1. WHAT EXPLAINS DIFFERENCES IN PUBLIC PENSION RETURNS SINCE 2001?:
Center for Retirement Research at Boston College explains the difference in public pension returns since 2001. Two key factors underlying the funded status of public pensions are the payment of the annual required contribution by plan sponsors and the investment return earned on pension fund assets. To date, CRR studies have focused on the importance of making the full payment of an appropriately set annual required contribution - highlighting how inadequate contributions can undermine funding progress. However, given that most public pension funds rely heavily on investment returns to fund future benefits, a key component of their long-term sustainability is the ability to achieve adequate returns. This brief documents the investment performance of public plans from 2001-2016 and investigates the two main factors underlying disparities among plans: 1) differences in asset allocation; and 2) differences in the realized returns within each asset class. The analysis is based on newly collected data from the Public Plans Data (PPD) website. The brief proceeds as follows. The first section documents differences in the average annualized investment returns for public plans from 2001-2016. On average, the annualized return for public plans during this period was 5.5 percent - well below the typical actuarially assumed return. However, the returns for plans in the top and bottom quartiles were 6.3 and 4.6 percent respectively - a difference that could account for roughly a 20-percentage-point disparity in their funded ratios. The second section introduces the two factors that could cause the differences in returns: asset allocation and returns by asset class. The third section investigates the relative role of these factors in explaining differences in plan performance over the 16-year period. The final section concludes that asset allocation across plans is relatively similar while asset class returns show more substantial variation. Therefore, differences in returns turn out to be the major reason that lower-quartile plans underperformed the top-quartile plans over the period. Number 60, July 2018
2. U.S. SUPREME COURT SHORTENS TIMELINE FOR FOLLOW-UP CLASS-ACTION LAWSUITS:
A report from Hazel Bradford indicates that the Supreme Court reduced the options investors have for filing repeated class-action lawsuits once an initial statute of limitations is reached. Writing the unanimous decision in China Agritech vs. Resh, Justice Ruth Bader Ginsburg wrote, "there is little reason to allow plaintiffs who passed up opportunities to participate in the first (and second) round of class litigation to enter the fray several years after class proceedings first commenced." The issue in the case was whether the so-called "American Pipe" precedent, under which statutes of limitations are suspended for all members of a class during the time a class action is pending, applies when class members later seek to bring another class action. The case involved China Agritech's 2011 stock decline after publication of several negative research reports on the company. After two different District Courts denied class certification, Michael Resh filed a third putative class-action lawsuit in 2014, which was dismissed because it came after the two-year limitation period. The 9th U.S. Circuit Court of Appeals reversed the dismissal, noting that the limitation period was tolled, or suspended, for individual claims during two previous class actions against China Agritech. “The practical impact of the court's ruling is to provide more power to the punch of an order denying class certification,” said Michael Biles, King & Spalding partner, in an emailed statement. “The Supreme Court clarified that American Pipe only tolls individual claims," and judicial efficiency arguments that justified tolling for individual claims do not apply to class claims. “This means that plaintiffs who wish to proceed with a class action following an order denying class certification must get the order reversed on appeal - they cannot recruit new shareholders and file another class action,” said Mr. Biles.
3. NORTH CAROLINA CREATES SOLVENCY FUND TO PAY DOWN UNFUNDED LIABILITIES:
Hazel Bradford reports that North Carolina has a new trust fund to help pay down unfunded liabilities for the pension system and health-care costs, thanks to a law signed by Gov. Roy Cooper. The Unfunded Liability Solvency Reserve Act creates a reserve that will be funded through several sources, including General Assembly appropriations, overflows from the state's rainy day fund or savings from refinancing of general obligation bonds. Between pension and health care, the state has $50 billion in unfunded liabilities, $35 billion in health care alone. The solvency fund is believed to be the only one of its kind in the nation, according to state Treasurer Dale Folwell, who credited the General Assembly and the governor for their leadership. "Today, we begin to make a generational difference for all North Carolinians and lead the nation in addressing $50 billion in unfunded pension and health-care costs. Our office did not create or discover these liabilities, but we have an obligation to fix them," Mr. Folwell, sole trustee of the $97.9 billion North Carolina Retirement Systems, Raleigh, said in a statement. Pensions & Investments, June 26, 2018
4. THE HISPANIC - WHITE WAGE GAP HAS REMAINED WIDE AND HELD STEADY FOR DECADES:
In a new Economic Policy Institute (EPI) paper, Professor of Economics at the University of Texas, Rio Grande Valley, Marie Mora and Professor/Dean of the Harrison College of Business at Southeast Missouri State University, Alberto Dávila, examine the Hispanic-white wage gap among full-time workers, including how it is affected by gender, Hispanic subgroup, education level, birthplace, immigrant status, and generational status. In 2017, Hispanic men working full-time made 14.9 percent less in hourly wages than comparable white men (an improvement from 17.8 percent in 2000) while Hispanic women made 33.1 percent less than comparable white men (a small improvement from 35.1 percent in 2000). This gap has remained wide and relatively steady since 2000 for Hispanic men and women overall and for most of the largest subgroups by national origin. “It is clear that Hispanic workers still lag behind their white peers in many regards,” said Mora. “But it is important to point out that Hispanic workers are not a homogeneous group. This analysis shows clear differences based on factors like where Hispanic workers are from, how educated they are and how long their families have lived in the United States.” Mora and Dávila also look at the unemployment and Labor Force Participation Rates (LFPR) over time for the Hispanic population overall, as well as by gender and by national origin (specifically Mexican American, Puerto Rican and Cuban American) - comparing these rates with the overall population. They find that the Hispanic unemployment rate is consistently higher than the overall unemployment rate. Meanwhile, the LFPR for Hispanic men is higher than the LFPR for men overall, while the LFPR for Hispanic women is lower than the LFPR for women overall. “There are many causes for concern in this analysis, but there are some reasons to be optimistic,” said Dávila. “For example, Hispanic workers clearly place value on education and Hispanic education attainment is growing - but we need to make sure that Hispanic Americans have access to high quality, affordable education.”
Other key findings of the paper include:
- Controlling for education and other factors significantly lowers the hourly wage gap between Hispanic men and non-Hispanic white men working full-time. This suggests that for Hispanic men, much of the earnings gap might be explained by a host of factors such as education, experience and regional differences in cost of living. However controlling for these same factors does not lower the hourly wage gap between Hispanic women and white men nearly as much: for Hispanic women, both the adjusted and unadjusted wage gaps have remained fairly steady and large since 1979. This suggests that for Hispanic women, ethnic and gender discrimination, and other forms of discrimination, might be at play.
- Wage gaps between second-generation Hispanic immigrants (those born in the U.S. to at least one foreign-born parent) and second-generation non-Hispanic white immigrants were narrower than wage gaps between first-generation Hispanic and white immigrants (those born outside the U.S.), consistent with the notion that as successive generations of immigrants assimilate, their labor market outcomes improve.
- While the share of Hispanics with a bachelor’s degree or more education has risen steadily over the last four decades, Hispanics have not been able to close the Hispanic-white “college attainment gap.” For Hispanic women, this gap has stayed relatively stable over this period, while for Hispanic men, the college attainment gap has widened.
Economic Policy Institute Press Release July 2, 2018
5. ELECTRONIC TAX ADMINISTRATION ADVISORY COMMITTEE ISSUES 2018 ANNUAL REPORT:
The Electronic Tax Administration Advisory Committee (ETAAC) released its annual report, featuring numerous recommendations on a range of issues in electronic tax administration. The Committee presented the report at a public meeting to IRS Acting Commissioner David Kautter. "The ETAAC works closely with the Security Summit in the fight against identity theft and refund fraud,” Kautter said. “The group’s advice is important to our efforts to improve tax administration, and the IRS looks forward to reviewing the recommendations.” ETAAC exists in support of the goal that paperless filing should be the preferred and most convenient method of filing tax and information returns. This is the Committee’s second annual report since it was realigned and expanded to focus on refund fraud and cybersecurity. While the ETAAC makes recommendations to the IRS, it works in conjunction with the Security Summit, a joint effort of the IRS, state tax administrators, tax software providers, tax professionals and financial services firms to fight fraud. Summit efforts have resulted in sharp declines in the number of taxpayer reports of identity theft and refund fraud. ETAAC members represent various segments of the tax community, including tax professionals, tax software developers, large and small businesses, employers and payroll service providers, individual taxpayers and consumer advocates, the financial industry and state and local governments. The 2018 report Electronic Tax Administration Advisory Committee Annual Report to Congress, is available on IRS.gov. Issue Number: IR-2018-144, June 27, 2018
6. UFCW LOCAL 653 GOES OUTSIDE THE BOX TO PROTECT THE PENSIONS OF UNION MEMBERS:
About two years ago, Matt Utecht, President of the United Food and Commercial Workers Union Local 653 (UFCW), began thinking about the solvency of the members’ private pension plan. He had come to know an older couple in their late 70s. The gentlemen of the pair was a proud retired union member who consistently wore his union branded clothing to service. One day, Utecht approached the older couple, observing that they looked upset. They had recently found out that the husband’s multiemployer pension plan had lost a substantial portion of its value. Their situation hit Utecht hard, as the couple reminded him of his own parents. Utecht remembered thinking, “Here is this proud old-timer who has given the best years of his life to an employer and had counted on a retirement benefit, and had just found out that his benefit would be reduced by half. He was so defeated and dejected. When they are supposed to enjoying the time they have left together, devastation hits,” Utecht said. According to a December 2017 report from the Center for Retirement Research, the instability of multiemployer pension plans are rooted in two central issues. First, aging workers are not being replaced, as union jobs that fund multiemployer plans have been disappearing due to outsourcing, bankruptcy or the lack of union jobs. Therefore, today there are substantially less new unionized workers to pay into the pension system. Secondly, the dot-com bubble in 2000 and subsequent economic shocks have gutted the investment returns that funded these plans. The looming multiemployer pension crisis instilled a sense of urgency in Utecht to confront the issues and make appropriate plans to protect UFCW members from the dejection that he had witnessed from the older couple. In the United States, the defined benefit (DB) private pension system was not legislated into existence but rather came as a result of organized labor bargaining with large employers to protect the interest of workers long after they had given their youth to their employer. Today, these pensions are in crisis following major economic shocks over the last 15 years. Corporate mismanagement has also plagued these systems. According to Bloomberg, General Electric has the highest pension liability among S&P 500 companies, approximately $28.7 billion. GE closed 2017 with $100.3 billion in obligations to over half a million people against $71.6 billion in assets. Longtime and recently resigned CEO Jeff Immelt created the problem by emphasizing acquisitions, mergers and stock buybacks. These decisions enriched shareholders instead of protecting long-term commitments to workers. Furthermore, the use of these pensions has declined with the weakening of organized labor and employers’ shift to their preferred defined contribution (DC) plans such as 401(k)s. DCs put the financial liability on the employee rather than the employer. Furthermore, the original intent of DCs was to create a plan that provided supplemental benefits, not necessarily replace traditional (DB) pensions. Defined contribution plans have shown to be riskier, as many of these plans collapsed during an economic crisis such was the case of Enron. Furthermore, many cash-strapped workers with 401(k)s have been raiding them in order to pay for unexpected expenses like rising health care costs or mortgage issues and other threats that have arisen from the ongoing impacts of recent economic downturns. Utecht began working with pension expert David Blitzstein. Together, they began exploring a "variable annuity pension plan." This plan has been available since 1953 but fell out of favor and was not widely adopted. The plan functions similarly to a traditional defined benefit pension. It is still a defined benefit and pays a lifetime annuity; however, it involves risk-sharing on the investments that fund its growth between employers and employees. The highly regarded Wisconsin State employee pension is a variable annuity plan along with the Major League Baseball Players Benefit Plan. Local 653 is the first UFCW Local in the United States that has bargained for a variable annuity plan. Because the benefit is variable there is more potential for benefit. If the annual return is above a “hurdle rate” there is an automatic increase in benefits. If returns fall below the hurdle rate benefits can be reduced; however, Local 653 negotiated restrictions on decreases with grocers. UFCW expects to propose this plan to the Seward Community co-operative during their ongoing bargaining. There is a fierce debate circulating on what to do about public pensions. Kurt Winkelmann is a Senior Fellow at the Heller-Hurwicz Economics Institute at the University of Minnesota. One of the institute’s focus, is examining the state of public pensions, and a new view, the reform necessary to stabilize public pensions. According to Winkelmann, “We United States have the worst of the worst. We do not have good defined benefit program plans because they are underfunded. Up until recently, and I would say it is incomplete, we do not have good defined contribution systems.” Utecht explained that UFCW considers a 401(k) to be a savings plan, not a retirement plan, and therefore not a viable replacement. Instead of offering solutions to the problems, Winkelmann sees his role as convening with stakeholders to discuss tradeoff and therefore be in the best position possible to decide what to do. Most of the funding for Winkelmann’s research is from the Arnold Foundation. The Arnold Foundation is primarily funded by former Enron trader and billionaire John Arnold. Unions contend that the Arnold Foundation is funding efforts to privatize public pensions across the United States and convert them to 401(k)-style defined contribution DC plans. Whether the Foundation is guiding Winkelmann’s research, he responded by saying, “The way they have treated us is pretty hands-off. I think they just want thoughtful analysis.” He further emphasized, “Am I trying to argue for privatizing? Not really. I just want a sensible conversation about tradeoffs.” Nevertheless, Arnold and the foundation bearing his name remain controversial. Rolling Stone described him as a, “young right-wing kingmaker with clear designs on becoming the next generation's Koch brothers, and who for years had been funding a nationwide campaign to slash benefits for public workers.” Investigative Researcher David Sirota explains in his report “The Plot Against Pensions” that pension privatization advocates distort the debate by focusing state budget debates on slashing benefits and, “downplaying proposals that would raise revenue to shore up existing retirement systems”, among other things. According to Sirota, the same sort of greed that has decimated private sector pension is impacting public pensions. Instead of states meeting their pension obligations, they offer tax abatements to politically connected corporations. Sirota notes that, “Left out of the analysis, of course, was any note that Kentucky’s $760 million annual pension shortfall is far less than the $1.4 billion a year Kentucky spends so-called “incentive programs” - much of them classic corporate welfare. These programs have included subsidies of $300 million to Ford Motor Company, $205 million to Weyerhaeuser and $110 million to United Parcel Service.” These systems and the millions of dollars they wield are interrelated and impacted by state level policies and the unwillingness of corporations to meet their obligations. The seriousness of this problem has led to the Bipartisan Budget Act of 2018 (P.L. 115-123). It creates a new joint select committee of the House and Senate. It is currently in the process of making recommendations and drafting legislation that will, “significantly improve the solvency of multiemployer pension plans.”
7. WESTERN STATES MULTIEMPLOYER PLAN APPLIES FOR THIRD TIME FOR BENEFIT CUTS:
Western States Office and Professional Employees Pension Fund, Portland, Ore., has submitted its third application to the Treasury Department for permission to cut benefits for participants, including retirees, as part of a proposed rescue plan. According to Hazel Bradford, previous applications were withdrawn. Pension fund assets as of January 1, 2018, were $336 million and liabilities were $525 million, for a funded status of 64%. Without benefit reductions, known as suspensions, the plan is projected to be insolvent by 2036. The proposed benefit reductions would be 30% for active participants, terminated vested participants and retirees under the age of 80. Retirees older than 80 or under disability would see no change in benefits under the proposed plan. In materials to participants, trustees said that since 2008 the number of active participants dropped 73%, with retirees now outnumbering them 11 to 1, and the number of employers dropped to 168 from 280 in 2008. While investment returns have stabilized in recent years, they have not been enough to make up for losing 32% in 2008, plus reduced contributions due to decreasing membership, the trustees said. The Treasury Department has 225 days to respond to the application, which was filed May 15, 2018.
8. THE TOP 25 CANADIAN CLASS ACTION SETTLEMENTS OF ALL-TIME:
Securities class action lawsuits were first permitted in Canada when in 1978 the province of Quebec ushered in enabling legislation. Since then, the country’s other provinces and territories with financial centers have followed suit. The requirements in raising a securities class action claim are broadly similar for all Canadian provinces and territories; however, there are no coordination procedures for class actions filed in multiple jurisdictions (except when it reaches a settlement) as is found in the U.S. Having tracked litigation in Canada for more than 20 years, ISS Securities Class Action Services recorded 172 cases filed in that market dating back to 1997. Of the 172 cases, 91 have settled, 60 remain engaged in ongoing proceedings and 21 have been dismissed. Download the Report for more details.
9. HERE IS WHAT TAXPAYERS SHOULD KNOW ABOUT PENALTY RELIEF:
Taxpayers who make an effort to comply with the law, but are unable to meet their tax obligations due to circumstances beyond their control, may qualify for relief from penalties. After receiving a notice stating the IRS assessed a penalty, taxpayers should check that the information in the notice is correct. Those who can resolve an issue in their notice may get relief from certain penalties, which include failing to:
- File a tax return
- Pay on time
- Deposit certain taxes as required
The IRS offers the following types of penalty relief:
This relief is based on all the facts and circumstances in a taxpayer’s situation. The IRS will consider this relief when the taxpayer can show he tried to meet his obligations, but was unable to do so. Situations when this could happen include a house fire, natural disaster and a death in the immediate family.
Administrative Waiver and First Time Penalty Abatement
A taxpayer may qualify for relief from certain penalties if he:
- Did not previously have to file a return or had no penalties for the three tax years prior to the tax year in which the IRS assessed a penalty.
- Filed all currently required returns or filed an extension of time to file.
- Paid, or arranged to pay, any tax due.
Before asking for First Time Abatement relief, taxpayers can request that the IRS first consider the reasonable cause relief provision. This preserves access to the First Time Abatement, which taxpayers may only use every three years.
In certain situations, legislation may provide an exception to a penalty. Taxpayers who received incorrect written advice from the IRS may qualify for a statutory exception.
Taxpayers who received a notice or letter saying the IRS did not grant the request for penalty relief may use the Penalty Appeal Online Self-help Tool. Issue Number: Tax Tip 2018-100, June 28, 2018
10. NEW OFFICE ADDRESS:
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.
11. PUN TIME:
I’m reading a book about anti-gravity. I cannot put it down.
12. INSPIRATIONAL QUOTES:
Turn your face to the sun and the shadows fall behind you. - Unknown
13. TODAY IN HISTORY:
On this day in 1917, J. Edgar Hoover gets job in US Department of Justice.
14. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.