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Cypen & Cypen
NEWSLETTER
for
December 12, 2013

Stephen H. Cypen, Esq., Editor

1.    WILL “PENSION THEFT” BE NEW OLYMPIC EVENT?: In recent days, we have seen a federal judge rule that Detroit can go bankrupt, putting its workers' pensions in jeopardy, and we have seen Illinois's legislature vote for substantial cuts in its retirees' pensions. Truthout posits these two actions are just the tip of the iceberg. We have opened up a new sport for America's elite: pension theft. The specifics of the situations are very different, but the outcome is the same. Public employees who spent decades working for the government are not going to get the pensions that were part of their pay package. In both cases, the governments claiming poverty, and, therefore, the workers are just out of luck. There has been a huge media campaign to trumpet generosity of public sector pensions. The Washington Post once ran a front page article on public pensions, in which it focused on a former official in a small California city who was getting a pension of $500,000 a year. Of course, that situation sounds horrible, and it is. The official had been the city manager and had assigned himself several other top jobs, all of which came with generous pensions. He also was under indictment.  However, this situation is far from typical in California or anywhere else. In Detroit, the typical pension is a bit over than $18,000 a year. In Illinois it is around $33,000 a year; but it is important to note that most Illinois workers do not get Social Security, so their pension is all their going to get. News coverage generally omits that pensions are part of workers’ pay. Controlling for education and experience, public-sector pay is somewhat lower than pay of private-sector workers. The more generous pension and health care benefits that most public sector workers enjoy are offsetting lower wages. Pensions are not gifts bestowed by the government on workers; they are part of workers' pay. When a city or state cuts workers' pensions, they are saying that they will not pay workers for the work they did. Detroit’s decline has far more to do with national economic policy than any decisions made by the city government. (It also did not help matters that the state of Michigan made it very easy to escape problems of the city simply by stepping over the city line into the suburbs, which many of its middle-class residents did.) Detroit workers might be forgiven if they thought they could count on getting the pensions for which they worked. After all, the Michigan Constitution prohibits the state from cutting pensions. And the city of Detroit is a creation of the state of Michigan, which might have led them to believe that the Michigan Constitution also applied to Detroit. However, a federal judge just ruled otherwise (See C & C Special Supplement Newsletter for December 3, 2013). Now Detroit's workers face prospects of a judge taking large chunks out of their pensions. The saga of Illinois pensions should be at least as infuriating. Unlike Detroit, the economy in Illinois is reasonably healthy. When reports tout its unfunded liability of $100 billion, they fail to mention that this obligation needs to be met over the next 30 years. During this same period, Illinois's economy will exceed $18 trillion in output, putting liability at roughly 0.6% of the state's future income -- hardly an unbearable burden. But most disturbing, underfunding pensions in Illinois was a deliberate choice. For years, the governor and Legislature approved budgets that did not make the required contribution to the pensions. In other words, the state's leading political figures acquiesced to the deliberate shafting of workers. Among those who deserve special vilification in this story are the bond-rating agencies (yes, the same folks who brought us subprime mortgage-backed securities rated AAA). Because most pension funds using the assumption that the stock bubble of the 1990’s would persist indefinitely, state and local governments had to make little or no contribution to their pensions. So, now, Illinois, Chicago and several other state and local governments have under-funded pensions. It would seem that they would have an obligation to raise the revenue to pay workers; after all, this money is owed to them. But in 21st century America, contracts and the rule of law apparently do not mean anything, at least not if the people at the other end are ordinary workers. Thus, rather than inconvenience all those rich folks at the Chicago Board of Trade or other highly successful businesses with a larger tax bill, the plan is to stiff the cops, firefighters, schoolteachers and the people who collected garbage for 30 years. It may turn out to be the case that the rich and powerful can just rewrite the rules as they go along. But at least the people should know that theft is now in style when it is their property at stake.
 
2. PUBLIC FUND SURVEY FOR 2012: The Public Fund Survey is an online compendium of key characteristics of most of the nation’s largest public retirement systems. The survey is sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement. Keith Brainard maintains the survey. Beginning with fiscal year 2001, the survey contains data on public retirement systems that provide pension and other benefits for 12.9 million active (working) members and 7.8 million annuitants (those receiving a regular benefit, including retirees, disabilitants and beneficiaries). At the end of FY 12, systems in the survey held assets of $2.63 trillion, membership and assets of systems included in the survey make up approximately 85% of the entire state and local government retirement system community. The primary source of survey data is public retirement system annual financial reports. Data also are culled from actuarial valuations, benefits guides, system websites, and input from system representatives. The survey is updated continuously as new information, particularly annual financial reports, becomes available. This report focuses on fiscal year 2012. The following are from the summary of findings. The funding level in FY 12 declined to 73.5%, down from 75.8% the prior year. The aggregate actuarial value of assets increased to $2.67 trillion, an increase of 0.9%. This increase was outpaced by growth in the actuarial value of liabilities, from $3.49 trillion to $3.63 trillion, or 4.1%. Liabilities grow primarily as active plan participants accrue retirement benefit service credits. Most plans have completed, or are nearing completion, of recognition of the sharp investment losses incurred in 2008-09. Those losses are being offset by asset gains since the market decline. Investment market performance was relatively strong during the 1990s, followed by two periods, from 2000-2002 and 2008-09, of sharp market declines.  Other factors also affect a plan’s funding level, including contributions made relative to those that are required; changes in benefits; and rates of employee salary growth. The survey measures two types of retirement system members: actives and annuitants. Actives are those who are currently working and earning retirement service credits. Annuitants are those who receive a regular benefit from a public retirement system. These members are predominantly retired, but also include those who receive a disability benefit, survivors of retired members or disabilitants. For the second consecutive year, the number of annuitants among systems in the Survey rose by 4.2%.  A low or declining ratio of actives to annuitants is not, per se, problematic for a public pension system. Typical public pension funding model features accumulation, during plan participants’ working years, of assets needed to fund retirement benefits. The median change in payroll was zero, although plans’ experience covered a wide range. Eighty-five percent of the plans had payroll growth over the two-year period of less than five percent, and the aggregate change was lower by 1.0%. The low rate of change in payroll reflects two basic factors: stagnant or declining employment levels and modest salary growth. Statistics indicates that annual growth in wages and salaries for employees of state and local government has remained below 2.0% since mid-2009 and below 1.5% since early 2010. Roughly 30% of employees of state and local government do not participate in Social Security, including approximately 40% of all public school teachers, and most to substantially all state and local government workers in seven states. Nearly every state has made changes to its pension plan in recent years; the most common change has been an increase in required employee contribution rates. For the first time since the inception of this survey, from median employee rate changed from 5.0% to 5.7%. Of all actuarial assumptions, a public pension plan’s investment return assumption has the greatest effect on the long term cost of the plan, because a majority of revenues of a plan comes from investment earnings. Median investment return for plans with a FY ending June 30, 2012, barely exceeded one percent. By contrast, the median one year return for funds with a FY dated of December 31, 2012, was a robust 13.1%. Returns for five-year periods ended in FY 12 remain depressed, as they continue to reflect the result of the sharp decline in 2008-09. For longer periods, particularly 10 years and higher, median public pension fund returns are closer to the investment return assumptions used by most plans.  For most of the Public Fund Survey’s measurement period, the most common investment return assumption used by public pension plans was 8.0%, with some plans using rates above and below that benchmark. Since 2009, an unprecedented number of plans have reduced their investment return assumption.  Some notable features are (a) the reduction of the median assumption below 8.0%; (b) the abandonment of rates above 8.5%; and (c) adoption for the first time for several plans of a rate below 7.0%. The average asset allocation shows a slow but steady decline in the average allocation to public equities and a consistent increase in allocations to real estate and alternatives.
 
3. CORPORATE PENSION FUNDING RATIO NEARS 94%; THIRD STRAIGHT MONTHLY IMPROVEMENT:  The funded status of 100 largest corporate defined pension plans improved by $34 billion during November, as measured by the Milliman 100 Pension Funding Index. The deficit declined to $93 billion from $126 billion at the end of October, due to a rise in the benchmark corporate bond interest rates used to value pension liabilities. Asset returns exceeded expectations and contributed to the funding improvement during November, as well. The PFI funded ratio increased to 93.9% from 91.9% at the end of October. The market value of assets increased by $11 billion as a result of November’s investment gain of 0.88%. The PFI asset value climbed to $1.440 trillion, up from $1.429 trillion at the end of October. By comparison, the 2013 Milliman Pension Funding Study reported that the monthly median expected investment return during 2012 was 0.60% (7.5% annualized). As the pension assets have already achieved an investment gain of 10.38% through November 30, it is likely that the FY 2013 investment return will exceed the annual expected return of 7.5% for the fourth time in the last five years. The portfolio of assets would have to deteriorate by more than $39 billion in December to reduce the actual return for FY 2013 to 7.5%. There has not been a monthly loss of at least $39 billion since February 2009.  Over the last 12 months, the cumulative asset return for these pensions has been 10.05% and the PFI funded status deficit has improved by $393 billion, primarily due to rising interest rates. The discount rate as of November 30, 2012, was 4.05%. The funded ratio of the Milliman 100 companies has improved over the past 12 months to 93.9% from 73.4%. C’mon, Silky Sullivan.
 
4. TWO BITS, FOUR BITS, SIX BITS ABITCOIN: Perhaps you have heard the word “Bitcoin,” but were afraid to ask what it meant. Well, Bank of America Merrill Lynch believes Bitcoin can become a major means of payment for e-commerce and emerge as a serious competitor to traditional money transfer providers. But what is Bitcoin? Bitcoin is a digital currency designed by Satoshi Nakamoto (a pseudonym) in January 2009. Bitcoin allows users to send payments within a decentralized, peer-to-peer network, and is unique in that it does not require a central clearing house or financial institution clearing transactions. Users must have an internet connection and Bitcoin software to make payments to another public account/address. Satoshi is the smallest unit of Bitcoin; 1 Bitcoin contains 100 million Satoshi. By design, the supply of Bitcoins cannot exceed 21 million Bitcoins (2,100 trillion Satoshi). The total amount of Bitcoin in circulation will increase predictably, based on its underlying code, until reaching the cap in 2140. The current supply is 12 million Bitcoins or 57% of the eventual total.  A public history of all transactions is continuously updated and verified by “miners,” who gather batches of new transactions into blocks and attach these blocks to the end of the “blockchain.” This public history forms a ledger of transactions where every single Satoshi is tracked from its first owner to the present owner. Having the full history publicly available guarantees that a buyer actually owns the number of Bitcoins he wants to spend, preventing fraud.  Bitcoin supply is increased with every new block of transactions added to the public history (blockchain). Verification of new transactions by miners is relatively easy and many transactions can be easily compressed in a single block. However, there is a computational task for each block of a high degree of difficulty designed to constrain the increase in the money supply, no matter how slow or fast the overall mining network is. If no external transactions are outstanding, a block with a single transaction to pay the miner would be produced. Indeed, the first several thousand blocks simply paid the miner and contained no other transactions (presently blocks contain a record of hundreds of transactions). This way the initial seed currency was distributed to miners who bore the speculative risk in the Bitcoin’s success. As a rough analogy, suppose competing journalists (miners) are asked to document the national news on each given day for the National Archives. The journalist is asked to write down the events (transactions) in a book (block) and the Archive will eventually buy one such book for a fixed fee. To determine which of the books the Archive will buy, the archive has an additional requirement for journalists that the book contains the fingerprints of 10 people whose birthday was on that particular day. Note that the list of people is not related to the national news (transactions), but is simply meant to control the supply of books coming out per day. As more journalists collaborate to find people, the Archive increases the number of fingerprints required. Exchanges allow the conversion between real-world fiat currencies and Bitcoin. The participation in exchanges requires consumers to take on credit risk by transferring Bitcoins from a personal account to a third-party’s account, which is similar to entrusting real life cash to depository institutions. However, unlike banks, Bitcoin third-party accounts are not regulated and do not provide FDIC protection. While personal accounts are easy to secure, start-up exchanges in overseas jurisdictions with online digital wallets are often targeted by hackers. Exchanges also have some risk of the operator absconding with the money before the currency conversion is completed. Bitcoin as a medium of exchange, distinct from speculative transactions on exchanges, initially gained popularity with companies involved within the Bitcoin ecosystem. For example, miners can purchase specialized chips with Bitcoins. To facilitate transactions, payment processors such as Bitpay provide software to merchants, and absorb FX volatility risk by guaranteeing exchange rates and sending daily bank payments. Since April 2013, significant investment was made into start-ups that develop and promote Bitcoin as a means of exchange for merchants (as opposed to speculation investment on the exchange). For example, CoinLab has received seed money to incubate other Bitcoin start-ups like mining companies and exchanges. The most notable company to accept Bitcoins may be Baidu, a major Chinese portal, which began accepting Bitcoin for its online security services in October 2013. The rapid rise in BTC prices (292% a year) has generated a comparable exponential growth in mining revenue, which in turn has attracted large capital investment. Indeed, the number of computations has grown 521% a year, requiring expensive, heavy-duty Bitcoin-mining chips. The competition for revenues has taken away the low-hanging fruit, and each dollar mined is now a hundred times “deeper.” Electricity costs are also going up as miners use more computers. Does the name “Amway” ring a bell?
 
5. BUT ARE WE READY FOR BITCOIN? As the virtual currency Bitcoin climbs in popularity and in value, state regulators would be wise to start figuring out a way to make the currency safe and user-friendly in their borders, according to Governing. Bitcoins are the world's first decentralized currency, meaning online consumers do not have to rely on a third party like a credit card company to process the transaction. Online consumers, of course, cannot use cash to buy something online, but Bitcoins (which are stored in a user's virtual wallet) are essentially the Internet's unregulated version of cash. The currency is entirely virtual, despite the news stories showing what it looks like an arcade coin. Bitcoins are hidden in a complex encrypted computer program, the process by which users find them is called mining. The easiest-to-find Bitcoins (about 12 million so far) have already been mined so it takes great amounts of computing power to find the ones still hiding. There are about 21 million in existence.  Unlike any other currency, Bitcoins are a global one -- they do not need any one country to establish legitimacy. Therefore states (and the federal government) ought to be wary of ignoring it.
 
6. HOW MUCH RETIREMENT SAVINGS DO WORKERS REALLY HAVE?: When considering employee well-being, as well as workforce planning, employers often wonder whether employees have adequate savings for retirement. While the assessment needs to be holistic, employers generally have no way of knowing about retirement savings and benefits workers have accumulated in previous jobs or from other sources.  Based on comprehensive household survey data, Towers Watson has made the following estimates:

  • Roughly 45% of workers have retirement savings outside of their current employers’ plans, and such savings average 55% of these workers’ total retirement accumulations. 
  • The median amount of outside retirement savings is $49,000 for workers ages 51 through 60, and $30,000 for workers ages 30 to 40.
  • Among survey participants, defined benefit plan benefits tend to be more valuable than defined contribution account balances: median $164,200 for DB versus $33,000 for DC.

As a cautionary note, the analysis does not consider whether workers’ accumulations -- both in their employer’s plans and outside them -- constitute adequate retirement savings. That assessment would be a different subject, duly considering household demographics and economic situations.
 
7.  SIX TIPS FOR OFFICE HOLIDAY PARTIES: Benefitnews.com says the most common questions of Human Resources surround holiday parties. Here are some recommendations for the perfect office appropriate get-together:

  • Have a party. Year-end holiday parties are great opportunities to network with your employees in a non-work environment, get to know their spouses/partners and reconnect with employees who you may not see as often in the office.
  • Remember that the party is employer-sponsored.  Always follow stated employee policies at the event, and send a reminder to employees, as well.  Remember that the employer is responsible for what goes on at the party and potentially events that occur following the gathering.
  • Have a plan for “the alcohol question.” If your facilities do not permit alcohol and you choose to have the party onsite, state up front to employees that alcohol will not be served on the premises. If you decide to serve alcohol onsite, if allowed, or at an off-site location, see the next bullet. 
  • How to manage alcohol consumption. Have a cash bar or supply employees with only a limited number of drink tickets, provide a good selection of non-alcoholic beverages and close the bar well before the party ends. Also, be sure to provide foods that are rich in starch and protein, which stay in the stomach longer, and slow the absorption of alcohol in the bloodstream.
  • Arrange transportation. You may want to consider arranging designated drivers or even a bus for employee transportation if at an offsite location.
  • Review insurance with your broker. Check with your insurance broker about liability for any holiday party-related injuries. Typically, though, workers' compensation does not cover these events. 

Grepse.

8. 2014 IRS STANDARD MILEAGE RATES: The Internal Revenue Service Notice 2013-80, IR-2013-95 (December 6, 2013) provides optional 2014 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The Notice also provides the amount taxpayers must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that may be used in computing allowance under a fixed and variable rate (FAVR) plan. IRS has rules for computing the deductible cost of operating an automobile for business, charitable, medical or moving expense purposes. Taxpayers using the standard mileage rates must comply with those rules.  However, a taxpayer is not required to use the substantiation methods described in the rules, but instead may substantiate using actual allowable expense amounts if the taxpayer maintains adequate records or other sufficient evidence. An independent contractor conducts an annual study for IRS of the fixed and variable cost of operating an automobile to determine the standard mileage rates for business, medical, and moving use reflected in the Notice. The standard mileage rate for charitable use is set by the Internal Revenue Code. The standard rate for transportation or travel expense is $0.56 cents per mile for all miles of business use (business standard rate). The standard mileage rate is $0.14 cents per mile for use of an automobile rendering gratuitous services to a charitable organization.  The standard mileage rate is $0.23 cents per mile for use of an automobile for medical care or as part of a move for which the expense are deductible. For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is $0.23 cents per mile for 2010, $0.22 cents per mile for 2011, $0.23 cents per mile for 2012, $0.23 cents per mile for 2013 and $0.22 cents per mile for 2014.  For purposes of computing the allowance under a FAVR plan, the standard automobile cost may not exceed $28,200 for automobile (excluding trucks and vans) or $30,400 for trucks and vans.  The notice is effective for (1) deductible transportation expenses paid or incurred on or after January 1, 2014, and (2) mileage allowances or reimbursements paid to an employee or to a charitable volunteer (a) on or after January 1, 2014, and (b) for transportation expenses the employee or charitable volunteer pays or incurs on or after January 1, 2014.

9.  ENLIGHTENED PERSPECTIVE BY ANDY ROONEY: I have learned... that money does not buy class.

10.  CLEVER SIGNS: In a Non-smoking Area: "If we see smoke, we will assume you are on fire and take appropriate action."

11. TODAY IN HISTORY: In 1961, Martin Luther King and 700 demonstrators arrested in Albany, Georgia.

12. 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.
 
13. 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.

 

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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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