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Cypen & Cypen
November 29, 2018

Stephen H. Cypen, Esq., Editor

Despite already feeling the financial strain from their obligations to public pensions, state and local governments can expect to face increased commitments to their retirement systems as investment return assumptions have fallen to an all-time low this year. According to the National Association of State Retirement Administrators (NASRA), nearly 75% of the 128 public plans it has tracked have reduced their investment return assumptions since fiscal year 2010, which has resulted in an all-time low median investment return assumption of 7.45% as of November, from 8% eight years earlier. Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall. Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%. Among the more high-profile pension funds lowering their investment return assumptions this year were the North Carolina Retirement Systems, which cut its assumed rate of return to 7% from 7.2%, the Teacher Retirement System (TRS) of Texas, which reduced its assumed rate of investment return to 7.25% from 8%, and Minnesota’s state pension, which cut its assumed rate of return to 7.5% from 8%. New Jersey also said it would lower its investment return assumption to 7% in fiscal 2023, after temporarily raising it to 7.5% from 7.0% in fiscal 2019. Michael Katz, Chief Investment Sponsor, November 14, 2018.
The Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking to raise the threshold for residential real estate transactions requiring an appraisal to $400,000. This proposal is in response to concerns raised about the time and cost associated with completing residential real estate transactions. The FDIC believes raising this threshold for residential real estate transactions from the current level of $250,000, last increased in 1994, could provide meaningful burden relief from the appraisal requirements, without posing a threat to the safety and soundness of financial institutions. Rather than requiring an appraisal, the proposal would require that residential real estate transactions exempted by the threshold obtain an evaluation consistent with safe and sound banking practices. Evaluations provide an estimate of the market value of real estate but could be less burdensome than appraisals because the FDIC's appraisal regulations do not require evaluations to be prepared by state licensed or certified appraisers. In addition, evaluations are typically less detailed and costly than appraisals. Evaluations have been required for transactions exempted from the appraisal requirement by the current residential threshold since the 1990s. This proposal responds, in part, to comments that the current exemption level for residential transactions had not kept pace with price appreciation in the residential real estate market. These comments were received during the recent Economic Growth and Regulatory Paperwork Reduction Act review process and during the rulemaking process that led to a final rule, issued in April 2018, which raised the appraisal threshold for commercial real estate transactions from $250,000 to $500,000. The proposal also would incorporate the rural residential appraisal exemption in the Economic Growth, Regulatory Relief and Consumer Protection Act to the list of exempt transactions and require evaluations for these exempt transactions. In addition, the proposal would require institutions to appropriately review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Comments will be accepted for 60 days from publication in the Federal Register. FDIC, November 20, 2018.
Even with the economy faring well, a majority of American voters are less confident about their retirement prospects than they were five years ago, a survey by the Certified Financial Planner Board of Standards (CFP Board) and Heart + Mind Strategies found. More than 60% say it is harder to retire on time now than it was in 2013. Fifty-eight percent say it will be harder to retire on time in 2023. Sixty-two percent are confident they will be able to maintain their savings as they transition into retirement, but only 45% think their savings will last throughout their retirement. “By 2060, there will be more than 98 million Americans who are 65 or older,” says CFP Board CEO Kevin Keller. “People are also living longer than ever before. In many cases, retired Americans will need to support themselves for 10, 15, 20 or even 30 years, meaning people need to save earlier, save more and be better prepared for the financial challenges of retirement.” The survey found that 66% have less than $100,000 in household financial assets outside of their primary residence. Nonetheless, 33% say they have become more proactive about setting and following a financial plan, and 60% say they are likely to work with an adviser to determine a retirement plan. However, 23% are waiting three to five years before retirement to start working with an adviser. Among the group looking to work with an adviser, 82% want them to take their entire financial situation into consideration, and 79% say the adviser should work in their best interest all of the time. “As Americans start planning for retirement, they want to work with financial professionals who are competent in financial planning and who are required to work in their best interest to ensure they are set up for a secure, comfortable future,” Keller says. “CFP certification is the best-in-class standard for financial planning and requires all financial planners to always act as a fiduciary.” The CFP Board and Heart + Mind Strategies conducted the survey of 1,000 voters on election night. Lee Barney, Plansponsor, November 15, 2018.
Two Orlando, Fla., pension funds reversed their decisions to make commitments totaling $20 million to middle-market buyout fund Windjammer Senior Equity Fund V, said Michele Keane, pension coordinator. The $560 million Orlando Police Pension Fund and $390 million Orlando Firefighters Pension Fund's boards voted earlier this year to commit $12 million and $8 million, respectively, to the fund managed by Windjammer Capital Investors. But Ms. Keane said the private equity manager would not accept fiduciary responsibility, so the boards elected not to proceed with the contract. Ms. Keane said investment consultant NEPC will present a different buyout fund for consideration, perhaps at the pension funds' December board meetings. Rob Kozlowski, Pensions & Investments, November 15, 2018.
The first California retirees to lose a cut of their pensions because of financial mismanagement by a local government are suing CalPERS in a bid to force the $350 billion fund to restore their income. The three retirees from the tiny Sierra County town of Loyalton filed their lawsuit in September, nine months after the city cut off a supplemental payment it had been giving to them since the California Public Employees’ Retirement System slashed their pensions in late 2016. “We haven’t got paid a dime,” said John Cussins, 57, who worked for the city for more than 20 years. The lawsuit, filed in Sierra County Superior Court, alleges CalPERS and Loyalton negligently defaulted on their obligations to fund pensions promised to the retirees. CalPERS’ November 2016 vote to reduce the benefits it pays to Loyalton’s handful of retirees startled retired California government workers. It demonstrated that they, too, could lose retirement income if their employers failed to keep up with their pension bills. A CalPERS survey in early 2017captured that anxiety when current public employees and local government executives each expressed less confidence in the security of their retirement plans. “You’re looking at your retirement and you’re seeing CalPERS is reducing pensions, which is something that had never happened before,” CalPERS board member Richard Costigan told The Sacramento Bee in March. Loyalton is one of hundreds of California cities that contract with CalPERS to provide pensions for their employees and retirees. CalPERS invests money from the cities to fund the retirement plans, and distributes benefits to retirees. In March 2017, CalPERS reduced pensions for almost 200 more former local government workers when the Los Angeles County organization that employed them also defaulted on its retirement bills. Loyalton in 2013 stopped paying its pension bills. CalPERS a year later sent the city a notice declaring that Loyalton had defaulted on its obligations and would have to pay $1.7 million fully to fund the pensions of its retirees. Loyalton didn’t pay. The CalPERS Board of Administration in November 2016 voted to shift money that had been earmarked for the Loyalton pensioners into a low-risk fund and reduce the value of their benefits by about 60 percent. Loyalton through 2017 made up the difference between what the retirees received from CalPERS and what they were promised. Minutes from city council meetings that year show the payments cost the local government about $5,000 a month. That arrangement ended in January, Cussins said. “I had to do something,” he said, referring to his decision to find an attorney and sue CalPERS. Longtime city employees Patsy Jardin and Donald Yegge joined him in the lawsuit. “The city simply didn’t fund CalPERS, and as a result my clients are getting screwed,” said their attorney, Seth Wiener. “Between them collectively they put in 100 years of dedicated service.” CalPERS declined to comment for this story. Adam Ashton, The Sacramento Bee, November 14, 2018.
AARP updated its recently launched Social Security Resource Center with an analysis of the 12 most common Social Security misconceptions held by workers and retirees in the U.S.; the publication also discusses solutions and strategies for improving the long-term strength of the system. According to David Certner, AARP’s legislative policy director, probably the first and most pervasive misunderstanding is that Social Security is at risk of “going bankrupt” in the near term. “At the moment, you could say the opposite; the Social Security trust funds are near an all-time high,” he says. “The program really is in good shape right now,” says David Certner. “But we know it has a long-term financial challenge.” The white paper recounts how, for decades, Social Security collected more money than it paid out in benefits. The surplus money collected from payroll taxes each year got invested in Treasury securities, generating reserves that are now worth about $2.89 trillion. “But as the birth rate has fallen and more Boomers retire, the ratio of workers to Social Security recipients is changing. This year is a tipping point,” Certner says. “The program will need to dip into its reserves to pay full benefits from this point forward, absent any change to the program. It’s now forecast that the trust fund reserves could be exhausted in 2034. Even if that happens, Social Security won’t be bankrupt. The program will continue to pay benefits, but at a rate of 79% of what recipients expected to receive.” According to the AARP analysis, some ideas to reform funding are starting to take shape, but near-term Congressional action remains unlikely. “One proposal is to either raise or eliminate the wage cap on how much income is subject to the Social Security payroll tax,” AARP says. “In 2019, that cap will be $132,900, which means that any amount a worker earns beyond that is not taxed. Remove that cap, and higher-income earners would contribute far more to the system. Other options lawmakers might consider include either raising the percentage rate of the payroll tax or raising the age for full retirement benefits.” According to AARP, it is important that workers are made to understand their Social Security benefits can be taxed, especially when an individual can draw significant resources from other income sources, such as defined contribution (DC) or defined benefit (DB) retirement accounts. As the white paper recounts, single filers whose combined annual income exceeds $34,000 might pay income tax on up to 85% of their Social Security benefits; couples filing jointly may pay tax on up to 85% if their combined income tops $44,000. Another key myth to break is that Social Security is meant to be an adequate source of income on its own for retirees. “The SSA says if you have average earnings, the program’s retirement benefits will replace only about 40% of your pre-retirement wages,” the analysis says. “Nevertheless, 26% of those 65 and over who receive a monthly Social Security benefit today live with families that depend on it for almost all of their retirement income. And 50% of them say their families depend on Social Security for at least half of their income.” The full publication is available on AARP’s website. John Manganaro, Plansponsor, November 14, 2018.
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