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Cypen & Cypen
NEWSLETTER
for
MAY 1, 2003

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. BEST AND WORST STATES FOR RETIREES:
In a recent Newsletter we presented the “Best and Worst States for Taxes” (see C&C Newsletter for April 9, 2003, Item 4). Now, from Kiplinger’s we have obtained data on the total tax burden -- income taxes, property taxes and sales taxes -- for a typical retired couple in each of the fifty states and the District of Columbia. When one looks at the so-called big picture, it might be cheaper to stay put than to move to one of the no-tax “havens.” For retirees who are really retired, and who have not taken on new jobs, income taxes are often the least of their worries.

So, here are the top ten:

Delaware
Alaska
Kentucky
South Carolina
New York
Michigan
Mississippi
Wyoming
Nevada
Colorado

and the worst:

Pennsylvania
New Jersey
Wisconsin
Vermont
Maryland
New Hampshire
Arkansas
Maine
Rhode Island
North Dakota

Meanwhile, the no-tax haven we call Florida comes in at number 27.

2. “WINDFALL ELIMINATION PROVISION” SNAGS ANOTHER VICTIM:
Stroup began working for the Kokomo, Indiana, Police Department in January, 1966. Under Indiana law and the Kokomo Police Pension Plan, he later qualified for retirement with pension benefits after completing twenty years of service -- December 31, 1985. However, Stroup did not retire until March, 1988. He then applied for Social Security Disability Benefits and was found eligible for them as of January 1, 1996. Meanwhile, Congress had enacted the Windfall Elimination Provision to Social Security, supposedly to eliminate the unintended “double dipping” that accrued to workers who split their careers between employment taxed for Social Security benefits (“covered”) and employment exempt from Social Security taxes (“noncovered”). Thereunder, the Social Security Administration determines a beneficiary’s primary insurance amount (the figure on which the amount of actual benefits is partially based) from his average monthly earnings. Prior to enactment of the Windfall Elimination Provision, the calculation was made without regard to whether an individual’s wages were covered or noncovered. Thus, an individual who had worked for both covered and noncovered wages in the course of his employment would receive both Social Security benefits and whatever pension benefits were provided by his noncovered employment. However, the Windfall Elimination Provision applies only if the applicant “first becomes eligible after 1985 for a monthly periodic benefit.” Individuals who become eligible prior to 1986 are not subject to the provision. Admitting that the statutory language is on its face ambiguous, the Eleventh Circuit U. S. Court of Appeals affirmed the Social Security Administration’s calculation using the Windfall Elimination Provision. As provided in Regulations adopted pursuant to its broad statutory authority, the Social Security Administration will “consider you to first become eligible for a monthly pension in the first month for which you met all requirements for the pension except that you were working or had not yet applied.” Here, Stroup did not become eligible for his pension until January, 1986. Stroup v. Barnhart, 16 Fla. L. Weekly Fed. C519 (U.S. 11th Cir., April 16, 2003).

3. LACK OF HEDGE FUNDS CAUSES LOSSES?
A report from PlanSponsor.com indicates that Massachusetts’s State Treasurer blames the State’s failure to allow investment in hedge funds for losses in a County retirement system. Last year the County system fell over 12%, compared to a 9% drop suffered in the Statewide fund. The County’s allocation to equities was only one-third, but stock losses almost hit 32%! The State Treasurer felt that if the County system had been able to put between 5% and 8% of its assets in hedge funds, the numbers would have been dramatically different. (Considering that small target allocation, we doubt it would have made much of a difference.) However, the State recently approved hedge fund use in public funds with at least $250 Million in assets -- so we’ll see how the $336 Million County system does.

4. PROPOSED TEXAS CONSTITUTIONAL AMENDMENT WOULD LIMIT MUNICIPALITY’S ABILITY TO REDUCE PENSIONS:
A proposed amendment to the Texas Constitution would limit a municipality’s ability to reduce pension benefits. Requiring a two-thirds majority in both chambers, the measure would primarily affect large Texas cities that fund their own pension plans, such as Dallas, Fort Worth, Houston and San Antonio. (Smaller cities -- the majority -- are part of the Texas Municipal Retirement System, a statewide program not included in the proposal.) Proponents point out that now a city could cut employees’ pensions in half or take them away entirely. After the horror stories of Enron and World Com, they believe Texans and the Legislature feel that a promise is a promise and cities should keep their word. Opponents, on the other hand, believe the amendment could lead to astronomical property tax increases if a city is forced to increase its pension contributions. They point to unfunded liabilities in Dallas ($1.9 Billion) and Houston ($2.4 Billion), which could increase in five years to $3.7 Billion and $4.9 Billion, respectively. The two factions are attempting to work out an acceptable compromise, which may include a local “opt-out” if local voters are not in favor of the provision.

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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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