National Round-up
By STEPHEN BORNSTEIN
NOVEMBER 1, 2013
Detroit–Extra Pension Payouts?: Who knew that Detroit had for yea...
2007, acquiredan electronics component manufacturer, Scott Brass, Inc., which went bankrupt
the following year.
Sun Capita...
of 2

National Round-up (Detroit bankruptcy, private equity carried interest)

Detroit – Extra Pension Payouts? : Who knew that Detroit had for years been taking money out of its pension fund when investment returns exceeded actuarial assumptions and paying it out to thousands of city employees and pensioners whose “base” pensions were deemed to be too small? Carried Interest – Double Trouble for Private Equity: Right after Mitt Romney bared his embarrassingly low (14%) effective tax rate during the 2012 presidential campaign and Warren Buffett then called for a flat 30% tax on millionaires, it really looked as if the preferential tax treatment of carried interest on private equity investments would not survive Obama’s second term. http://aroundwallstreet.com/2013/11/national-round-up/
Published on: Mar 3, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - National Round-up (Detroit bankruptcy, private equity carried interest)

  • 1. National Round-up By STEPHEN BORNSTEIN NOVEMBER 1, 2013 Detroit–Extra Pension Payouts?: Who knew that Detroit had for years been taking money out of its pension fund when investment returns exceeded actuarial assumptions and paying it out to thousands of city employees and pensioners whose “base” pensions were deemed to be too small? Detroit had also used some of the excess funds to reduce its own annual pension fundcontributions, but, two years ago,discontinued all such extra paymentsin a vain effort to stave off bankruptcy. Numerous other cities and states across the country have also been issuing “13th checks” to their retirees for many years. In fact, San Diego underwent a similar pension scandal in 2001 and barely avoided bankruptcy itself. Detroit’s “bump-ups,” however, have now come home to roost. Not only did they deprive the city’s pension plan of billions of dollars that could be earning income today, the suspended payments must now be made to retirees retroactively and continue to be honored through Detroit’s bankruptcy according to a recent ruling from a Michigan state judge (who likened his order to “a ticket refund on the Titanic”). While the Michigan constitution protects municipal pensions, Detroit has filed for federal bankruptcy protection which could trump state law and invalidate the pension add-ons. Other cities and states with severely underfunded pensions are therefore watching the Detroit case closely to see whether a federal bankruptcy filing could actually free them from otherwise unpayable pension liabilities. Carried Interest– Double Trouble for Private Equity:Right after Mitt Romneybared his embarrassingly low (14%) effective tax rateduring the 2012 presidential campaign andWarren Buffett (http://aroundwallstreet.com/2012/08/zingers-from-buffett-welch-and-weill/) then called for a flat 30% tax on millionaires, it really looked as if the preferential tax treatment of carried interest (http://aroundwallstreet.com/2012/11/curtains-for-carried-interest/) on private equity investments would not survive Obama’s second term. Almost a year has gone by since then without a word about carried interest, but its tax treatment recentlyresurfaced thanks toa seemingly unrelatedpension fund decisionagainst Sun Capital Partners(http://media.ca1.uscourts.gov/pdf.opinions/12-2312P-01A.pdf), a PE fund that, in
  • 2. 2007, acquiredan electronics component manufacturer, Scott Brass, Inc., which went bankrupt the following year. Sun Capital brought the suit against Scottand its underfunded pension fund in order to avoid liability for the underfunding,claiming that it was a mere passive investor in the company. The First Circuit Court of Appeals, however,found that Sun Capital was actively involved in Scott’s operations,controlled itsboard and management team and was paid a fee by Scott for its management services, all of which led to itsrulingthat Sun Capital wasactually engaged in a “trade or business” involving Scott and was therefore responsible for the company’s pension obligations under US labor law (ERISA). Since PE funds typically acquire controlling positions in their portfolio companies and oversee their management and operations, the adverse holding in Sun Capitalnow also calls into questionPE’sprincipal argument forthe preferential treatment of carried interest. Under the US tax code, a carried interest in a portfolio company qualifies for capital gains treatmentonly if thePE fundowning that interest does not actively operate the portfolio company as a “trade or business.” If it does, as was found in Sun Capital,its carried interest would bedeemed to becompensation for management services,and any profit earned by the fund on the sale of the portfolio company would be characterized as a return on labor rather thancapital, in which case the carried interest would be treated for tax purposes asordinary income. Now let’s see if the Obama administration uses Sun Capital torenew its legislative assault on PE’s sacred cow.

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