Cypen & Cypen
AUGUST 24, 2006
Stephen H. Cypen, Esq., Editor
1. TREASURIES DECLINE AMID TALK OF RATE INCREASE: U.S.
Treasuries just posted their first weekly loss since June, as the Federal Reserve suggested it may boost interest rates again after refraining from raising borrowing costs for the first time in two years. Yields on benchmark 10-year notes rose the highest since August 1. The Treasury’s sale of $44 Billion in notes and bonds and a report showing retail sales rose more than expected, renewing inflation concerns, also weighed on prices, according to a report from Bloomberg News. Ten-year note yields rose about 8 basis points, to 4.97%. The Fed recently kept the overnight lending rate between banks at 5.25% after 17 successive increases since June, 2004. Interest rate futures show traders see a 27% likelihood the Fed will lift the interest rates to 5.5% on September 20 and a 74% chance they will raise them by year end. Inflation quickened to 2.4% in the year that ended June 30. Prices have not increased faster than that since April of 1995. Concern increased after retail sales climbed 1.4% last month, the biggest gain since January. Economists had expected a .9% rise in July.
2. IRS SAYS MANY MILITARY PERSONNEL CAN STILL MAKE IRA CONTRIBUTIONS FOR 2004 AND 2005:
Under the Heroes Earned Retirement Opportunities (HERO) Act, signed into law on Memorial Day (see C&C Newsletter for June 1, 2006, Item 5), taxpayers can now count tax-free combat pay when determining whether they qualify to contribute to either a Roth or traditional IRA. Before this change, members of the military whose earnings came entirely from tax-free combat pay were generally barred from using IRAs to save for retirement. In addition, the HERO Act allows military personnel who received tax-free combat pay in either 2004 or 2005 to go back and make IRA contributions for those years. Eligible military members will have extra time, until May 28, 2009, to make these special back-year contributions. For those under the age of 50, the IRA contribution limit was $3,000 for 2004 and $4,000 for 2005. For those 50 and over, the limit was $3,500 for 2004 and $4,500 for 2005. The IRA contribution limit for 2006 is $4,000 for those under age 50 and $5,000 for those 50 and over. IR-2006-129 (August 18, 2006).
3. GOVERNMENT EMPLOYEES IN MIAMI-DADE COUNTY MUST BEWARE OF ETHICS CODE:
Little-known Section 2-11.1(k)(2) of the Miami-Dade County Conflict of Interest and Code of Ethics Ordinance provides:
Many municipal employees are engaged in outside employment, out of financial necessity or otherwise. The Code of Ethics makes no distinction between “off duty” employment and “outside employment.” Off duty employment, generally related to police and fire employees, is usually coordinated through the department with, for example, local businesses that require security work. The department designates the rate of compensation and collects a surcharge for use of the uniform, vehicle and other city equipment. All payments are made by check from the employer through the department to the employee. Outside employment consists of any other employment outside the city. Municipal employees who do any work for outside employers are required by the County Code of Ethics to file an annual report thereof with the municipal clerk. Failure to do so could subject such employees to penalties under the County Code of Ethics Ordinance. Comment: We seriously question the validity of a County ordinance purporting to regulate municipal employees in this manner, particularly when Chapter 112, Part III, Florida Statutes, contains a State Code of Ethics for public officers and employees. However, the municipality itself may have a similar requirement, which, of course, could impose a similar reporting requirement.
4. WSJ OP-ED PIECE DECRIES PUBLIC PENSION PRICE TAG:
In a recent Wall Street Journal op-ed, E. J. McMahon, Director of the Empire Center for New York State Policy and a senior fellow at the Manhattan Institute, assails what he calls the “public pension price tag.” He concludes that the overriding concern of public pension reform should be to reduce the taxpayers’ exposure to accounting and financial risk -- now and in the future. He sets out four essential steps toward that goal:
McMahon says the growing public sector burden fundamentally poses a test of political wills and is fraught with financial complexity. Although benefits for their members are legally untouchable, union leaders derive substantial power from the existing system and will battle any attempt to change it. Today, improved accounting practices can at least force elected officials to face up to the price tag of their rash promises. On the other hand, we continue to believe that shifting to defined contribution plans is not the solution, although defined benefit plans could profit by some adjustments.
In an appeal, the wife challenged several items in the equitable distribution scheme found in the trial court’s final judgment of dissolution of marriage, as well as the overall unequal distribution in favor of the husband. The appellate court found several distributions not supported by evidence in the record, and reversed for reconsideration. We report this case solely because the court made a somewhat important (if obvious) statement: equitable distribution of a pension involves complicated calculations and will generally require expert testimony. A word to the wise. Smith v. Smith, 31 Fla. L. Weekly D2019 (Fla. 2d DCA, August 2, 2006).
6. HOW DEFINED BENEFIT PENSIONS AND SOCIAL SECURITY WILL AFFECT HOUSEHOLD WEALTH ACCUMULATION:
A new working paper from Center for Retirement
Research at Boston College recognizes that defined benefit
pension plans have been a staple of the U.S. pension system
for decades, before heading into a persistent and secular
decline over the last 30 years. Although defined contribution
plans continue to grow faster than the more traditional
DB plans, DB plans nevertheless continue to play an important
role in the pensions system. Especially when including Social
Security, a public defined benefit system, DB plans provide
a significant amount of retirement income for many elderly
households. Yet the effects of such plans on retirement
income are controversial. Benefits from DB plans are tax-preferred;
they are typically paid as annuities, making them illiquid;
and they are usually unindexed for inflation. These factors,
combined with uncertainty about the relative importance
of the major motives for saving (retirement, precautionary,
down payments, as examples), the differing importance of
such motives over the life-cycles, difficulties with measuring
DB pension wealth and other issues, have made estimation
of the impact of DB plans on wealth a difficult exercise.
The paper offers an analysis of how DB pension plans and
Social Security affect household wealth with special attention
to examining how to interpret estimates of the offset between
DB pension wealth and other wealth. The authors obtained
several key results. First, “raw” DB pension
wealth must be adjusted in a particular way to yield meaningful
coefficients in a cross section regression of non-pension
wealth on pension wealth. Second, most previous work has
not made such adjustments. Third, the adjustments that have
been made in the past do show significant changes in the
interpretation of how DB pensions affect wealth. Fourth,
the Health and Retirement Study data used in the piece show
little offset between “raw” pension wealth and
non-pension, and making the adjustments to DB pension wealth
has relatively modest effects on the estimated overall offset
between pension wealth and other wealth. Fifth, the results
do show statistically significant differences in offsets
among households who have different levels of educational
attainment. In short, there is a need to correct for a variety
of biases in common econometric constructions, and the need
to allow for heterogeneous responses to pensions across
households with differing educational status. Phew -- another
very scholarly piece from CRR.
“Retirement, we understand, is great
if you are busy, rich, and healthy. But then, under those
circumstances, work is great too.” William E. Vaughan
Copyright, 1996-2006, all rights reserved.
Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.