Water Cooler Wisdom: 2nd Quarter 2012

Castle Rock Investment Company conducts a thorough market analysis each quarter. We have put together few highlights on why it was a long hot summer with languishing markets

Supreme Court decision upheld the individual mandate:
On June 29th PLANSPONSOR.com reported a “Reaction Survey” completed the previous day by the International Foundation of Employee Benefit Plans with responses from 1,122 plan administrators, trustees, and organizational representatives. “Despite the differing reactions among U.S. business sectors to the Affordable Care Act (ACA) Supreme Court ruling, 77% of surveyed organizations are very likely to provide health coverage in 2014. Only 2% indicated they will not provide coverage in 2014”.

As a result of the Court’s decision, insurance companies that spent less than 80% of premiums on medical care and quality for coverage provided in 2011 will be  rebating the difference back to their customers impacting 12.8 million Americans and totaling more than $1.1 billion. The notifications and rebates are due before August 1st and can be paid by check or applied to future premiums or to the account it was paid by. Employers can pass through the rebates in the same manner or in a manner that benefits its employees.

Presidential election on November 6th:
Now that ACA has been upheld, the majority of employers from the survey cited above are waiting to implement significant initiatives until the next President is elected.

Fiscal Cliff and Congressional Gridlock:
The Budget Control Act of 2011 requires the Office of Management and Budget (OMB) to conduct a sequester on January 2, 2013 (and every year after through 2021) to achieve the $1.2 trillion in deficit reduction that the Super Committee did not. The expiration of the Bush tax cuts and payroll tax holiday, and the reduction in federal spending is referred to as the “fiscal cliff” that make most politicians wary due to the weak economic recovery. Using the current laws in place, the CBO projects the economy to contract at an annual rate of 1.3% in the first half of the year and expand at an annual rate of 2.3% in the second half, providing growth in real (inflation-adjusted) GDP in the calendar year 2013 of just 0.5%. Without the fiscal cliff the growth of real GDP in 2013 would “lie in a broad range around 4.4%”.

European Sovereign Debt Crisis:
European leaders have been unwilling to take the steps necessary to avoid a catastrophic sovereign default by Greece with Italy, Portugal, and Spain facing the risk of spiraling borrowing costs that are unsustainable. Their economies are currently contracting and the deepening recession is impacting stronger countries in the Eurozone and, to a lesser extent, export-driven BRIC economies.

GSAB change in public pension accounting rules:
On June 25th the Governmental Accounting Standards Board voted to approve Statements No. 67 and 68 which revise existing guidance for the financial reports of most pension plans and establishes new financial reporting requirements. In particular, governments will be required to recognize their long-term obligation for pension benefits as a liability for the first time as a net pension liability (the difference between the present value of projected benefit payments to employees based on their past service ) and the assets reported at fair value. The impact of the increased transparency is expected to have a dramatic effect with total liabilities for fiscal 2010 more than three times the amount reported by local governments. Moody’s issued a public request for comment on four major changes it plans to make in how it treats pension liabilities. The negative impact of the modifications-which will start taking effect in the fall—will hit local governments such as counties, cities and town, as well as school districts most heavily. The Center for Retirement Research at Boston College determined using its public pension database that as of 2010 those plans would have reported 57 cents on hand for every dollar they must pay retirees in the future (instead of 76 cents). Moody’s Managing Director Timothy Blake said in a statement that cities and counties are likely to see downgrades.

Maybe Wal-Mart should put out their holiday decorations now just to cheer us all up.