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Cypen & Cypen
NEWSLETTER
for
November 7, 2013

Stephen H. Cypen, Esq., Editor

1. REPORT REVEALS DEPTH OF CORPORATE COLLUSION IN PENSION ATTACKS: In September, the Florida Public Pension Trustees Association invited reporters throughout the state to participate in a press call with journalist and author David Sirota who has just published a report entitled The Plot Against Pensions: How Pew and the Arnold Foundation Plan to Undermine America’s Retirement Security.  Sirota explained how former Enron executive and billionaire John Arnold has partnered with the Pew Charitable Trust to manipulate discussion about public pensions in states including Florida, Kentucky, and Rhode Island, where public pension benefits recently were drastically cut back. Sirota says that Arnold has employed his billions of dollars and the reputation of Pew Charitable Trust to mislead elected officials and taxpayers. For example, he points to a Pew report warning of a massive $1.3 trillion dollar, 30-year pension gap, a $45 billion annual shortfall, and yet he has previously said that states, counties and cities are giving up more than $80 billion each year to companies in the form of subsidies and tax expenditures. Sirota says the plot forwards the illusion that state budget problems are driven by pension benefits rather than by the far more expensive and wasteful corporate subsidies that states have been doling out for years. This shell game ends up focusing state budget debates on benefit-slashing proposals, and therefore downplaying proposals that would raise revenue to shore up existing retirement systems.  Increasingly, it appears the public pension "crisis" is nowhere near as catastrophic as the pending retirement security crisis facing Americans in both the public and private sector as defined contribution accounts are pushed to replace defined benefit pensions as retirement plans.
 
2.  IRS ANNOUNCES PLAN LIMITATIONS FOR 2014:  As expected (See C & C Newsletter for October 10, 2013, Item 1), Internal Revenue Service has announced 2014 pension plan limitations.  Here are some highlights:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $17,500.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $5,500.
  • The limit on annual contributions to an Individual Retirement Arrangement remains unchanged at $5,500. 
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. 

The following are details on both the unchanged and adjusted limitations: Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans.  Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415.  Effective January 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $205,000 to $210,000.  For a participant who separated from service before January 1, 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2013, by 1.0155. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000. IR-2013-86 (October 31, 2013).
 
3. VARIOUS TAX BENEFITS WILL INCREASE IN 2014:  For tax year 2014, Internal Revenue Service has announced annual inflation adjustments for more than forty tax provisions, including tax rate schedules and other tax changes.  Tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts:

  • The tax rate of 39.6% affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from respectively, $400,000 and $450,000.  The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from, respectively, $6,100 and $12,200. 
  • The personal exemption generally rises to $3,950, up from the 2013 exemption of $3,900.
  • Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
  • The annual exclusion for gifts remains at $14,000 for 2014.

IR-2013-87 (October 31, 2013).
 
4. CINCINNATI VOTERS SOUNDLY REJECT PENSION REFORM:Proposed pension reform that would have closed off Cincinnati’s current system to new employees and reduce benefits for current employees met a resounding defeat on November 5, 2013, as residents voted four-to-one against the ballot measure.  Governing.com says the proposed amendment sought to rein in the city’s $862 million unfunded liability but received criticism for being primarily funded by out-of-state interests connected to the Tea Party. The final tally was 78% against and 22% for the measure. The proposal would have affected 7,500 workers, retirees and beneficiaries, and shut off the city’s defined benefit plan to new hires to enroll them in a 401(k)-style plan. Current employees’ future benefits would have decreased as the multiplier that factors into a worker’s total pension amount would be reduced by nearly one-third (2.2% down to 1.5%) for all benefits accrued after June, 2014. Other limitations, like a cap on city contributions and limitations on cost-of-living increases, were also proposed.  Pension costs amount to 12.5% of Cincinnati's total revenue base -- not too bad.
 
5. COLLINS INSTITUTE DOES IT RIGHT: LeRoy Collins Institute has produced a report entitled Doing It Right: Recognizing Best Practices In Florida’s Municipal Pensions. Part of a series called Tough Choices: Shaping Florida’s Future, the report is the latest effort to look into municipal pension funding in Florida.  In recent years, Floridians have grown accustomed to bad news about the condition of their municipal pension plans. Pension costs have increased and are straining city budgets throughout the state. Annual contributions and returns on pension investments have not kept up with growing liabilities, and there is a 10-year trend of pension plans that are deeper in the red. But, not all of Florida’s municipal pension plans are in trouble. Many plans are relatively healthy and well funded. The report identifies municipal pension plans in Florida that are in “good condition,” and examines whether those plans tend to be better than others at following nationally-recognized “best practices” in public pension management. In summary, there is no clear blueprint for good public pension plan management. Rather, there are several different options available to be considered a well-funded plan. The variation in the plans examined highlights the mixture in approaches. However, well-funded plans tend to make decisions that balance needs and expectations of retirees with realistic financial commitments for the public’s purse. The five approaches examined help municipalities successfully balance public and retiree interests:

  • Annual required contributions were, for the most part, made at or above the 100% level.
  • Employees shared the cost of their plans, allowing the plan to avoid costly increases in contributions
  • The cost-of-living adjustments were kept at low, manageable levels.
  • Pension spiking was limited, both by exclusions of overtime and pension calculation controls.
  • Actuarial assumptions were realistic.

6. NEWS FROM THE DEAD LETTER DEPARTMENT: The U.S. government has a problem with dead people, according to washingtonpost.com. For one thing, it pays them way too much money.  In the last few years, Social Security paid $133 million to beneficiaries who were deceased. The federal employee retirement system paid more than $400 million to retirees who had passed away. And an aid program spent $3.9 million in federal money to pay heating and air-conditioning bills for more than 11,000 of the dead. (Brrr, it is cold down here.)  These mistakes are part of a surprising glitch at the heart of the federal bureaucracy. Because of an outdated system meant to track deaths, the government has trouble determining exactly which Americans are deceased.  As a result, Washington is bedeviled by both the living dead and the dead living.  The first group are people who have died but are counted as alive in federal records. Their benefits keep coming. Millions of dollars pile up in unwatched accounts. Millions more are spent by feckless relatives. In one recent case, a son stole his dead father’s federal benefits for 26 years. The second group includes living Americans -- at least 750 new people every month -- whom the system falsely lists as dead. And once you are on that list, it is not easy to get off. In Washington, these failures have become a long running case study in how government systems break -- and stay broken.  The task of tracking deaths for the federal bureaucracy is an enormous one; about 2.5 million Americans die each year. Federal officials say most of these cases are handled correctly; the death is recorded. Government money is no longer sent to that person. But not always. In fact, glitches in the system have paid more than $700 million to the dead, according to government audits performed since 2008. The latest mistakes were revealed a while ago. In 2011 alone, auditors found, Medicare paid $23 million for services “provided” to dead people. From 2009 to 2011, it spent $8.2 million on medical equipment “prescribed” by doctors who had been dead for at least a year. The causes seemed to include poor record-keeping, sometimes exploited by fraudsters.  For government watchdogs, these are some of the most fixable, and therefore the most maddening, mistakes that the government makes. A big part of the frustration stems from the fact that there is no interest group fighting to keep the flawed status quo.  The dead do not lobby. (But in some places, they do vote!) 

7.  SIX REASONS THAT A FROZEN PENSION PLAN IS DIFFERENT:  A frozen pension plan is different from an open plan, and it needs to be managed differently. From russell.com, here are some observations:

  • Demography takes over.  Freezing a plan gives it a finite life span. The dynamics of plan demography change: the participant base inevitably ages; the time horizon for investment shrinks; there are no new benefit accruals or accompanying contributions to absorb effects of the ups and downs of experience. And the act of freezing a plan creates greater distance from the sponsoring corporation; the plan can still cost money but it plays a reduced role in benefits policy.
  • Less funding flexibility for a frozen plan.  Investment experience is uncertain. For an open pension plan, future contributions can be adjusted either up or down in response to investment experience. For a frozen plan, the upside can be capped by the threat of trapped capital (contributions cannot be reduced below zero) while the downside is made more painful by the shorter time horizon that the plan now has. Funding decisions are normally less flexible for frozen plans.

 

  • Trapped capital and liability-responsive asset allocation. While a frozen plan does not want to find itself short of assets, neither is a surplus necessarily as good as it sounds; it can be difficult to get money out again once it has been put in. This risk of trapped capital is one reason for the popularity of de-risking glide paths among frozen plans.
  • Think ahead.  Certain features of the plan’s asset and liability profile -- the growth and shrinking of asset values and changing demographic profile -- are known in advance. Investment policy needs to reflect not just what the plan is today, but what it will be in the years to come. This affects investment decisions in areas such as the use of illiquid assets, the complexity of the management structure, cash flow management and more.

 

  • “Fully funded” is a higher target for a frozen plan. Fully funded for the purposes of statutory contribution calculations, or for the purposes of corporate accounting, may not be enough to ensure that a frozen plan will be able completely to take care of all of its liabilities without additional capital being injected. The plan termination liability may be some 110% to 120% of the projected benefit obligation accounting liability
  • A frozen plan is on the path to a known endgame.  The journey to eventual termination has been started by more than 8,000 U.S. pension plans. While the early stages of the path are well-trodden, later stages are not. Transfer of risk -- through the payment of lump sums of the purchase of annuities -- is just beginning to become commonplace. Plan termination itself is a demanding and time consuming exercise; the timeline typically exceeds two years at present (the majority of the time being taken up on the administrative process). Only a handful of plans have reached the natural conclusion of the journey, but it is only a matter of time.

8.  REVISED PRIVATE PENSION ELECTRONIC DISCLOSURE RULES COULD CLARIFY USE AND BETTER PROTECT PARTICIPANT CHOICE: United States Government Accountability Office has issued a report to congressional requesters.  GAO found federal statutes and regulations under the purview of the Department of Labor and the Department of the Treasury allow employers who sponsor private pension plans to furnish all pension disclosures to participants electronically:

  • As the default delivery method if participants meet specific criteria regarding access, or,
  • If affirmative consent is obtained.

When neither of these conditions can be met, or when requested by participants, plan sponsors must send paper disclosures.  Industry representatives and participant advocates reported various advantages and disadvantages concerning the use of electronic delivery. Both groups agreed that the popularity of electronic delivery was growing due to various efficiencies -- such as reduced costs and better tracking of disclosures --that can be advantageous both to pension plan sponsors and participants. However, both groups also raised concerns with the requirements associated with electronic delivery, citing issues with their lack of consistency and clarity, as well as concerns that they may not adequately protect a participant’s right to opt to receive paper disclosures.  GAO’s analysis of these concerns identified several weaknesses in the current electronic delivery requirements. For example, although agencies are to draft regulations that avoid inconsistency across agencies and are easy to understand, GAO found that Labor’s and Treasury’s requirements describing which participants qualify for default electronic delivery to be somewhat inconsistent and unclear, which may impede use of electronic delivery by some plan sponsors. GAO also found that, although participants may request paper disclosures at any time, requirements permitting default electronic delivery and sponsors’ use of a secured website to furnish disclosures may not fully protect a participant’s ability to choose paper as his preferred delivery method on an ongoing, rather than a document-by-document, basis.  GAO-13-594 (September 13, 2013).
 
9. I HAVE MINE, AND DO NOT CARE ABOUT YOURS:  Easystreetinvesting.com believes the reason Social Security, Medicare and federal public retirement systems that are operated by the government are not in great shape is because the politicians running them do not have much "skin in the game." In other words, since the pols do not really depend on these programs for their own retirements, they can consistently choose their own short-term self-interests over what is best for the rest of the population. Don’t believe it? Just look at how members of Congress retire:

  • All current Senators and Representatives receive a guaranteed monthly pension check from a traditional defined benefit pension plan, the option of socking away more money in a tax-deferred 401(k)-style plan that matches a good portion of their contributions and carries below average fees plus Social Security payments.
  • Actually there are two different DB systems: the old Civil Service Retirement System and the newer Federal Employees' Retirement System, which became the default for any member of Congress elected since 1984. Regardless of which plan they are covered by, members of Congress can receive their pension at age 50 if they have served for 20 years or more, at any age as long as they have served for 25 years and at age 62 as long as they have served at least five years.  
  • The exact monthly amount each pensioner receives is based on his number of years in office and the average of his highest three years of salary. As of October 2011, there were 495 retired members of Congress receiving pensions based on their service, 280 of them covered by the older CSRS system, receiving an average pension worth over $70,000 a year.  Meanwhile, the 215 that had retired under the newer FERS were receiving an average annual pension of almost $40,000.
  • To put these figures in context, consider that the average public worker retires with a pension of about $26,000 a year, 
  • And how much members of Congress contribute to their DB plans? Most members of FERS pay in just 1.3% of salary. Meanwhile, Congress contributes 18.7% of salary on their behalf -- that's a 14-to-1 match!
  • Remember, members of Congress can get additional matching contributions as high as $17,500 a year if they choose to participate in the separate 401(k)-style plan available to them.

As we like to say, nice work if you can get it.
 
10.  PBGC MAXIMUM INSURANCE BENEFIT INCREASES FOR 2014:  The Pension Benefit Guaranty Corporation, a U.S. government agency, announced that the yearly maximum guaranteed benefit for a 65-year-old retiree has increased to almost $59,320 from about $57,500.  Most retirees who get their pension from PBGC, almost 85% according to a 2006 study, receive the full amount of their promised benefit. In some cases, retirees can receive more than the PBGC maximum guarantee. The maximum guarantee is based on a formula prescribed by federal law. Yearly amounts are higher for people older than age 65, and lower for those who retire earlier or choose survivor benefits.  If a pension plan ends in 2014, but a retiree does not begin collecting benefits until a future year, the 2014 rates still apply. For plans that terminate as a result of bankruptcy, the maximum yearly rates are guided by the limits in effect on the day the bankruptcy started, not the day the plan ended.  Beginning in 2014, the maximum yearly guarantee for a 65-year-old retiree is $59,318.16. The increase is not retroactive.  The guarantee increase applies only to single-employer pension plans. The maximum guarantee limit for participants in multiemployer plans is $12,870 with 30 years of service, which has been in place since 2001. For your information, PBGC protects the pension benefits of more than 40 million of America's workers and retirees in nearly 26,000 private-sector pension plans. The agency is directly responsible for paying benefits of more than 1.5 million people in failed pension plans. PBGC receives no taxpayer dollars, and never has. Its operations are financed by insurance premiums and with assets and recoveries from failed plans.  PBGC No. 13-13 (November 6, 2013).
 
11.  MOST OUTRAGEOUS EXCUSES WHEN CALLING IN SICK:Have you ever had one of those days where your false teeth fly out the window on the highway, your doors and windows are all glued shut or a swarm of bees keeps you from getting in your car? While most employees use sick days to recover from an illness, some employers have heard much more memorable excuses. In the past year, nearly one-third of workers have called in sick when not actually sick, up slightly from last year. On the flip side, almost one-third of employees say they have gone to work despite actually being sick, in order to save their sick days for when they are feeling well.  From CareerBuilder, the most memorable excuses are

  • Employee’s false teeth flew out the window while driving down the highway.
  • Employee was quitting smoking and was grouchy.
  • Employee said that someone glued her doors and windows shut so she could not leave the house to come to work.
  • Employee bit her tongue and could not talk.
  • Employee claimed a swarm of bees surrounded his vehicle and he could not make it in.
  • Employee’s fake eye was falling out of its socket (Sammy Davis, Jr.?  Moshe Dayan?)

12. JEWISH WISDOMS: When I bore people at a party, they think it is their fault. Henry Kissinger

13. DID I READ THAT SIGN CORRECTLY? In an office: WOULD THE PERSON WHO TOOK THE STEP LADDER YESTERDAY PLEASE BRING IT BACK; OR FURTHER STEPS WILL BE TAKEN.

14. TODAY IN HISTORY: In 1962, Nixon tells press he will not be available to kick around anymore after losing election for Governor of California.

15. 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.

16. 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.

 

 

Copyright, 1996-2013, 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.


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