Friday Financial Five – November 22nd, 2013

Friday, November 22, 2013

Dan Forbes, GoLocalWorcester MINDSETTER™

From Obamacare to ProblemaCare?

Rolling out a huge undertaking like the Affordable Care Act wasn’t expected to go hiccup-free, but it’s not going well, to say the least. The furor over people having health plans they “love” get eliminated appears to be political opportunism, as people only love their health plan to the extent that premiums or health claims don’t submarine their financial standing. The Act’s true success will be measured by an increased number of insureds, similar coverage and services as before, and a lower total cost to the consumer. That’s where the new health act will be made or broke – not the website, which presumably will get fixed at some point. But if people don’t sign up, it’s going to be very hard to justify this added layer of insurance reform.

Getting a mortgage in 2014 might be more difficult

Thanks to Dodd-Frank legislation and the Consumer Financial Protection Bureau, lenders and borrowers should prepare for the possibility that it might be quite a bit harder to obtain a mortgage next year. Starting on January 10, 2014, banks and lenders must assess a borrower’s ability to pay in order to provide a “Qualified Mortgage”. Qualified Mortgages are expected to meet fee requirements, be a maximum term of 30 years, while being absent of risky features, such as balloon or interest-only payments. Most importantly, the standard for maximum debt-to-income ratios for borrowers could be reduced to 43%, leaving younger and/or lower income borrowers unable to get a Qualified Mortgage.

Tax deductions set to expire

With the end of the year approaching, it’s time to revisit the deductions that will expire unless extensions are agreed upon. The biggest provision affecting individuals is the federal deduction for state and local taxes. Another big one is the tax-free distribution from an IRA for charitable contributions. We’ve seen in the past that Congress waits until the last minute to address these issues, but it’s tough to plan when almost sixty deductions are scheduled to disappear.

Long term care industry in disarray

The Long Term Care industry continues to work out growing pains, as both Manulife (John Hancock) and Genworth are pushing for large increases to their existing premium base. Manulife is looking for an average increase of 25 percent on half of their existing in-force business, while Genworth is looking to increase premiums between 6 percent and 13 percent on policies taken out between 2003 and 2012. More disheartening is the recent report from the Commission on Long-Term Care. The 15-person group readily identified problems, but were unable to agree upon a solution going forward. Back to the drawing board.

Roth IRA vs Roth 401(k)

People continue to try to minimize tax burden in retirement, making Roth vehicles more and more popular, especially as options within retirement plans. There is no income requirement, meaning higher income individuals can contribute, but there are some differences as well. First, there is no recharacterization, meaning once you convert you cannot go back. The bigger issue is that Roth 401(k) money is still subject to required minimum distributions (RMD). Once you reach the age of 70 ½, there will be forced withdrawals from the Roth 401(k) just like a traditional IRA.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].

Related Slideshow: The Worcester Research Bureau To Host Seminar With Retiree Benefit Experts

Reports on Massachusetts' and Worcester's post-employment liabilities for public employees paint a stark picture of future state and municipal budgets. Researchers and experts agree, though, that reform and prudent investment could very well pave the road to solvency.

The Worcester Research Bureau will hold a seminar on November 6th for elected officials, community leaders, and the general public to highlight the ways that Massachusetts municipalities can keep their commitments to current and former employees – specifically non-pension post-employment benefits — without careening toward fiscal receivership or municipal bankruptcy.

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State Issues Report on OPEB

In January of 2011, the Massachusetts Commission to Study OPEB issues a report detailing the unfunded benefit obligations on a state level. The report projects a combined municipal and state savings of $15-20 billion over 30 years if recommended reforms are enacted. View full report.

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WRRB Report Confirms, Enhances State Report

In April of this year, the Worcester Regional Research Bureau issued its own report which confirmed and enhanced the findings of the state report. Recommendations in the report included reform of existing benefit packages, forming a city managed trust to defray future costs, and the establishment of retiree management trusts – 401(k)-style savings accounts designed to allow retirees more control and flexibility in benefit spending. View full report.

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Dissemination and Education

WRRB will hold a seminar tomorrow for elected and appointed officials to discuss strategies that will allow municipalities to bear the costs of long-term benefit payouts, while still honoring their commitments to former and current public employees. Speakers from the State Commission on OPEB, the Manhattan Institute, the Government Accounting Standards Board, and the Town of Shrewsbury are on the schedule. Worcester City Manager Michael O’Brien will moderate.

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Henry Dormitzer

In addition to serving as the Chairman of the Massachusetts Commission to Study OPEB, Dormitzer is president, chief executive officer and a board member of Free Flow Power Corporation, a hydroelectric development company. He was an investment banker for 15 years, most recently as a managing director at UBS, where he managed the firm’s Massachusetts public finance investment banking office.

Dormitzer previously served as commissioner of the Massachusetts Department of Revenue and as undersecretary for administration and finance under Governor Deval Patrick. He has served on the boards of the Massachusetts Educational Financing Authority and MassDevelopment, and is president of the board of trustees of Worcester Academy, an independent school in Massachusetts. He is a graduate of Harvard College.

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Stephen D. Eide, Ph.D.

A former senior research associate at the WRRB, Eide currently serves as a senior fellow at the Manhattan Institute's Center for State and Local Leadership. He edits PublicSectorInc.org, a project of the Manhattan Institute, and is also a contributor to the site. His work focuses on public administration, public finance, political theory, and urban policy. His writings have been published in the Worcester Telegram and Gazette, Orange County Register, the New York Post, Interpretation: A Journal of Political Philosophy, and City Journal.

Eide holds a bachelor's degree from St. John's College in Santa Fe, NM, and a Ph.D. in political philosophy from Boston College.

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Dean Mead

Mead is Research Manager at the Governmental Accounting Standards Board. Dean is lead methodologist for the GASB, responsible for overseeing project managers in the planning, design, and administration of the GASB’s research agenda, managing external research, and interfacing with the academic community. Dean also coordinates the GASB’s constituent outreach and communication efforts and is staff liaison to the Governmental Accounting Standards Advisory Council. Dean is a lecturer at Rutgers Business School, Rutgers University. Prior to joining the GASB, Dean was the Deputy Research Director at the Citizens Budget Commission in New York City. At that time he was an adjunct member of the finance faculty at the Robert F. Wagner Graduate School of Public Service, New York University, where he pursued his doctoral studies in public finance, public policy, and management. He holds an undergraduate degree in public policy from Cornell University.

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Daniel Morgado

Morgado is the current Town Manager of Shewsbury, and has formerly held town manager and administrator positions in Swansea, Blackstone, Easton, and Grafton. He is also a Massachusetts Municipal Association Committee member. He holds a Master’s degree in Public Administration from Clark University, and has served as an adjunct professor of Public Administration studies there for over twenty years.