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Cypen & Cypen
November 15, 2018

Stephen H. Cypen, Esq., Editor

The number of US pension plans with assets equal to or exceeding 95% of their liabilities on an accounting basis has risen to 37%, nearly doubling from 20% at the end of 2017, according to RiskFirst data. Analysis by fintech company RiskFirst of the data from approximately 500 plans, with total assets exceeding $100bn, reveals that, in Q3 2018, alone there has been almost a 25% increase in plans within this funding level band — which arguably makes a buyout or significant risk-transfer deal a feasible option. This sharp increase reflects the favorable conditions in the market to de-risk. Michael Carse, DB Pensions Product Manager, RiskFirst, says: “The 2017 plan year is the last opportunity to maximize a pension plan’s tax deduction before the lower corporate tax rate comes into force. For the majority of US corporate plans, the final deadline for plan sponsors to make contributions for the 2017 plan year was September 15, 2018, and this been reflected in our Q3 2018 analysis, with a number of plans putting in sizeable contributions before the deadline, thereby improving plans’ funded positions further since June 30.” Accounting reforms, increased PBGC premiums, and a favorable quarter for market movements — with liability discount rates increasing slightly (resulting in liabilities decreasing), and positive asset returns — are additional factors that could have contributed. Matthew Seymour, CEO, RiskFirst, comments: “As pension plans look to de-risk, it is all the more important that they are positioned with the right tools to manage risk effectively. By carrying out detailed analysis on both assets and liabilities and regularly and accurately monitoring their funding levels, plans can make truly informed decisions on how to optimize their strategy and harness opportunities in the market.” Risk First, November 5, 2018.

The Securities and Exchange Commission seized a collective $3.95 billion in enforced penalties and assets that were returned to its investors in fiscal 2018, up 4.2% from the previous year’s $3.79 billion. In the year ended September 30, the government regulator saw 821 enforcement actions, almost 100 higher than the previous year’s 747, and returned $794 million to disgorgements, or investors who had been burned by perps, less than fiscal 2017’s record $1.07 billion. Most of the high-level disgorgement and penalties came from a single case surrounding Brazilian oil company PetrĂ³leo Brasileiro SA on grounds of foreign bribery and a bid-rigging scheme. In September, the corporation said it would pay an $853 million penalty plus another $933 million in disgorgement and prejudgment interest as settlement. The SEC is expecting to receive only $85.3 million if PetrĂ³leo meets its obligations to the Justice Department, Brazilian authorities, and a class-action lawsuit regarding the issue. Jay Clayton, the agency’s chairman, praised the enforcement division and its continued success “in its efforts to deter bad conduct and effectively remedy harms to investors.” Of the enforcement calls, 490 of them were standalone actions. About 63% of the standalone cases were investment advisory issues, securities offerings, and issuer reporting/accounting and auditing related. Market manipulation, insider trading, and broker-dealer misconduct composed of about 10% each for the standalones. “As stewards of the SEC’s Division of Enforcement, our goal is to continue to protect investors, deter misconduct, punish wrongdoers, and keep our markets the safest and strongest in the world,” said Stephanie Avakian, the division’s co-director. Chief Investment Officer, November 7, 2018.
The Treasury Department and the Internal Revenue Service issued final regulations expanding the long-standing paid preparer due diligence requirement to include individual income tax returns claiming the head of household filing status. The final regulations, available in the Federal Register, implement a provision included in the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December 2017. The additional requirement will apply starting with 2018 returns, prepared on or after November 7, 2018. The due diligence requirement was originally designed to reduce errors on returns claiming the Earned Income Tax Credit. Legislation in 2015 expanded the due diligence requirements to include the Child Tax Credit, Additional Child Tax Credit, and American Opportunity Tax Credit. Under the TCJA, the due diligence requirement now also applies to individual income tax returns claiming the head of household filing status. Temporary and proposed regulations were issued in December 2016 to implement the 2015 changes, which the regulations also finalized. Paid preparers must submit Form 8867, Paid Preparer’s Earned Income Credit Checklist, with every tax return claiming any of the covered tax benefits. The form is designed as a checklist to help paid preparers meet the requirement by obtaining eligibility information from their clients. The form will be revised later this year to reflect the addition of the head of household filing status. Paid preparers are required to keep copies of the form or comparable documentation for their records, which is also subject to review by the IRS. Paid preparers are subject to a penalty, indexed to inflation, for each failure to comply with the requirement. For tax year 2018, the penalty will be $520. For updates on this and other TCJA provisions, visit  IRS Newswire, Issue Number: IR-2018-216, November 6, 2018.
The IRS issued a new publication to help taxpayers learn about tax reform and how it affects their taxes. Taxpayers can access Publication 5307, Tax Reform Basics for Individuals and Families, on While last year’s Tax Cuts and Jobs Act includes tax changes for both individuals and businesses, this publication is specifically geared to individual taxpayers. It breaks down the law in easy-to-understand language. The publication highlights the changes that taxpayers will see on their 2018 federal tax returns they file in 2019.

This new publication provides important information about:

  • Increasing the standard deduction
  • Suspending personal exemptions
  • Increasing the child tax credit
  • Adding a new credit for other dependents
  • Limiting or discontinuing certain deductions

Taxpayers can also go to to find other information about tax reform. This includes the steps taxpayers can take now to help make filing their taxes smoother next year. Following these steps will also help taxpayers avoid surprises when they file their returns. IRS Tax Tips, Issue Number: Tax Tip 2018-171, November 5, 2018.

Two more courts have disallowed claims of imprudence against 401(k) plan fiduciaries that permitted investments in employer stock as those companies headed toward bankruptcy. In Kopp v. Klein, a newly spun-off business established a 401(k) plan with company stock as an investment. When the company experienced serious financial trouble and entered bankruptcy, participants sued claiming, among other things, that the plan’s fiduciaries had breached their duty of prudence by allowing continued investments in company stock despite public information about the company’s financial instability. A Fifth Circuit panel disagreed, however, citing the U.S. Supreme Court’s Dudenhoefferdecision, which held that fiduciary breach claims based on public information are generally implausible, absent special circumstances, because fiduciaries are entitled to rely upon the price set by the public market as a fair assessment of a stock’s value. The participants argued that Dudenhoeffer was inapplicable because their claim was based on the stock’s “riskiness” rather than the accuracy of the stock’s price. The panel rejected that argument, however, stating that the distinction between risk and price was “illusory.” Market pricing considers risk, so Dudenhoeffer applies equally to claims based on excessive risk. Furthermore, the fiduciaries’ alleged fraud was not the type of special circumstance contemplated in Dudenhoeffer. In the SunEdison case, the plan sponsor’s aggressive expansion strategy resulted in bankruptcy. As in Kopp, participants sued, claiming that the 401(k) plan’s fiduciaries failed to stop investments in the company’s stock after they knew or should have known that the company was in peril and too risky to be an appropriate retirement investment. The court rejected that claim, however, stating that the Dudenhoeffer analysis applies to all allegations of imprudence based on publicly available information “regardless of whether the allegations are framed in terms of market value or excessive risk.” The participants alleged that eight specified items of public information should be treated as special circumstances allowing their claim to proceed, but the court rejected all eight, noting that the correlation between those negative developments and changes in the company’s stock price suggested that the shares were not riskier than the market’s assessment. Lacking allegations of special circumstances, the participants’ claim was dismissed for failure to satisfy the pleading threshold in Dudenhoeffer.
EBIA Comment: Dudenhoeffer eliminated the presumption of prudence for employer stock investments in part because the presumption made it impossible to state a duty-of-prudence claim, “no matter how meritorious, unless the employer is in very bad economic circumstances.” Ironically, courts are now applying Dudenhoeffer to bar prudence claims in the worst of economic circumstances, creating uncertainty as to what claims can be made if all relevant public information is deemed incorporated into market prices, and risk-based claims can be dismissed as claims of inaccurate pricing (subject to an unclear special circumstances exception). Does this approach to public information cases have a blind spot? Market prices may, in an efficient market, perfectly incorporate all public information, but they do not, by themselves, reveal the amount, type, likelihood, or timing of any relevant risks or gains. Thus, they don’t distinguish between stocks of the same price, or help determine whether a specific stock’s risk of loss and opportunity for gain are suitable for a particular retirement plan. Another court acknowledged some of these limitations in a case involving stock funds liquidated at a substantial loss, expressing the view that market price does not capture all of the factors that must be considered by a prudent fiduciary, Until the fiduciary duties applicable to publicly traded investments have been more clearly articulated and the special circumstances exception clarified, fiduciaries should not assume that stock traded on a public market requires less attention to factors other than price than it did before Dudenhoeffer. Thomson Reuters, November 1, 2018.
The Broward Health board fired its general counsel Lynn Barrett as the taxpayer-supported health system continues to struggle after a series of state and federal investigations related to alleged overspending, kickbacks and open-government law violations. Broward Health doctors alleged during a board meeting that Barrett helped cultivate a hostile culture at the South Florida health system, which led to a "mass exodus" of doctors that crippled the organization. Barrett's firing occurred amid controversy surrounding an independent review process spurred by a $69.5 million healthcare fraud settlement agreement reached in Sept. 2015. The review process, spearheaded by law firm Baker Donelson, is part of a five-year deal with the federal government to settle allegations of physician kickbacks and Stark violations. The latest independent review organization report filed July 23 took issue with some of Broward's executive and senior staff compensation contracts and corresponding consulting arrangements. Broward Health did not immediately reply to requests for comment. The report accused Broward Commissioner and Chairman of the Board Andrew Klein, one of seven commissioners that oversee the system, of failing to negotiate the contract of Beverly Capasso, who took the role of president and CEO in February and abruptly resigned on Oct. 3. The report also claimed that Klein didn't share a third-party compensation report regarding CEO pay with other commissioners. Klein knew or should have known that the compensation report was not an accurate representation of "fair market value," according to the independent review report. The "fair market value" was $850,000 and Capasso accepted $750,000, although there was never a formal negotiation process, the report found. Broward contracted with consultancy Aon Rx Coalition Services to produce the compensation report, which was expected to be in the range of $15,000 to $20,000. Aon ended up sending the organization an invoice for $116,054.88. The independent review organization found it "stunning" that Aon was never mentioned in the March 28 board meeting where Capasso's contract was approved. When Commissioner Steven Wellins asked for a copy of the draft consultant contract prior to the board meeting, Capasso allegedly told him over the phone that the "board was not involved in the contract process—so she does not feel it was necessary for (him) to see it." She had the authority to do it without the board's approval, Capasso said, according to the report. Following the independent review organization's July 23 report, Barrett enlisted the law firm McGuire Woods to conduct an investigation related to the findings. Klein then wrote an email to Barrett telling her that "no such investigation has been authorized by the Board of Commissioners and therefore should cease immediately," describing the report as "flawed," according to a letter that Modern Healthcare obtained sent by the Office of Inspector General to Broward Health on Oct. 19. "My concern is heightened because the IRO's report mentioned Commissioner Klein individually in a discussion of what information about the proposed CEO contract for Beverly Capasso was and was not made available to the Board as a whole," OIG senior counsel Laura Ellis wrote to Nicholas Hartfield, vice president and chief compliance officer of North Broward Hospital District. The OIG said it had nothing more to add. In a letter Modern Healthcare obtained that Baker Donelson's Scott Newton sent to Commissioner Nancy Gregoire on Oct. 17, Newton wrote that Klein has not only attempted to obstruct and discredit the work of the IRO, but restricted the ability of Broward Health to investigate and take mandatory corrective action. "The matters being reviewed by the outside counsel presumably includes Commissioner Klein's conduct, which would raise the issue of whether Commissioner Klein has and continues to act to protect his personal interests, rather than in accordance with his fiduciary duties," the letter reads. Even Broward Health's outside counsel wrote a letter to Klein warning him of potential violations of Florida law where Klein acted individually and without the authority of the board, Newton added. Circling back to Barrett's firing, Klein was the one who led the charge. The board also accepted Capasso's resignation at this week's meeting. Gino Santorio, the system's executive vice president and chief operating officer, will replace Capasso. Barrett and Capasso are two of five current and former Broward Health officials named in a Dec. 2017 Broward County grand jury indictment for allegedly holding private meetings to discuss kickback accusations against former interim president and CEO Pauline Grant. Grant was ultimately fired on Dec. 1, 2016. Capasso faces second-degree misdemeanor charges for violating and conspiring to violate Florida's Sunshine Law. Broward called that investigation "predetermined, biased and manipulated from the start." The health system reported a $149.2 million operating loss on operating revenue of $1.03 billion in 2017, which aligned with its 2016 operating loss of $152.1 million on $1.02 billion of operating revenue, according to its year-end financial statement. But the system was buoyed by its property tax and non-operating revenue. It received $137.9 million in property tax revenue in 2017 as well as $44.6 million in net non-operating revenue. Broward only received $2.2 million in non-operating revenue in 2016. Broward has several projects in the works including the Broward Health North emergency room, Broward Health Medical Center neonatal intensive care unit and Broward Health Coral Springs tower. Its construction costs totaled about $557 million in 2017. Modern Healthcare, November 2, 2018.
Public and private pension sinkholes are showing up all over the country, and we’re tumbling in. In Pittsburgh, benefit cuts of 30 percent were announced for 21,000 retirees from UPS and other shipping companies. When Sears Roebuck filed for bankruptcy in October, its pension plan was revealed to be $1.5 billion short of what was needed to cover its retirees. Some of this will be covered by the government, but not all of it. Public pensions aren’t immune from sinkholes either: Over 100 California city and municipal governments just asked voters for tax hikes seeking help to pay for long-term pension underfunding, on top of 36 similar requests already made earlier this year. Kentucky’s public pension underfunding was the subject of a recent and damning Frontline report, and massive shortfalls in Illinois’ state pensions have dominated the election news, with no easy fix in sight. Lest we forget, our nation’s basic retirement security pillar, Social Security, is also heading for the tank. Fifteen years from now, it will require benefit cuts of 28 percent or payroll-tax increases of at least 60 percent to stay in business. Plenty of folks bear the responsibility for this gloomy state of affairs. For years, particularly in municipal and state plans, employers and employees paid too little in contributions to meet accrued benefits. Accounting and actuarial rules allowed both public and private pensions to avoid reporting their actual state of poor health. Seeking to get lucky with risky investments, pension sponsors have increasingly moved to hedge funds, private equity and infrastructure holdings, often without full knowledge of how much these nonstandard investments cost and how risky they are. Meanwhile, taxpayers and plan members often have trouble finding out how badly off their pensions really are. Public plans are supposed to make available their Comprehensive Annual Financial Reports (CAFRs), but often they do not. After years of sleuthing, a Stanford study estimates that the public plan black hole is now almost $5 trillion. In the private sector, pensions are required by law to submit information online, but here too, the information can be difficult to interpret and may involve averaging asset values rather than reporting actual market values of assets. Figuring out Social Security’s prospective underfunding also takes digging — it’s parked back on page 200 of the Trustees’ report, where we learn that it amounts to a staggering $34.3 trillion, or almost twice the entire U.S. GDP. Just as gravity from a celestial black hole attracts and obliterates nearby objects, it’s looking like the revenue requirements of our national pension black holes may also suck dry our city, state and national tax revenues.

To make better decisions, here’s what policymakers need:

  • Public pensions should post their financial reports online right after their fiscal year ends. These should be easy to find and presented in a searchable format These accounts should employ transparent accounting and be audited by an independent CPA firm.
  • Underfunding numbers should be reported not only in aggregate, but also per capita, so people understand how big the black holes are.
  • States and municipalities should report their net positions in a timely way, without hiding "deferred" items like pension costs to be dealt with later.
  • Pension providers and politicians should be restricted from offering additional benefits until their past promises are adequately funded.
  • What about those hoping to get retirement benefits?
  • For individuals and their families, here are a few ideas that can help:
  • Understand that your pension and Social Security are not fully guaranteed. Most of us will get something, but all of us face benefit haircuts, which could be large.
  • Delay retirement as late as possible. This reduces the period over which assets are drawn down, and it also boosts benefits quite substantially. For instance, Social Security benefits are 76-percent higher if claimed at age 70 instead of age 62.
  • Don’t retire completely if possible. Part-time work can help stretch out old-age resources substantially. Working longer can also keep people healthier.
  • Cut spending as soon as possible. Money saved now is money that will make old age easier, covering medical care, nursing home care or simply daily living.
  • People sometimes call economics the "dismal science," since economists dig into dark places for stories of poor incentives and misbehavior. Yet, it is critical that our aging nation stop ignoring these pension black holes.
  • Our leaders, both public and private, must be reminded of their mandate to protect the nation’s security — including its retirement security.

Olivia S. MitchellThe Hill, November 5, 2018. [Just goes to show that everyone has their own opinion.]

Within the last few days, you probably started to hear the phrase, “spring forward, fall back.” The reason is that on November 4 at 2 AM, most of the country moved from Daylight Saving Time (DST) to Standard Time (ST). People use the saying to remember what to do with their non-cell phone clocks, and turn them back one hour, but not every region of the U.S. observes this change. If you live in Hawaii, Guam, Puerto Rico, U.S. Virgin Islands, American Samoa and most of Arizona, your clocks will stay the same. For the rest of you, enjoy the extra hour of sleep! Zzz. National Institute of Standards and Technology, November 2018.

“Remember not only to say the right thing in the right place, but far more difficult still, to leave unsaid the wrong thing at the tempting moment.”
Why do we drive on a parkway and park on a driveway?
You can never cross the ocean until you have the courage to lose sight of the shore. — Christopher Columbus
On this day in 1904, King C. Gillette patents the Gillette razor blade.

Copyright, 1996-2018, 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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