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Miami

Cypen & Cypen
NEWSLETTER
for
December 15, 2011

Stephen H. Cypen, Esq., Editor

1.      FLORIDA’S SPECIAL RISK POPULATION DIES ALMOST TWELVE YEARS EARLIER THAN GENERAL POPULATION: Brevard County, Florida Sheriff J.R. “Jack” Parker has conducted a Florida Mortality Study, comparing the mortality of Florida law enforcement and corrections officers to the Florida population in general.  During the 2011 legislative session, changes made to the Florida Retirement System extended by five years both the age and years of service necessary to retire for members of the special risk class, which includes law enforcement and corrections officers.  The stated justification for the change was assumption that special risk class members are living longer and now have life spans similar to those of the general population.  This assumption was derived without benefit of conducting any studies in the State of Florida.  In addition, the assumption directly conflicts with well-established medical theory and other scientifically-conducted longitudinal studies regarding lifespan of law enforcement officers.  To verify whether there is a lifespan difference between law enforcement and corrections special risk class members and that of the general population in Florida, data were derived from FRS and the Florida Department of Health.  The comprehensive data were analyzed and compiled to establish an accurate “average age at death” comparison between FRS special risk members and the State of Florida general population.  Actual death rates between the two groups were compared during the most recent decade, beginning in the year 2000 and ending in 2009.  Determination was made that average age at death for FRS special risk class members assigned to law enforcement and corrections duties was 62.4 years, while the average age of death for Florida’s general population was 11.8 years longer at 74.2 years – a lifespan of almost 20% greater.  The report clearly demonstrates that FRS special risk class members assigned to law enforcement and corrections duties do not enjoy a similar lifespan compared to the population they serve, and the 2011 changes to FRS requiring officers to work to age 60 were based on an invalid assumption.  Thereupon, Sheriff Parker requests the Florida Legislature to pass a bill this session returning special risk members in FRS to the appropriate special risk retirement date of age of 55 or 25 years of service.  Further, those FRS special risk members hired on or after July 1, 2011 should be retroactively included in the legislative change.  Yes, Sir. 
 
2.      DC PLAN WOULD INCREASE N.H. RETIREMENT SYSTEM’S LIABILITY:  If the New Hampshire Retirement System eliminates its public pension program to establish a defined contribution system modeled after private-sector 401(k)s, the change would add $237 Million to a $3.7 Billion unfunded liability.  That conclusion, according to Seacoastonline.com, was reached by an independent actuary in a report to NHRS.  The actuary studied financial impact of proposed legislation that would put public employees, hired after November 1, 2012, into a new defined contribution program.  Why does a relatively-small state like New Hampshire have a relatively-large unfunded pension liability?  How about a 16-year “pension holiday,” when NHRS was deliberately unfunded.  What goes around comes around. 
 
3.      VIRGINIA WOULD NOT SAVE WITH PROPOSED PENSION PLAN:   Much like New Hampshire, despite a concerted push to overhaul Virginia’s retirement system for public employees, a high-profile proposal to offer them an optional 401(k)-style plan would not save the state money over the next decade, according to lexisnexis.com.  Cumulatively, if the plans were offered to state employees and teachers, between $197 Million and $944 Million in additional costs could be expected through fiscal 2022.  The high range assumed a greater participation rate and a maximum state match, while the low end assumed a 5 percent participation and a minimum employer match.  Guess what?  State lawmakers have long approved contribution rates below what the retirement systems’ actuary has recommended:  since 1992, state employees’ plan rates have been fully funded in only four years and the teachers’ plan rates have been funded in only two years.  Duh. 
 
4.      DETERMINANTS AND CONSEQUENCES OF CORPORATE PENSION PLAN INVESTMENTS IN ALTERNATIVE ASSETS:   In a new research piece from Center for Retirement Research at Boston College, the author examines the determinants and consequences of corporate pension plan investments in hedge funds and private equity, commonly referred to as “alternative assets.”  The author found that highly leveraged firms with low market-to-book ratios and volatile earnings performance are more likely to invest in alternative assets, indicating that financially constrained firms choose alternative investments to increase asset returns and minimize pension contributions.  The author also found a nonlinear relationship between plan funding status and alternative investing -- very underfunded and well-funded plans are less likely to make alternative investments compared to moderately underfunded plans, suggesting that such plan sponsors may avoid these investments to minimize contribution volatility.  Finally, plans with alternative investments earn higher returns in the pre-crisis period, but also perform more poorly during the crisis period, suggesting that the potential diversification benefits from investing in this asset category may be overstated.  Hmmm.  CRR WP 2011-13 (September 2011) 
 
5.      ASSESSING STABLE-VALUE STRATEGIES:  Towers Watson has issued a paper dealing with what plan sponsors should consider when assessing stable-value strategies.  Stable value is an investment strategy that has been around for a number of decades and one that has, over time, experienced its high and lows.  Overall, stable-value has performed relatively well, and investors have appreciated benefits offered through stable-value:  principal protection, benefit-responsiveness and liquidity.  Stable-value also offers consistently higher returns than money markets while taking on modestly higher amounts of interest rate and credit risk exposures. However, more recently, a changing economic climate with greater regulatory uncertainty, diminishing wrap capacity and consistently lower yields have seemingly reduced stability and value that investors have come to expect from stable-value.  Plan fiduciaries face not only less stability, but also an increased governance burden.  Now is the time to ask tough questions about stable-value, because it is important to understand the risks associated with this investment strategy.  Regardless of upcoming regulatory decisions, there has been a structural shift in competitive advantage away from plan sponsors and stable-value managers over to insurance providers as the investment strategy faces unique market and regulatory headwinds.  Nothing is simple. 
 
6.      LOW-VOLATILITY STRATEGIES REQUIRE CAUTION: Minimum Variance strategies have become increasingly popular, given the high levels of market volatility experienced by equity investors during the 2008–2009 financial crisis, according to ai-cio.com.  However, investors who aim to reduce portfolio volatility can usually achieve a reduction through investments in fixed income rather than sacrificing expected returns by investing in a low-volatility strategy.  Minimum Variance strategies attempt to construct equity portfolios that minimize volatility.  These low volatility strategies make no explicit assumptions regarding expected returns.  Volatility is estimated using historic stock return volatility and correlations between individual stock returns and market movements.  If these estimates of volatility are stable over time, the minimum variance story predicts this portfolio will have substantially lower volatility than the market portfolio.  The piece also outlines and expands on the following points: 
 

  • Low-volatility strategies such as minimum variance have similar returns with substantially less volatility when compared with a related market portfolio over the period 1968–2010.  
  • The analysis shows that low-volatility strategies’ gain in performance can largely be attributed to industry bets and value tilts.  
  • The weighting schema used to construct minimum variance portfolios contributes little to performance of these strategies.  
  • Similar Sharpe ratios can be attained using a balanced portfolio of stocks and bonds. 

 
The study concludes that simulations of low-volatility strategies (such as Minimum Variance) yield levels of average returns similar to those of equity market indices.  
 
7.      INFORMATION RETURN REPORTING FOR STATE AND LOCAL GOVERNMENTS:  Internal Revenue Service reminds us of the general rule that government entities are subject to the same information reporting requirements and must file information returns for each calendar year with respect to applicable payments made during the year in the course of its trade or business.  Payer must file Form 1099-MISC (Miscellaneous Income) for each person it has paid at least $600 for rents, services (including parts and materials), prizes and awards or other income payments.  If payment for services includes amounts paid for labor and parts, both must be included amounts on the Form 1099-MISC.  Generally, a government entity must issue Form 1099-INT (Interest Income) to each person to whom it paid during the calendar year $10 or more of interest on accounts in banks, credit unions or similar organizations; tax credit bonds; bonds, including tax-exempt state or local bonds; and U.S. savings bonds or$600 of interest on damage awards; income tax refunds; and other payments made in the course of governmental operations.  There are also some special information reporting rules:
 

  • Payments to Attorneys: Attorneys’ fees of $600 or more paid in the course of the business must be reported on Form 1099-MISC, box 7, including legal fees paid to corporations.  This amount does not include gross proceeds paid to attorneys in connection with legal services in box 14. 
  • 1099-R: Use 1099-R to report distributions from certain pensions, annuities, retirement or profit-sharing plans of $10 or more.  
  • Government entities are subject to requirements to withhold income tax of 28% from certain payments if the payee is not exempt from backup withholding and fails to furnish a correct taxpayer identification number or a notice is received from IRS indicating that backup withholding should begin on a payee.  (Note, backup withholding does not apply to wages or pension payments.) 

 
8.      GASB IS AT IT AGAIN:  
Governmental Accounting Standards Board has approved Preliminary Views on major issues relating to Economic Condition Reporting:  Financial Projections.  The Preliminary Views presents the Board’s current views on what it believes are the most fundamental issues associated with reporting of financial projections and related narrative discussions that will assist users in assessing a governmental entity’s economic condition.  The Board’s intent is to obtain comments from constituents before developing more detailed proposals for potential new standards.  The Board believes that decision makers need information with which to assess a government’s economic condition -- its financial position, fiscal capacity and service capacity.  Fiscal sustainability is the forward-looking aspect of economic condition.  Fiscal sustainability is defined as a government’s ability and willingness to generate inflows of resources necessary to honor current service commitments, and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits.  The Board’s preliminary view is that five components of information are necessary to assist users in assessing a governmental entity’s fiscal sustainability: 
 

  • Projections of the total cash inflows and major individual cash inflows, in dollars and as a percentage of total cash inflows, with explanations of the known causes of fluctuations in cash inflows 
  • Projections of the total cash outflows and major individual cash outflows, in dollars and as a percentage of total cash outflows, with explanations of the known causes of fluctuations in cash outflows 
  • Projections of the total financial obligations and major individual financial obligations, including bonds, pensions, other postemployment benefits and long-term contracts, with explanations of the known causes of fluctuations in financial obligations 
  • Projections of annual debt service payments (principal and interest) 
  • Narrative discussion of the major intergovernmental service interdependencies that exist and the nature of those service interdependencies. 

 
Financial projections would be (1) based on current policy, (2) informed by historical information and (3) adjusted for known events and conditions that affect the projection periods.  Current policy includes policy changes that have been formally adopted by the end of the reporting period but that will not be effective until future periods.  Inflows and outflows would be projected on a cash basis of accounting, and financial obligations would be projected on an accrual basis of accounting.  Deadline for submitting written comments is March 16, 2012.  GASB is responsible for developing standards of state and local governmental accounting and financial reporting that will (a) result in useful information for users of financial reports and (b) guide and educate the public, including issuers, auditors and users of those financial reports.  Preliminary Views is a step toward an Exposure Draft of a Statement of Governmental Accounting Standards but is not an Exposure Draft.  A Preliminary Views is a Board document designed to set forth and seek comments on the Board’s current views at a relatively early stage of a project.  A Preliminary Views generally is issued when the Board anticipates that respondents are likely to be sharply divided on the issues or when the Board itself is sharply divided on the issues.  Because the Board anticipates that respondents likely will express a range of differing views on major issues associated with the reporting of financial projections and related narrative discussions, it believes that a Preliminary Views, rather than an Exposure Draft, is appropriate.   No. 13-3 (November 29, 2011). 
 
9.      MOST IRS MILEAGE RATES STAY THE SAME: 
 Internal Revenue Service has issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.  Beginning January 1, 2012, the standard mileage rates for use of a car, van, pickup or panel truck will be: 
 

  • 55.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

 
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011.  The medical and moving rate has been reduced by 0.5 cents per mile.  The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile.  The rate for medical and moving purposes is based on the variable costs as determined by the same study.  Independent contractor Runzheimer International conducted the study.  Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.  IR-2011-116 (December 9, 2011). 
 
10.    GOLF WISDOMS:  
The odds of hitting a duffed shot increase by the square of the number of people watching.    
 
11.    PARAPROSDOKIAN:  (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part.  It is frequently used for humorous or dramatic effect.):   I always take life with a grain of salt... plus a slice of lemon... and a shot of tequila.    
 
12.    QUOTE OF THE WEEK:  “The hardest thing is to take less when you can get more.”  Kim Hubbard 
 
13.    ON THIS DAY IN HISTORY:  In 1791, Bill of Rights ratified when Virginia gave its approval.  
 
14.    OUR NEW LOOK:  We recently switched to a new list-serve, which accounts for a different look.  Tell us if you have any problems, as work is still in progress.  Thanks for subscribing to our Newsletter.

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.  Thank you. 

 

Copyright, 1996-2011, 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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