North Carolina Retirement System 2012 Investment Returns

Last week, the North Carolina Retirement System (NCRS) announced investment returns as of December 31, 2012 for its $78 billion pension fund.  What the press release did NOT include was information about average pension fund returns.  The table below shows just how terribly the North Carolina Retirement System pension fund is managed.

                                            1-Year     10-Year
North Carolina Pension    11.84%     7.16%
Average Large Pension   13.45%     8.13%
Under-performance            -1.61%    -0.97%

The "Average Large Pension" fund was reported by Wilshire Associates for all Master Trusts larger than $5 Billion in total assets.  At first glance, one might not think that a one-year lag of -1.61% is that big a difference.  However, since the North Carolina pension fund holds $78 billion of investments, the -1.61% under-performance for 2012 translates into a cost of $1.25 billion that will have to be made up by North Carolina tax payers.  

For the 10-year period, the under-performance of -0.97% per year amounts to a cost of approximately $6.8 billion.  In other words, the North Carolina pension fund could be $6.8 billion larger, or nearly $85 billion if North Carolina's investment performance were merely average.

Just imagine all the things the state of North Carolina could do with an extra $6.8 billion right now.  Imagine what we will have to do without over the next 10 years if we continue to under-perform.  

Did you know severance pay is tax deductible in North Carolina until 12/31/2013?

In North Carolina, if you've been laid off and received severance pay, you likely do not need to pay North Carolina State Income Tax on the severance amount up to $35,000.  The way it works is you enter your severance as a deduction on line 43 on page 3 of your Form D-400. 

 Check out the North Carolina Department of Revenue statement on the subject by clicking here.

Tax Credits for Efficient Air Conditioners, Furnaces and Water Heaters

You can get a US Federal Tax Credit up to $500 if you purchased an energy efficient central air conditioning unit, furnace, or water heater.  You can find the details for what qualifies by clicking here, but here is a quick summary:

• Central Air Conditioning or Heat Pump Systems - $300 for systems with a SEER rating of at least 16 for split systems or 14 for package systems.
• Furnaces - $150 for systems with AFUE of 95 or higher.
• Water Heater - $300 for systems with an energy factor of at least 0.82 or thermal efficiency of 90%.

All these credits are limited to a lifetime total of $500 going back to 2005.  So, if you've received credits in the past, you might not be eligible.  You will need to file IRS Form 5695 for Residential Energy Credits with your 2012 tax return to receive the credit.

AMT = Additional Mandatory Tax

It's that time of year again when we all start calculating out our tax return here in the US.  I've discovered there is some confusion about the AMT.  AMT stands for "Alternative Minimum Tax" but that name can confuse folks.  AMT would be less confusing if it stood for "Additional Mandatory Tax."

AMT is NOT an "alternative" tax in that it is NOT an "option."  The AMT is an "additional" tax added to your federal tax for some tax payers that earn more than a certain threshold and have Itemized Deductions that are deemed too large.  That is when the AMT kicks in to force these unlucky tax payers to pay a higher amount of federal tax.  The threshold where you might be subject to AMT is $78,750 for married couples and $50,600 for individuals.

I've discovered many folks believe the Alternative Minimum Tax is an alternative way to calculate tax and that the tax payer could "choose" to pay either the normal way or the "alternative" method.  AMT is NOT an option.  The AMT is mandatory.  Thus, when you see AMT, think Additional Mandatory Tax.

Click here to learn more about AMT on the Internal Revenue Service website IRS.gov

Wall Street Fees Explode in North Carolina's Pension Fund (I told you so)

The Triangle Business Journal reports "Fees Paid by Pension Fund Soar 28%" to $318 million last year. (see page 6 of the 2/1/2013 issue).  I hate to say it, but I told you so. Yep, we poor North Carolinian's, despite having several of the top MBA programs in the nation located in our state, and a huge financial center in Charlotte packed with investment talent, we can't seem to figure out how to manage our own pension fund investments.  Instead, we outsource management of the fund at a current annual expense of $318 million.

To put the $318 million of external manager fees into perspective, just consider that over the next 10 years North Carolina will pay Wall Street more than $3.18 billion in investment fees.  Given the growth rate of the fees are greater than the growth of the fund, it will likely me MUCH more than that.  We should bring the money home and manage it ourselves right here in North Carolina and save ourselves billions of dollars.

According to pages 24-25 of the latest annual report, last year teachers contributed $830 million of their pay checks to this pension fund while other state employees added an additional $333 million for a total of $1.16 billion.  The State Treasurer's Office takes 27.3% of state employee and teacher contributions and gives it to Wall Street EVERY year.  A ridiculous waste of state pensioner money.