Archive

from Tax Break:

Essential reading: Cuts debated on tax breaks for retirement savings, Simpson-Bowles vote, more

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Lawmakers consider changing tax breaks on retirement savings. Lori Montgomery - The Washington Post. The painful trade-offs of tax reform came into sharper focus on Tuesday as lawmakers began considering reducing or otherwise changing specific tax breaks, starting with laws that allow millions of Americans to avoid taxes while saving for retirement through 401(k) plans, employer pensions, IRAs and other programs. Link

* White House says Obama would veto Republican tax cut. Alister Bull - Reuters. The White House said on Tuesday that President Barack Obama would veto a small business tax cut proposal by Republicans in the House of Representatives that his Democrats complain is biased toward helping the rich. Link

* Senate to take up Simpson-Bowles deficit plan. James Politi - The Financial Times. The centrist Democrat who chairs the Senate budget committee will present legislation on Wednesday to implement the recommendations of a 2010 bipartisan debt reduction panel, in a surprise move to force the upper chamber to consider the contentious plan. In a sign that the Simpson-Bowles plan is unlikely to garner much traction in the Senate, Republicans mocked the move. Link

* How to pay no taxes: 10 strategies used by the rich. Jesse Drucker - BloombergBusinessweek. If you have lots of money, Tuesday, April 17, was one of the best tax days since the early 1930s: Top tax rates on ordinary income, dividends, estates and gifts remain at or near historically low levels. Our era is rife with opportunities to avoid — or at least defer — tax bills, according to tax specialists and public records. Link

* IRS rule threatens bank capital flight: analysts. Kevin Drawbaugh - Reuters. Banks in Texas, Florida and other southern states could face a pull-out of non-U.S. depositors due to a new U.S. rule finalized on Tuesday. The rule, part of efforts to combat offshore tax evasion and issued by the Internal Revenue Service, will require U.S. banks, starting on Jan. 1, 2013, to report to the IRS payments of interest made to non-resident aliens. Link

* Sino-Forest says ex-CEO leaves firm, three fired. Reuters. Embattled Chinese forestry company Sino-Forest Corp said on Tuesday its former CEO had quit his final role at the company and three other executives were fired after securities regulators signaled they could press charges against them. Link

from Breakingviews:

Long life may cost world’s governments dear

By Christopher Swann The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Underestimate the elderly at your peril is the warning from the International Monetary Fund. Statisticians and economists may be downplaying the lengthening of the human lifespan. If they’re doing so by the same three years as in recent decades, the IMF reckons the cost of pensions and healthcare will be 50 percent higher than estimated. Something, almost certainly the age of retirement, will have to give.

Demographers keep expecting a slowdown in rising life expectancies that has yet to occur. In 1977 the British government was being guided by actuaries who predicted its citizens would be living to 71 on average by 2011. In fact, they now typically make it to 79. Estimates by rich-nation statisticians have generally fallen shy of actual life spans by around three years over the past several decades. Yet the number crunchers continue to forecast a stalling of the longevity escalator.

This could prove an expensive blunder. Even under the current cautious lifespan assumptions, the cost of providing a reasonable retirement - replacing around 60 percent of pre-retirement income - will double over the coming 40 years globally, the IMF calculates. Supporting armies of silver-haired citizens in rich nations, the fund believes, will gobble up 11 percent of GDP by 2050, up from 5 percent now. Most states have done precious little to prepare even for this. But assume current life forecasts are short by three years again, and the cumulative price tag rises by half again at mid-century.

Facing up to the threat might be unpleasant. The pension liabilities of the Netherlands jumped by 50 billion euros - or 7 percent of GDP - at a stroke in 2010 when the country decided to take account of even modest expected increases in lifespan. Such moves demand chunky injections of cash into private and public pension pots, which would in turn deprive the productive generations needed to support the elderly of much-needed investment in education and infrastructure.

More distress is on the way, however, unless more permanent solutions are found. Tying the retirement age - and benefits - to the escalating life expectancy is the simplest step. A few pioneers, like Denmark and Sweden, have already moved in this direction. Other nations would be wise to follow suit quickly. Delaying will only make the final reckoning more painful.

from MuniLand:

State and local government hiring will never recover

Throughout the recovery, public-sector employment figures have been dismal. Even though recent data suggests that government job losses might have peaked, there is an ugly accounting change looming that could prove a permanent deterrent to a large rebound in government hiring.

The accounting change is being driven by the Government Accounting Standards Board (GASB) and relates to pension liabilities. Governments will soon be required to report their pension liabilities alongside their other liabilities, like long-term debt, on their financial statements. Currently governments are allowed to bury their unfunded pension liabilities in the footnotes of their financial statements. When they calculate their financial ratios, they are also not required to include future liabilities owed to retirees.

With pension costs expected to take up larger and larger amounts of tax revenues, politicians will have no excuse to ignore their ballooning pension problems. What has long been an unpleasant fact for budget officers will soon become a very visible sign to government officials, the public and investors that pension burdens are very heavy and that adding employees means long-term fiscal burdens that many governments don't have the fiscal space to take on.

Bloomberg has a good overview of the state and local government employment picture:

After four years of shuttering fire houses, cutting school budgets and firing teachers and police, these governments are starting to steady as tax revenues rebound. Public employment at all levels declined by just 7,000 in the first two months of this year, well down from the 22,000 monthly average in 2011, according to Labor Department data.

“We’re at a point where we’re nearing the bottom,” said Christopher Hoene, director of research with the National League of Cities in Washington. While some cities still are shrinking staffs, others are “not that far off from some of them hiring again. In the sense of the business cycle for local governments, the curve is starting to change.”

There certainly will be hiring to augment police forces and teaching staffs in places that can afford it, but the resources needed to make new hires will increasingly be crowded out by the costs for retired public workers. Retirements will likely increase as employees who first joined state and local government workforces in the early 1980s meet their 30-year service requirement.

With a handful of exceptions, public pension plans across the country are underfunded. In some instances, they are projected to exhaust the assets in their plans as soon as 2020. Forty states and many cities have enacted changes to get their pension plans on more solid footing, but it will take decades in some cases to restore them to full health. The states with the biggest unfunded pension liabilities, such as Illinois, are just now grappling with the legal and legislative changes necessary to prevent their pension commitments from swallowing larger and larger amounts of their annual budgets.

from Breakingviews:

BT gets better side of deal with its pension fund

By Chris Hughes

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

BT is finally regaining the initiative in the battle over its gargantuan pension deficit. The UK telecoms group has reported a sharply reduced shortfall in the scheme’s funding position, and cut a favourable deal with members to close the remaining gap. It’s not hard to see why BT shares gained 6 percent, adding 1 billion pounds to the group’s market value. But it would be wrong to assume that the pension deficit is now a dead issue.

The pension hole has dragged on the share price for years. At the last valuation, for June 2011, it was 4.1 billion pounds, down 54 percent since the previous assessment in 2008. That fall partly reflects the free-lunch benefit of changes in the inflation measure permitted for the calculation of liabilities.

Seeing that BT is in good health and benefiting from these changes in valuation metrics, the scheme’s trustees might have driven a harder bargain. Previously, BT was paying 525 million pounds annually into the scheme over 17 years to plug the previous 9 billion pounds hole - an elongated timetable that worried the pensions regulator. Now, it is making a 2 billion pounds lump-sum and paying 325 million pounds annually over nine years.

That may look as if the trustees have done really well. But the new timetable only looks speedy because the previous plan was so extended. True, the regulator is content to let deficit reduction plans last up to a decade. But BT could have stuck to the existing annual payment level and cleared the deficit in five years. It’s a strong company - 75 percent of the lump sum top-up is coming from existing cash resources.

The flipside is that the resulting financial flexibility accelerates the prospect of a higher dividend for investors. The payout could rise to 14 pence a share for fiscal 2014, against expectations of 9.6 pence, says Jefferies.

from Breakingviews:

UK’s post deal should have pension bosses drooling

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The deal struck between the UK government and its Royal Mail postal service should have other pension bosses drooling. What’s not to like about an arrangement that sees the state take on responsibility to pay ex-employees’ inflation-proofed retirement incomes far into the future?

The Royal Mail is getting rid of future liabilities with an estimated present value of nearly 38 billion pounds at a cost of only 28 billion pounds - the value of the assets in its pension fund. In a neat sleight of hand, the UK government also seems to benefit. It can use those assets to offset about 2 percent of the national debt, while ministers get to bury the index-linked liability deep in the budget books.

In accounting terms, this looks aggressive. One fig leaf-sized justification for glossing over the liability is that it is hard to estimate the present cost of paying long term retirement incomes. Another is that the government doesn’t assign a precise cost to the future pensions of the UK’s public servants, either.

To be fair, the UK government may appreciate the illusory nature of what George Osborne, the chancellor, chose to call a “windfall”. It also deserves grudging credit for honoring its obligation, as the ultimate owner of the Royal Mail, to finance pension promises. The deal also paves the way for a sale of the postal service, which could see the British treasury recoup some cash. And many enterprises have thrived once freed from the shackles of state control.

But the purest test might be how private-sector managers of underfunded pension plans would react if offered the same deal - and they’d be queuing all along Downing Street. And where the Royal Mail paid the bargain basement equivalent of 75 pence to slough off each pound of liability, others would be prepared to pay much closer to a full price to get rid of the inflation-linked risk.

from MuniLand:

Greece is not Germany, and California is not Vermont

Last week Gillian Tett of the Financial Times picked up Meredith Whitney's municipal bond doomsday flag and started waving it for an international audience. Her article, entitled "Pension gap spells trouble for muni bonds," broadly painted the entire municipal bond market as having unacknowledged, long-term issues. Her closing line seemed to be a call for investors to shift their concerns from European sovereign debt to the debt of muniland:

Fiscal woes, in other words, are not just a matter for the eurozone; investors had better keep watching that American periphery too.

I agree with Ms. Tett that it is important for investors to dig down into the affairs of municipal bond issuers. Like the nations of the European Union, the quality of fiscal management varies by state. The U.S. has a number of well-run Germanys and we also have a handful of Greeces.

The problem with Tett's piece is that it both used some less-than-credible sources to assert that unfunded public pension liabilities are an enormous problem and failed to distinguish California from Vermont. For example, this graph shows the combined state and local pension fund expenditures of the country overall and the nine states that devote the highest share of their annual budgets to their pension plans (source: U.S. Census Bureau via the National Association of State Retirement Administrators, page 3):

According to the National Association of State Retirement Administrators (NASRA), the national average for state and local government pension contributions is 3 percent:

Based on the most recent information provided by the U.S. Census Bureau, approximately three percent of all state and local government spending is used to fund pension benefits for employees of state and local government... pension costs since 1980 have been reliably stable, declining from around four percent to nearly three percent in 2009.

from Unstructured Finance:

Hedge fund faithful descend on Boca Raton

By Svea Herbst-Bayliss and Katya Wachtel

Balmy temperatures and sunny skies greeted hedge fund industry managers, investors and lawyers as they gathered in Boca Raton, Florida, for 2012's first prominent industry conference.

Despite clear skies overhead, the mood was decidedly grimmer at the GAIM 2012 USA meeting, held at the swanky Boca Raton Resort and Club, as the industry faces dramatic regulatory changes after having ended 2011 on a losing note.

As managers drifted between sessions that promised "unique insights" from top traders about where to make money to how regulation will affect the industry, many quietly shared tales of woe about last year's losses, when the average fund lost 5 percent. Top investors conceded that times would be tough in the months ahead but that hedge funds are still the way to go for pension funds and others that need to boost investment returns with strong performance.

Prominent managers like Marathon Asset Management's Bruce Richards and Oak Hill Advisors President Glenn August mingled with investment chiefs for the states of Florida and Wisconsin.

For the first time ever the organizers of this conference had invited media to attend, but then reversed the decision at the last minute saying many of the sessions were closed to the press, which is not uncommon in the historically secretive industry.

Some 500 people came to Boca Raton in search of ideas and more critically money -- many investors said they were inundated with requests for meetings from tiny newcomers.

from Tax Break:

Pay into pension, get boost to earnings

Companies are going to have to contribute some serious money to shore up their lilting pension plans this year, but there's a silver lining: higher earnings.

In a Dec. 7 analysis, UBS analysts spell out how contributing to the company plan could handsomely help the bottom line.

It has a lot to do with the peculiarities of pension accounting.

As UBS accounting expert Janet Pegg wrote in the report,  companies that sponsor pension plans mostly don't use current market results when determining how much their plans cost them in a certain year.  Instead they use an "expected long-term rate of return"  to calculate how their investments did.

Currently, that expected return is usually between 7.5 percent and 8.5 percent.

So if a company put $100 million into its plan in 2011, and it was expecting a 7.5 percent rate of return on investments, it automatically gets $7.5  million in net income added to the bottom line. That goes even for a year like last year when the S&P 500 returned almost zero, and many global markets far less. On the books, pension plans looked to be doing quite well.

In reality, pension plans have not been doing that well.  According to UBS, pensions' average annual return over the past decade was only about 5 percent, but they  expect to do better, and thus their earnings rise.

from MuniLand:

Tapping the brakes on Illinois debt?

Illinois, the state in the weakest fiscal position, is planning two big bond deals in the first quarter of 2012. Next week they plan to raise $800 million in general obligation bonds to finance various transportation projects, followed by another $750 million later this winter in long-term bonds to fund construction projects.

Although the state is drowning in debt, unfunded pension liabilities and unpaid bills, these debt offerings are very restrained compared to the last two years when it borrowed to make obligatory payments to its heavily underwater pension system.

The State Treasurer, Dan Rutherford, had opposed issuing debt to fund pension obligations and managed to raise the alarm among his former colleagues in the Illinois legislature about the dangers of endless borrowing. Rutherford's actions may have reversed the momentum of Illinois's debt issuance. He is certainly the first fiscal officer that I have heard of who threatened to call the rating agencies to slow his state's bond issuance.

In another important step for the cash-strapped state, Illinois raised the personal income tax last year:

An income tax hike enacted in early 2011 that will raise $6.8 billion in new revenue annually helped ease the state’s cash flow and budget woes, but its unfunded pension obligations still pose a daunting challenge to efforts to stabilize its fiscal house. The state’s funded ratios were the lowest among states last year based on fiscal 2010 results.

The latest review based on fiscal 2011 figures shows Illinois’ unfunded [pension] liabilities rose to $82.9 billion for a funded ratio of 43.4% from $75.7 billion for a funded ratio of 45.4% in fiscal 2010.

The need to fund pension liabilities is crushing Illinois. Reform must be pretty radical to move the system to a more sustainable level of pension funding, but the state government seems to be dithering:

from MuniLand:

Rhode Island’s awful investment returns

It's getting a little tiresome to hear all the adulation that's being heaped on Gina Raimondo, the Rhode Island General Treasurer. She's been praised in the Wall Street Journal, Time, and now CNBC as some sort of fiscal Joan of Arc who rescued the state's public pension system from insolvency. I'll give Raimondo credit for leading the charge to reduce benefits to Rhode Island public workers and increasing their retirement age, but she's far from a pioneer in making tweaks to state pension plans -- 17 other states have also made changes recently.

More importantly, the problems Raimondo addressed were not the biggest that the state faced. The main problem with Rhode Island's pension system is that it has very poor investment returns on its $6.5 billion portfolio of assets. Over the past ten years the state's investments returned 2.47 percent compared with the national median of 3.4 percent (page 6). These returns are in the lowest tier of state pension plans, and this chronic underperformance is causing a substantial shortage of assets to pay retirees.

A national clearinghouse for public pension fund data, the Public Fund Survey, wrote in its report for FY2010:

Over time, investment earnings have a major effect on the cost and funding condition of a public pension plan: from 1982 through 2009, investment earnings accounted for 60 percent of all public pension revenue.

So the major source of pension plan funding, investment returns on plan assets, has been terrible in Rhode Island. I'm not aware of any discussion or changes in the law to address this issue. Instead, state workers and retirees are carrying the load of getting the pension plan in better shape. The latest pension reform only addressed state worker conditions. Check out this list from WPRI.com: