filings, those executives ended up receiving $18.7295 million in bonuses for that year. In response to the Financial Times, Netflix said its executive compensation practices are consistent with federal statutes. “The fact the targets are set during guidance makes them inherently uncertain, and not a foregone conclusion,” the company told the Financial Times. “To hit the target, it requires effort and management skill by the executives. It is also a benefit to the company as we receive a tax deduction.” The shareholder suit was first reported by the Hollywood Reporter. Netflix declined to comment, saying the company would weigh in “at the appropriate time.”
With the April 17 tax deadline has passed, the Internal Revenue Service and Security Summit partners urge taxpayers and tax professionals to be alert to identity theft scams, especially a new email version currently pretending to be from “IRS Refunds.” As the filing season came to a close, thieves have stepped up their efforts, warned the Internal Revenue Service and the Security Summit partners. The Security Summit, a partnership between the IRS, state tax agencies and the tax industry, continues to take steps to combat tax-related identity theft. The “IRS Refunds” scam is a common tactic used by cybercriminals to trick people into opening a link or attachment associated with the email. This link takes people to a fake page where thieves try to steal personally identifiable information, such as Social Security numbers. Often these links or attachments also secretly download malware that can perform many functions, such as giving the thief control of the computer or tracking keystrokes to determine other sensitive passwords or critical data. The IRS does not randomly contact taxpayers or tax professionals via email, including asking people to confirm their tax refund information. The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However, there are special circumstances in which the IRS will call or come to a home or business, such as when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment or to tour a business as part of an audit or during criminal investigations. Even then, taxpayers will generally first receive several letters (called “notices”) from the IRS in the mail.
Note that the IRS does not:

  • Demand that taxpayers use a specific payment method, such as a prepaid debit card, gift card or wire transfer. The IRS will not ask for debit or credit card numbers over the phone. Taxpayers should make check payments to the “United States Treasury” or review for IRS online options.
  • Demand that taxpayers pay taxes without the opportunity to question or appeal the amount they say is owed. Generally, the IRS will first mail a bill to those who owe any taxes. Taxpayers should also be advised of their rights as a taxpayer.
  • Threaten to bring in local police, immigration officers or other law-enforcement to have taxpayers arrested for not paying. The IRS also cannot revoke a driver’s license, business license or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.

With scams like these circulating, taxpayers and tax professionals should take ongoing security precautions to protect their identities and their computer networks from identity thieves.
Here are a few basic security steps for taxpayers:

  • Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and can automatically update. Encrypt sensitive files such as tax records stored on computers. Use strong, unique passwords for each account.
  • Learn to recognize and avoid phishing emails, threatening calls and texts from thieves posing as legitimate organizations such as banks, credit card companies and even the IRS. Do not click on links or download attachments from unknown or suspicious emails.
  • Protect personal data. Do not routinely carry Social Security cards, and make sure tax records are secure. Shop at reputable online retailers. Treat personal information like cash; do not leave it lying around.

 Here are few basic security steps for tax professionals:

  • Learn to recognize phishing emails, especially those pretending to be from the IRS, e-Services, a tax software provider or cloud storage provider. Never open a link or any attachment from a suspicious email. Remember: the IRS never initiates initial contact with tax pros via email.
  • Create a data security plan using IRS Publication 4557, Safeguarding Taxpayer Data, and Small Business Information Security – The Fundamentals, by the National Institute of Standards and Technology.
  • Review internal controls:
    • Install anti-malware/anti-virus security software on all devices (laptops, desktops, routers, tablets and phones) and keep software set to automatically update.
    • Use strong and unique passwords of 10 or more mixed characters, password-protect all wireless devices, use a phrase or words that are easily remembered and change passwords periodically.
    • Encrypt all sensitive files/emails and use strong password protections.
    • Back-up sensitive data to a safe and secure external source not connected fulltime to a network.
    • Wipe clean or destroy old computer hard drives that contain sensitive data.
    • Limit access to taxpayer data to individuals who need to know.
    • Check IRS e-Services account weekly for number of returns filed with EFIN.
  • Report any data theft or data loss to the appropriate IRS Stakeholder Liaison.
  • Stay connected to the IRS through subscriptions to e-News for Tax ProfessionalsQuick Alert and Social Media.

IR-2018-88, April 9, 2018
The IRS reminds taxpayers they may have money waiting for them. About 1 million taxpayers who did not file a 2014 federal income tax return have unclaimed tax refunds totaling about $1.1 billion. Here are some things taxpayers should know about these unclaimed refunds:

  • To collect the money, taxpayers must file their 2014 tax return with the IRS no later than this year's tax deadline, Tuesday, April 17, 2018.
  • The IRS estimates that half of the refunds are more than $847.
  • When a taxpayer who is getting a refund does not file a return, the law gives them three years to claim that tax refund. If the taxpayer does not file a tax return within three years, the money goes back to the U.S. Treasury. For 2014 tax returns, the three-year window closed April 17, 2018.
  • The law requires taxpayers to properly address and mail the tax return to the IRS. It must be postmarked by the April deadline.
  • The IRS may hold the 2014 refunds of taxpayers who have not filed tax returns for 2015 and 2016.
  • The unclaimed money will be applied to any amounts still owed to the IRS or a state tax agency. The money may also be used to offset unpaid child support or past due federal debts, such as student loans.
  • By failing to file a tax return, people stand to lose more than just their tax refund. Many low- and moderate-income workers may be eligible for the earned income tax credit. For 2014, the credit was worth as much as $6,143.
  • Current and prior year tax forms are available on the Forms, Instructions and Publications page or by calling toll-free 800-TAX-FORM. This includes forms 1040, 1040A and 1040EZ for 2014.
  • Taxpayers who are missing forms W-2, 1098, 1099 or 5498 for the years 2014, 2015 or 2016 should request copies from their employer, bank or other payer. Taxpayers who are unable to get missing forms can order a free wage and income transcript at using the Get Transcript Online tool. Taxpayers can use the information on the transcript to file their tax return.

Please note that Cypen & Cypen has a new office address: Cypen & Cypen, 975 Arthur Godfrey Road, Suite 500, Miami Beach, Florida 33140. All other contact information remains the same.
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