I read this March 20, 2010 post on The Research Puzzle blog with interest. It explains very well why investing is an inside game.
Investing for you is about your goals, your cash flow, your dreams and your financial status. Read and enjoy
http://researchpuzzle.com/
Wednesday, March 24, 2010
Investing Luck vs. Skill
Friends,
At Mackey Advisors™ we are always looking for ways to keep our clients educated on what we do and why we do it. I have included this latest piece for your enjoyment.
Thanks,
Andy Pulsfort
Investing Luck vs. Skill
Periodically, we hear about this or that person who called the market top, who predicted a major downturn--or, sometimes, a mutual fund manager who managed to beat the market by some astronomical amount. Last year was no exception: for example, the Encompass Fund was up 122.05% in 2009 according to Morningstar--which, of course, means that its investors would have doubled their money if they'd invested at the start of the year and held on for the next 12 months. The Birmiwal Oasis Fund was up 102.94% last year.
These people are geniuses, right?
Usually not. The simple law of averages says that somebody, somewhere, will have a streak of correct predictions or hold, for a year, maybe two, stocks that dramatically outperform the markets. Certain unsavory people who hung out at race tracks knew how to make money at this game; they would go around the track telling some people that Horse A was going to win the next race, others that Horse B was a shoo-in, and still others to put their money on Horses C, D and E.
Then, if horse D won the race, the unsavory tout would go back to the people for whom he had "correctly" predicted the outcome, and offer to give them more "inside tips" for a generous fee.
To see how the normal patterns of luck can bring about even the most extraordinary results, imagine that instead of managing investment portfolios, we were talking about people who flipped coins in a huge nationwide contest. On Day One of the contest, 300 million people flip their coins, and those whose coin comes up tails are out of the contest. By the law of averages, 150 million (or so) people will be able to play the game on Day Two, and after they flip, the number of contestants will have shrunk to 75 million.
Then come Day Three (37.5 million left), Day Four (18.75 million), Day Five (9.4 million)--and by the end of three weeks, the amateurs have been weeded out, and there are only 144 people left. In newspaper accounts, these are all described as remarkable coin flippers who somehow managed to throw a coin in the air and have it land on heads 21 consecutive times. This is exactly what would be predicted by the law of averages, but now, suddenly, reporters in each city are interviewing their local champion, asking about their "winning techniques." And, of course, the local champions are starting to believe in their own remarkable coin-flipping skills, telling their friends and the press about their wrist movements and the preferred height of the coin toss.
The next day, only 72 of these highly-skilled coin flippers are left, and the following day, just 36, and as the number diminishes, as the number of consecutive flips goes up, the media attention becomes frenzied. Eighteen, then nine, then four finalists are flown to Hollywood for the nationally-televised coin flipping face-off, and all America believes in the skills that allowed these remarkable people to consistently cause a coin to land with the head of the coin facing up.
Finally, two flips later (maybe three), there is a winner--and who can seriously believe that this person managed to get a coin to land on heads 29 or 30 consecutive times without a tremendous amount of coin-flipping skill?
When one or two of the 8,000 mutual funds break dramatically from the pack in any one year, this is no more than what the law of averages would predict. Yet investors flock into these funds, believing in their stellar investment skill. The next time these winning managers confidently flip the coin, it just as likely turns up tails, the performance falls back into the pack, and experts call it "mean reversion," which just means that the luck ran out and the statistics caught up with the process. Investors put their money in too late to catch the first remarkable flip, but just in time to catch the fall, the return to normalcy. It is the oldest trap in the book, and it sucks away millions, perhaps billions, from consumer retirement portfolios.
There ARE excellent fund managers, but you rarely see them break from the pack, and if they do, they will be the first to tell you that there was as much luck as skill involved. Sometimes, a great manager will experience a terrible year, for the same reasons. Investing is a game where you take the luck that is offered you, and inevitably you give something back when the luck runs out. Those investors who are diligent and careful and humble in the face of this reality, who don't chase the hot coin flipper right after a great run, will usually win more often than they lose--because, unlike a casino, the odds in the investment markets have, over most historical periods, tended to favor the patient investor. The markets go up more than they go down, and so you can have more than your share of coin flips going your way with no more skill than the patience to stay invested.
Advisory services offered through Mackey Advisors, LLC, a registered investment advisor.
At Mackey Advisors™ we are always looking for ways to keep our clients educated on what we do and why we do it. I have included this latest piece for your enjoyment.
Thanks,
Andy Pulsfort
Investing Luck vs. Skill
Periodically, we hear about this or that person who called the market top, who predicted a major downturn--or, sometimes, a mutual fund manager who managed to beat the market by some astronomical amount. Last year was no exception: for example, the Encompass Fund was up 122.05% in 2009 according to Morningstar--which, of course, means that its investors would have doubled their money if they'd invested at the start of the year and held on for the next 12 months. The Birmiwal Oasis Fund was up 102.94% last year.
These people are geniuses, right?
Usually not. The simple law of averages says that somebody, somewhere, will have a streak of correct predictions or hold, for a year, maybe two, stocks that dramatically outperform the markets. Certain unsavory people who hung out at race tracks knew how to make money at this game; they would go around the track telling some people that Horse A was going to win the next race, others that Horse B was a shoo-in, and still others to put their money on Horses C, D and E.
Then, if horse D won the race, the unsavory tout would go back to the people for whom he had "correctly" predicted the outcome, and offer to give them more "inside tips" for a generous fee.
To see how the normal patterns of luck can bring about even the most extraordinary results, imagine that instead of managing investment portfolios, we were talking about people who flipped coins in a huge nationwide contest. On Day One of the contest, 300 million people flip their coins, and those whose coin comes up tails are out of the contest. By the law of averages, 150 million (or so) people will be able to play the game on Day Two, and after they flip, the number of contestants will have shrunk to 75 million.
Then come Day Three (37.5 million left), Day Four (18.75 million), Day Five (9.4 million)--and by the end of three weeks, the amateurs have been weeded out, and there are only 144 people left. In newspaper accounts, these are all described as remarkable coin flippers who somehow managed to throw a coin in the air and have it land on heads 21 consecutive times. This is exactly what would be predicted by the law of averages, but now, suddenly, reporters in each city are interviewing their local champion, asking about their "winning techniques." And, of course, the local champions are starting to believe in their own remarkable coin-flipping skills, telling their friends and the press about their wrist movements and the preferred height of the coin toss.
The next day, only 72 of these highly-skilled coin flippers are left, and the following day, just 36, and as the number diminishes, as the number of consecutive flips goes up, the media attention becomes frenzied. Eighteen, then nine, then four finalists are flown to Hollywood for the nationally-televised coin flipping face-off, and all America believes in the skills that allowed these remarkable people to consistently cause a coin to land with the head of the coin facing up.
Finally, two flips later (maybe three), there is a winner--and who can seriously believe that this person managed to get a coin to land on heads 29 or 30 consecutive times without a tremendous amount of coin-flipping skill?
When one or two of the 8,000 mutual funds break dramatically from the pack in any one year, this is no more than what the law of averages would predict. Yet investors flock into these funds, believing in their stellar investment skill. The next time these winning managers confidently flip the coin, it just as likely turns up tails, the performance falls back into the pack, and experts call it "mean reversion," which just means that the luck ran out and the statistics caught up with the process. Investors put their money in too late to catch the first remarkable flip, but just in time to catch the fall, the return to normalcy. It is the oldest trap in the book, and it sucks away millions, perhaps billions, from consumer retirement portfolios.
There ARE excellent fund managers, but you rarely see them break from the pack, and if they do, they will be the first to tell you that there was as much luck as skill involved. Sometimes, a great manager will experience a terrible year, for the same reasons. Investing is a game where you take the luck that is offered you, and inevitably you give something back when the luck runs out. Those investors who are diligent and careful and humble in the face of this reality, who don't chase the hot coin flipper right after a great run, will usually win more often than they lose--because, unlike a casino, the odds in the investment markets have, over most historical periods, tended to favor the patient investor. The markets go up more than they go down, and so you can have more than your share of coin flips going your way with no more skill than the patience to stay invested.
Advisory services offered through Mackey Advisors, LLC, a registered investment advisor.
5 Credit Score Killers
By: Blake Ellis
CNNMoney.com
As banks shy away from making risky consumer loans, a mediocre credit history just won't cut it anymore. To get the best rates on mortgages, credit cards and auto loans, you need a killer score.
Your FICO score is a numerical measure of your creditworthiness that ranges from 300 to 850. While there are a few different credit scoring systems available, it's the FICO score, created by the Fair Isaac Corporation, that most lenders look at when they check your credit.
Lenders have already raised their standards by about 20 to 40 points this year, according to Barry Paperno, consumer operations manager at FICO. So while a score in the 720 to 740 range would have gotten you the best rates on a mortgage in the past, you now need a score of at least 760 to snag the best loans.
"Requirements are higher than in the past so you're going to have to be more diligent this year," said Paperno.
FICO focuses on five categories when calculating your score: How much debt you have, your payment history, your debt utilization ratio (how much you owe in relation to your credit limits), how far back your credit history goes and your mix of various types of credit.
Here are a few things that can wreak havoc on your score and wreck your chances of getting an affordable loan:
1. Making late payments
A single late payment on a credit card or other loan could ding your score by as much as 110 points if you already had a great score and 80 points for someone with an average score. So the best thing you can do to improve your score is make payments on time.
"This continues to be the number one reason scores are lower," said Paperno. "In addition to being a heavily weighted part of your score, if you're late on a payment, it's going to continue to appear on your credit report for about seven years."
If you've made mistakes in the past, you can't change them, but you can outlive them. The longer it's been since you were late on a payment, the less of an impact it will have on your score, but "your history does follow you," said Paperno.
Since payment history accounts for about 35% of your total score, it's really important to start paying on time.
2. Carrying a big balance
Your debt utilization ratio accounts for almost 30% of your score. So carrying too much debt will not only cost you a fortune in interest, it can also destroy your credit rating.
"The best thing to do is pay your bills on time and pay as much of the balance as possible to try to keep your debt utilization ratio down and raise your credit score," said Bill Hardekopf of Lowcards.com.
As part of the CARD Act that went into effect last month, credit card issuers must now include a chart with your bills that shows how long it will take to pay off your balance if you only make the minimum payments. The chart will also display how much you need to pay each billing cycle in order to completely pay off your balance in three years.
Hardekopf thinks the new information will be a huge wake-up call for most consumers, and even he was alarmed by the calculations on his own statement.
"It was shocking," he said. "This is going to have a dramatic effect on how much people are paying when they see it in black and white, and will be a positive move for their credit score."
3. Closing a credit line
As credit card companies jack up interest rates and add inactivity fees to compensate for lost revenues, it's tempting to just close your accounts.
But closing a line of credit could impact your debt to utilization ratio, said Hardekopf.
For example, if you have two credit cards with a limit of $1,000 each and a $400 balance on one card, closing the other account will immediately double your debt to utilization ratio from 20% to 40%.
But the negative effect varies greatly. Closing one card could have a very small impact if you have lots of other high-limit cards.
You can also counteract some of the impact by opening up a new line of credit. But beware: that can also impact your score.
4. Opening a credit line
"When you open a new account, you'll knock some points off your score," said Paperno. "The reason why is that the people who open new accounts tend to be of a higher risk level immediately after opening a new account."
In order to open a new account, a credit card company will need to check your credit, and a typical "hard" inquiry like this will lower your score by about five points, plus the cost of opening a new line of credit typically ranges from five to 15 points.
But the temporary ding only lasts about six months, so if you're in a stable financial situation, the score reduction could be worth it, said Paperno.
"You can look at it as a long-term strategy and go in with the idea that you might lose a few points now but in the long run you might be better off because you'll have more credit available," he said.
5. Defaulting
Defaulting on a loan is the single worst thing you can do for your credit, said Rex Johnson, founder of credit union consulting firm Lending Solutions Consulting. And given the down economy, more people are damaging their credit scores through foreclosures, credit card charge offs and bankruptcies.
A home foreclosure, for example, might dock about 200 points off your score and a short sale could cost you around 80 to 90 points, said Johnson. Declaring bankruptcy could lower a good score of 750 by up to about 250 points, Johnson said.
While most negative information stays on your report for seven years (bankruptcies can stay on for 10 years), it's never too late to start rebuilding your credit.
"People have been hit hard by the economy and those who had really good scores now have scores in the 500s and want to just give up," Johnson said.
But certain good behaviors like making on-time payments, taking out a small loan and paying it off and keeping a low balance, can get your score back up in the mid-600s or low 700s in a little over 2 years, said Johnson.
CNNMoney.com
As banks shy away from making risky consumer loans, a mediocre credit history just won't cut it anymore. To get the best rates on mortgages, credit cards and auto loans, you need a killer score.
Your FICO score is a numerical measure of your creditworthiness that ranges from 300 to 850. While there are a few different credit scoring systems available, it's the FICO score, created by the Fair Isaac Corporation, that most lenders look at when they check your credit.
Lenders have already raised their standards by about 20 to 40 points this year, according to Barry Paperno, consumer operations manager at FICO. So while a score in the 720 to 740 range would have gotten you the best rates on a mortgage in the past, you now need a score of at least 760 to snag the best loans.
"Requirements are higher than in the past so you're going to have to be more diligent this year," said Paperno.
FICO focuses on five categories when calculating your score: How much debt you have, your payment history, your debt utilization ratio (how much you owe in relation to your credit limits), how far back your credit history goes and your mix of various types of credit.
Here are a few things that can wreak havoc on your score and wreck your chances of getting an affordable loan:
1. Making late payments
A single late payment on a credit card or other loan could ding your score by as much as 110 points if you already had a great score and 80 points for someone with an average score. So the best thing you can do to improve your score is make payments on time.
"This continues to be the number one reason scores are lower," said Paperno. "In addition to being a heavily weighted part of your score, if you're late on a payment, it's going to continue to appear on your credit report for about seven years."
If you've made mistakes in the past, you can't change them, but you can outlive them. The longer it's been since you were late on a payment, the less of an impact it will have on your score, but "your history does follow you," said Paperno.
Since payment history accounts for about 35% of your total score, it's really important to start paying on time.
2. Carrying a big balance
Your debt utilization ratio accounts for almost 30% of your score. So carrying too much debt will not only cost you a fortune in interest, it can also destroy your credit rating.
"The best thing to do is pay your bills on time and pay as much of the balance as possible to try to keep your debt utilization ratio down and raise your credit score," said Bill Hardekopf of Lowcards.com.
As part of the CARD Act that went into effect last month, credit card issuers must now include a chart with your bills that shows how long it will take to pay off your balance if you only make the minimum payments. The chart will also display how much you need to pay each billing cycle in order to completely pay off your balance in three years.
Hardekopf thinks the new information will be a huge wake-up call for most consumers, and even he was alarmed by the calculations on his own statement.
"It was shocking," he said. "This is going to have a dramatic effect on how much people are paying when they see it in black and white, and will be a positive move for their credit score."
3. Closing a credit line
As credit card companies jack up interest rates and add inactivity fees to compensate for lost revenues, it's tempting to just close your accounts.
But closing a line of credit could impact your debt to utilization ratio, said Hardekopf.
For example, if you have two credit cards with a limit of $1,000 each and a $400 balance on one card, closing the other account will immediately double your debt to utilization ratio from 20% to 40%.
But the negative effect varies greatly. Closing one card could have a very small impact if you have lots of other high-limit cards.
You can also counteract some of the impact by opening up a new line of credit. But beware: that can also impact your score.
4. Opening a credit line
"When you open a new account, you'll knock some points off your score," said Paperno. "The reason why is that the people who open new accounts tend to be of a higher risk level immediately after opening a new account."
In order to open a new account, a credit card company will need to check your credit, and a typical "hard" inquiry like this will lower your score by about five points, plus the cost of opening a new line of credit typically ranges from five to 15 points.
But the temporary ding only lasts about six months, so if you're in a stable financial situation, the score reduction could be worth it, said Paperno.
"You can look at it as a long-term strategy and go in with the idea that you might lose a few points now but in the long run you might be better off because you'll have more credit available," he said.
5. Defaulting
Defaulting on a loan is the single worst thing you can do for your credit, said Rex Johnson, founder of credit union consulting firm Lending Solutions Consulting. And given the down economy, more people are damaging their credit scores through foreclosures, credit card charge offs and bankruptcies.
A home foreclosure, for example, might dock about 200 points off your score and a short sale could cost you around 80 to 90 points, said Johnson. Declaring bankruptcy could lower a good score of 750 by up to about 250 points, Johnson said.
While most negative information stays on your report for seven years (bankruptcies can stay on for 10 years), it's never too late to start rebuilding your credit.
"People have been hit hard by the economy and those who had really good scores now have scores in the 500s and want to just give up," Johnson said.
But certain good behaviors like making on-time payments, taking out a small loan and paying it off and keeping a low balance, can get your score back up in the mid-600s or low 700s in a little over 2 years, said Johnson.
Tuesday, March 23, 2010
Tax Provisions in the Health Care Act
From the Journal of Accountancy
MARCH 22, 2010
The Patient Protection and Affordable Care Act (H.R. 3590), passed by Congress on Sunday, contains numerous tax provisions.
The Reconciliation Act of 2010 (H.R. 4872), which also passed the House on Sunday, contains many other tax items, including extending the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year and codifying the economic substance doctrine. The reconciliation bill has not yet passed the Senate.
Among the many tax provisions in the Patient Protection and Affordable Care Act are the following:
Premium Assistance Credit
The act provides for refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange (which each state is required to establish under section 1311 of the act). Under new IRS § 36B, an eligible individual will enroll in a plan offered through an exchange and report his or her income to the exchange. Based on the information provided to the exchange and his or her income, the individual will receive a premium assistance credit. Treasury will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual will then pay to the plan in which he or she is enrolled the dollar difference between the premium tax credit amount and the total premium charged for the plan.
Eligibility for the premium assistance credit is based on the individual’s income for the tax year ending two years prior to the enrollment period. The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level (for the family size involved) who do not received health insurance through an employer or a spouse’s employer. The credit amount is determined by the Secretary of Health and Human Services, based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of federal poverty level for the family size involved to 9.5% of income for those at 400% of federal poverty level for the family size involved.
The premium assistance credit will be available for years ending after Dec. 31, 2013.
Small Business Tax Credit
The act provides tax credits for small businesses and individuals designed to increase levels of health insurance coverage, as part of the IRC § 38 general business credit. Small businesses—defined as businesses with 25 or fewer employees and average annual wages of less than $40,000—would be eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of their employees for insurance premiums (new IRC § 45R). Tax-exempt organizations would get a 35% credit against payroll taxes.
Employers with 10 or fewer employees and average wages of less than $20,000 would get 100% of the credit; it would be phased out, up to the 25-employee limit. The $20,000 average annual wages figure will be indexed for inflation after 2013. Five-percent owners under the section 416 top-heavy plan rules and 2% S corporation shareholders are not included in the definition of employee, but leased employees are counted.
This credit is available for tax years beginning after Dec. 31, 2009.
Excise Tax on Uninsured Individuals
The act creates new IRC § 5000A, which requires U.S. citizens and legal residents to maintain minimum amounts of health insurance coverage. Minimum essential coverage includes various government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans and other coverage as recognized by the Secretary of Health and Human Services in coordination with the Secretary of the Treasury. This requirement would not apply to individuals who are incarcerated, not legally present in the United States or maintain religious exemptions.
Individuals who fail to maintain minimum essential coverage will be subject to a penalty equal to $750. The fee for an uninsured individual under age 18 is one-half of the adult fee. The total household penalty may not exceed 300% of the per-adult penalty.
The penalty amount will be phased in over the years 2014–2016 and will be indexed for inflation after 2016. However, liens and seizures are not authorized to enforce this penalty, and noncompliance will not be subject to criminal penalties.
This provision is effective for tax years beginning after Dec. 31, 2013. The reconciliation bill if enacted would change the amount of the penalty.
Tax-Exempt Health Insurers
The act provides for a program administered by the Department of Health and Human Services that will foster the creation of qualified nonprofit health insurance issuers to offer health insurance. Insurers receiving federal grants or loans under the program would be exempt from federal tax (under IRC § 501(a)) for periods when the insurer complies with the terms of the program.
Reporting Requirements
The act requires insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year to report certain health insurance coverage information to both the covered individual and to the IRS (new IRC § 6055).
The information required to be reported includes: (1) the name, address, and taxpayer identification number of the primary insured, and the name and taxpayer identification number of each other individual obtaining coverage under the policy; (2) the dates during which the individual was covered under the policy during the calendar year; (3) whether the coverage is a qualified health plan offered through an exchange; (4) the amount of any premium tax credit or cost-sharing reduction received by the individual with respect to such coverage; and (5) such other information as the Secretary may require.
This requirement is effective for calendar years beginning after 2013.
Medical Care Itemized Deduction Threshold
The threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for tax years beginning after Dec. 31, 2012, except that for 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.
Cafeteria Plans
The act makes premiums for coverage under a qualified health plan offered through an exchange a qualified benefit under a cafeteria plan. This provision applies only to cafeteria plans established by a small employer that elects to make all its full-time employees eligible for one or more qualified plans offered in the small group market through an exchange.
This provision is effective for tax years beginning after Dec. 31, 2013.
Additional Hospital Insurance Tax on High-Income Taxpayers
Under the act, the employee portion of the hospital insurance tax part of FICA, currently amounting to 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.
The provision applies to remuneration received and tax years beginning after Dec. 31, 2012.
Employer Responsibility
Under new IRC § 4980H, an “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.
An employer is an applicable large employer with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year.
An applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees. The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.
An applicable large employer who offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan is subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.
This provision is effective for months beginning after Dec. 31, 2013.
Fees on Health Plans
Under new section 4375, a fee is imposed on each specified health insurance policy. The fee is equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the policy. The issuer of the policy is liable for payment of the fee.
For any policy year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (A) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (B) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year.
The issuer of the policy is liable for payment of the fee.
In the case of an applicable self-insured health plan, new IRC § 4376 imposes a fee equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the plan. For any policy year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (A) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (B) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year. The plan sponsor is liable for payment of the fee.
The fee is effective with respect to policies and plans for portions of policy or plan years beginning on or after Oct. 1, 2012.
Excise Tax on High-Cost Employer Plans
New IRC § 4980I imposes an excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse and any other primary insured individual) exceeds a threshold amount. The tax is equal to 40% of the aggregate value that exceeds the threshold amount. For 2018, the threshold amount is $10,200 for individual coverage and $27,500 for family coverage, multiplied by the health cost adjustment percentage (as defined in the act) and increased by the age and gender adjusted excess premium amount (as defined in the act).
The provision is effective for tax years beginning after Dec. 31, 2017.
Tax on HSA Distributions
The additional tax on distributions from a health savings account (HSA) or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount, effective for disbursements made during tax years starting after Dec. 31, 2010.
Tax on Indoor Tanning Services
The act imposes a 10% tax on amounts paid for indoor tanning services (new IRC § 5000B). Like a sales tax, the tax will be collected from the person tanning when payment for the tanning services is made. The provision applies to services performed on or after July 1, 2010.
Flexible Spending Account
The act mandates that the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee, under a health flexible spending account for a plan year (or other 12-month coverage period) must not exceed $2,500. The provision is effective for tax years beginning after Dec. 31, 2012.
SIMPLE Cafeteria Plans for Small Business
The act establishes a SIMPLE cafeteria plan for small businesses. Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self insured medical expense reimbursement plan, and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.
The provision is effective for tax years beginning after Dec. 31, 2010.
Expansion of Adoption Credit, Adoption Assistance Programs
For 2010, the maximum adoption credit is increased to $13,170 per eligible child (a $1,000 increase). This increase applies to both non-special needs adoptions and special needs adoptions. Also, the adoption credit is made refundable. The new dollar limit and phase-out of the adoption credit are adjusted for inflation in tax years beginning after Dec. 31, 2010. Also, the scheduled sunset of EGTRRA provisions relating to the adoption credit is delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).
For adoption assistance programs, the maximum exclusion is increased to $13,170 per eligible child (a $1,000 increase). The new dollar limit and income limitations of the employer-provided adoption assistance exclusion are adjusted for inflation in tax years beginning after Dec. 31, 2010. The EGTRRA sunset of provisions relating to adoption assistance programs is also delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).
Charitable Hospitals
The act establishes new requirements applicable to section 501(c)(3) hospitals, regarding conducting a community health needs assessment, adopting a written financial assistance policy, limitations on charges, and collection activities.
Information Reporting
The act requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer, effective for tax years beginning after Dec. 31, 2010.
The act requires businesses to file an information return (e.g., a Form 1099) for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). The provision is effective for payments made after Dec. 31, 2011.
Return Information Disclosure
The act allows the IRS, upon written request of the Secretary of Health and Human Services, to disclose certain taxpayer return information if the taxpayer’s income is relevant in determining the amount of the tax credit or cost-sharing reduction, or eligibility for participation in the specified state health subsidy programs.
Upon written request from the Commissioner of Social Security, the IRS may disclose the certain limited return information of a taxpayer whose Medicare Part D premium subsidy, according to the records of the Secretary, may be subject to adjustment.
MARCH 22, 2010
The Patient Protection and Affordable Care Act (H.R. 3590), passed by Congress on Sunday, contains numerous tax provisions.
The Reconciliation Act of 2010 (H.R. 4872), which also passed the House on Sunday, contains many other tax items, including extending the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year and codifying the economic substance doctrine. The reconciliation bill has not yet passed the Senate.
Among the many tax provisions in the Patient Protection and Affordable Care Act are the following:
Premium Assistance Credit
The act provides for refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange (which each state is required to establish under section 1311 of the act). Under new IRS § 36B, an eligible individual will enroll in a plan offered through an exchange and report his or her income to the exchange. Based on the information provided to the exchange and his or her income, the individual will receive a premium assistance credit. Treasury will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual will then pay to the plan in which he or she is enrolled the dollar difference between the premium tax credit amount and the total premium charged for the plan.
Eligibility for the premium assistance credit is based on the individual’s income for the tax year ending two years prior to the enrollment period. The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level (for the family size involved) who do not received health insurance through an employer or a spouse’s employer. The credit amount is determined by the Secretary of Health and Human Services, based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of federal poverty level for the family size involved to 9.5% of income for those at 400% of federal poverty level for the family size involved.
The premium assistance credit will be available for years ending after Dec. 31, 2013.
Small Business Tax Credit
The act provides tax credits for small businesses and individuals designed to increase levels of health insurance coverage, as part of the IRC § 38 general business credit. Small businesses—defined as businesses with 25 or fewer employees and average annual wages of less than $40,000—would be eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of their employees for insurance premiums (new IRC § 45R). Tax-exempt organizations would get a 35% credit against payroll taxes.
Employers with 10 or fewer employees and average wages of less than $20,000 would get 100% of the credit; it would be phased out, up to the 25-employee limit. The $20,000 average annual wages figure will be indexed for inflation after 2013. Five-percent owners under the section 416 top-heavy plan rules and 2% S corporation shareholders are not included in the definition of employee, but leased employees are counted.
This credit is available for tax years beginning after Dec. 31, 2009.
Excise Tax on Uninsured Individuals
The act creates new IRC § 5000A, which requires U.S. citizens and legal residents to maintain minimum amounts of health insurance coverage. Minimum essential coverage includes various government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans and other coverage as recognized by the Secretary of Health and Human Services in coordination with the Secretary of the Treasury. This requirement would not apply to individuals who are incarcerated, not legally present in the United States or maintain religious exemptions.
Individuals who fail to maintain minimum essential coverage will be subject to a penalty equal to $750. The fee for an uninsured individual under age 18 is one-half of the adult fee. The total household penalty may not exceed 300% of the per-adult penalty.
The penalty amount will be phased in over the years 2014–2016 and will be indexed for inflation after 2016. However, liens and seizures are not authorized to enforce this penalty, and noncompliance will not be subject to criminal penalties.
This provision is effective for tax years beginning after Dec. 31, 2013. The reconciliation bill if enacted would change the amount of the penalty.
Tax-Exempt Health Insurers
The act provides for a program administered by the Department of Health and Human Services that will foster the creation of qualified nonprofit health insurance issuers to offer health insurance. Insurers receiving federal grants or loans under the program would be exempt from federal tax (under IRC § 501(a)) for periods when the insurer complies with the terms of the program.
Reporting Requirements
The act requires insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year to report certain health insurance coverage information to both the covered individual and to the IRS (new IRC § 6055).
The information required to be reported includes: (1) the name, address, and taxpayer identification number of the primary insured, and the name and taxpayer identification number of each other individual obtaining coverage under the policy; (2) the dates during which the individual was covered under the policy during the calendar year; (3) whether the coverage is a qualified health plan offered through an exchange; (4) the amount of any premium tax credit or cost-sharing reduction received by the individual with respect to such coverage; and (5) such other information as the Secretary may require.
This requirement is effective for calendar years beginning after 2013.
Medical Care Itemized Deduction Threshold
The threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for tax years beginning after Dec. 31, 2012, except that for 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.
Cafeteria Plans
The act makes premiums for coverage under a qualified health plan offered through an exchange a qualified benefit under a cafeteria plan. This provision applies only to cafeteria plans established by a small employer that elects to make all its full-time employees eligible for one or more qualified plans offered in the small group market through an exchange.
This provision is effective for tax years beginning after Dec. 31, 2013.
Additional Hospital Insurance Tax on High-Income Taxpayers
Under the act, the employee portion of the hospital insurance tax part of FICA, currently amounting to 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.
The provision applies to remuneration received and tax years beginning after Dec. 31, 2012.
Employer Responsibility
Under new IRC § 4980H, an “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.
An employer is an applicable large employer with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year.
An applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees. The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.
An applicable large employer who offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan is subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.
This provision is effective for months beginning after Dec. 31, 2013.
Fees on Health Plans
Under new section 4375, a fee is imposed on each specified health insurance policy. The fee is equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the policy. The issuer of the policy is liable for payment of the fee.
For any policy year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (A) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (B) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year.
The issuer of the policy is liable for payment of the fee.
In the case of an applicable self-insured health plan, new IRC § 4376 imposes a fee equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the plan. For any policy year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (A) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (B) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year. The plan sponsor is liable for payment of the fee.
The fee is effective with respect to policies and plans for portions of policy or plan years beginning on or after Oct. 1, 2012.
Excise Tax on High-Cost Employer Plans
New IRC § 4980I imposes an excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse and any other primary insured individual) exceeds a threshold amount. The tax is equal to 40% of the aggregate value that exceeds the threshold amount. For 2018, the threshold amount is $10,200 for individual coverage and $27,500 for family coverage, multiplied by the health cost adjustment percentage (as defined in the act) and increased by the age and gender adjusted excess premium amount (as defined in the act).
The provision is effective for tax years beginning after Dec. 31, 2017.
Tax on HSA Distributions
The additional tax on distributions from a health savings account (HSA) or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount, effective for disbursements made during tax years starting after Dec. 31, 2010.
Tax on Indoor Tanning Services
The act imposes a 10% tax on amounts paid for indoor tanning services (new IRC § 5000B). Like a sales tax, the tax will be collected from the person tanning when payment for the tanning services is made. The provision applies to services performed on or after July 1, 2010.
Flexible Spending Account
The act mandates that the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee, under a health flexible spending account for a plan year (or other 12-month coverage period) must not exceed $2,500. The provision is effective for tax years beginning after Dec. 31, 2012.
SIMPLE Cafeteria Plans for Small Business
The act establishes a SIMPLE cafeteria plan for small businesses. Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self insured medical expense reimbursement plan, and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.
The provision is effective for tax years beginning after Dec. 31, 2010.
Expansion of Adoption Credit, Adoption Assistance Programs
For 2010, the maximum adoption credit is increased to $13,170 per eligible child (a $1,000 increase). This increase applies to both non-special needs adoptions and special needs adoptions. Also, the adoption credit is made refundable. The new dollar limit and phase-out of the adoption credit are adjusted for inflation in tax years beginning after Dec. 31, 2010. Also, the scheduled sunset of EGTRRA provisions relating to the adoption credit is delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).
For adoption assistance programs, the maximum exclusion is increased to $13,170 per eligible child (a $1,000 increase). The new dollar limit and income limitations of the employer-provided adoption assistance exclusion are adjusted for inflation in tax years beginning after Dec. 31, 2010. The EGTRRA sunset of provisions relating to adoption assistance programs is also delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).
Charitable Hospitals
The act establishes new requirements applicable to section 501(c)(3) hospitals, regarding conducting a community health needs assessment, adopting a written financial assistance policy, limitations on charges, and collection activities.
Information Reporting
The act requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer, effective for tax years beginning after Dec. 31, 2010.
The act requires businesses to file an information return (e.g., a Form 1099) for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). The provision is effective for payments made after Dec. 31, 2011.
Return Information Disclosure
The act allows the IRS, upon written request of the Secretary of Health and Human Services, to disclose certain taxpayer return information if the taxpayer’s income is relevant in determining the amount of the tax credit or cost-sharing reduction, or eligibility for participation in the specified state health subsidy programs.
Upon written request from the Commissioner of Social Security, the IRS may disclose the certain limited return information of a taxpayer whose Medicare Part D premium subsidy, according to the records of the Secretary, may be subject to adjustment.
Monday, March 22, 2010
Yes, finally Health Care Reform
I have worked with many people over the years who are stiffled in their life by health care. They are stuck in jobs they dislike becuase of access to health care. They continue in jobs when they would rather own their own businesses because of the cost of health care. They tetter on the edge of bankruptcy becuase of an unexpected illness.
Don't misunderstand me. I believe we need to spend more time teaching people how to stay well, by eating whole foods, preferably locally grown, cooking their meals, getting adequate exercise, staying away from cigarettes and excessive alcohol. We all have a responsiblity to our own health.
There are times when through no action of our own we fall ill. That is what insurance is all about, taking care of us when we are victims of an unexpected event. We also have a responsibility to each other. I am pleased we have finally gathered the political will to take action toward health care for all.
Don't misunderstand me. I believe we need to spend more time teaching people how to stay well, by eating whole foods, preferably locally grown, cooking their meals, getting adequate exercise, staying away from cigarettes and excessive alcohol. We all have a responsiblity to our own health.
There are times when through no action of our own we fall ill. That is what insurance is all about, taking care of us when we are victims of an unexpected event. We also have a responsibility to each other. I am pleased we have finally gathered the political will to take action toward health care for all.
Tuesday, March 16, 2010
Ecocommerce
I saw this article (credit noted) and found the idea of ecocommerce exciting. We all benefit when resources are used sustainably. How do we design a economic system that supports sustainabiliyt?
The Next-Generation Ecoservice Market
Today’s ecoservice markets
By Tim Gieseke
Seventy-five years ago, the U.S. Department of Agriculture (USDA) placed value on soil resources with the creation of the Soil Conservation Service, now known as the USDA Natural Resources Conservation Service (NRCS), creating incentive programs to encourage producers to conserve soil.
Several decades later, the U.S. Environmental Protection Agency implemented a regulatory approach to resource conservation.
Both efforts succeeded to a point. However, their shortcomings have initiated ecoservice markets.
After a decade of progress, ecoservice markets seemed to backslide in 2009. Relatively few of the nearly 80 water quality credit markets in the United States have generated viable trades and function as true market systems.
Sequestered carbon credits are worth about a dime per ton on the Chicago Climate Exchange, and the cap-and-trade system to address climate change is losing support. U.S. House Agriculture Committee Chairman Collin Peterson, who played a major role securing rural lawmakers’ support for cap-and-trade legislation last summer, said in early January 2010 he would vote “no” if a similar bill returned to the House for final passage.
From a producer’s perspective, for the most part, these markets have not been a legitimate business opportunity, relative to the traditional commodity markets. The lack of legitimacy is not just due to fluctuating or low prices, but is related to a lack of market organization.
Illusive ecoservices
We define ecoservices as public goods generated by conservative land management: practices yielding fertile soil, clean water, wildlife habitat and carbon and nutrient sequestration. Those striving to encourage these markets find it difficult to identify buyers and sellers and place a price tag on those items.
Imagine trying to sell the corn produced in a 40-acre field without the ability to measure volume or weight. Creating a market for soil stewardship, clean water, habitats and other ecoservices faces a similar challenge. Further complicating the situation, beneficiaries are not a specific processing plant or farm operation, but society as a whole, which benefits from a healthy ecosystem. And, don’t forget agribusiness, which relies on enduring soil productivity.
After decades of developing natural resource monitoring methods that prove marginally successful, we might conclude direct measurement of non-point source pollution, and most ecoservice quantities and sources, is not only difficult, but likely impossible.
Because proponents designed most existing ecoservice markets from the perspectives of policymakers and ecoservice buyers, the markets’ frameworks tend to serve their self-interests. They describe an ecoservice demand “package” that meets their accounting and oversight needs, and trades ensue. However, the discussion of ecoservice supply and demand interaction is absent.
Organizing an ecocommerce structure
The next-generation ecoservice market must allow producers to take advantage of the multiple benefits of a singular conservation practice, recognizing the many benefits to society. And, the ecoservices must be placed within the context of the landscape.
Both market attributes can be created by using agro-ecological indices that measure the immeasurable. The USDA NRCS, universities and institutions across the nation have developed and implemented agro-ecological indices for the purpose of quantifying ecoservices. These include the soil conditioning index, habitat suitability index and various methods to score water quality.
Ecoservice portfolios and their values become the ecocommerce process as described in EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy.
Graphic courtesy of Gieseke.
For someone not versed in the language of indices, these measurements may seem daunting. Most or all of the agro-ecological indices have been developed independently of each other, and the language describing them today is more like the “Tower of Babel,” rather than a common language.
In the future, ecocommerce indices could be created using similar indices, but with a coordinated effort and standardized units. This language can then develop landscape intelligence as it pertains to management of watersheds and biofuel sheds, and it could provide the foundation for a sustainability index, such as what is now proposed by Walmart.
According to Walmart’s Web site, the company developed a sustainability index initiative in order to meet customers’ requests for more efficient, longer-lasting, higher-performance products. The company’s goal is to create a more transparent supply chain, driving product innovation and providing customers with information to assess products’ sustainability, the site says.
Because the value of ecosystem services is generated by resource management outcomes, rather than the cost of conservation practices, a role reversal occurs. Farmers become the conservation supplier for ecoservice demands, rather than the conservation customer for government programs.
Imagine a farmer sitting down to evaluate his production plan for the year. He considers the price of traditional agricultural commodities and how to produce these in certain quantities.
Now, add a value for soil conditioning, water quality, habitat and carbon sequestration indices.
For example, what if a water quality score of 80 meets the criteria for multiple beneficiaries? It may meet the objectives of a USDA incentive program, and/or an EPA Total Maximum Daily Load regulatory assurance requirement. It also may provide market access via Walmart’s sustainability index, generate a tax rebate from the local watershed district, or become an eligibility requirement to engage in a water quality trading program for a wastewater treatment plant.
A compilation of these resource indices becomes the farm’s ecoservice portfolio that can be recalculated yearly.
These ecoservice portfolios and their values, applied by public and private stakeholders, become the ecocommerce process as described in EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy.
The ecoccommerce process is significant, because it is more than a compilation or organization of ecoservice markets. It also provides the framework to build an ecological intelligence system, allowing the public arena of commerce to define sustainability.
Jerry Hatfield, Director, National Laboratory for Agriculture and the Environment, wrote in the EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy foreword, "… this [intellectual framework] is a unique feature because what has been lacking in the discussions of ecosystems or their monetary value has been a framework from which the value could be evaluated.”
He also says EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy will be a valuable tool to understanding the emergence of this ecoservice economy, especially to policymakers and traders who will serve as the driving force for the development of policies related to ecosystem services.
To learn more about this book, visit www.ecocommerce.us.com.
About the Writer: Tim Gieseke farms part-time in southern Minnesota and through Ag Resource Strategies, LLC provides agro-environmental assessment services. His book is titled, EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy and is scheduled for release in May 2010.
The Next-Generation Ecoservice Market
Today’s ecoservice markets
By Tim Gieseke
Seventy-five years ago, the U.S. Department of Agriculture (USDA) placed value on soil resources with the creation of the Soil Conservation Service, now known as the USDA Natural Resources Conservation Service (NRCS), creating incentive programs to encourage producers to conserve soil.
Several decades later, the U.S. Environmental Protection Agency implemented a regulatory approach to resource conservation.
Both efforts succeeded to a point. However, their shortcomings have initiated ecoservice markets.
After a decade of progress, ecoservice markets seemed to backslide in 2009. Relatively few of the nearly 80 water quality credit markets in the United States have generated viable trades and function as true market systems.
Sequestered carbon credits are worth about a dime per ton on the Chicago Climate Exchange, and the cap-and-trade system to address climate change is losing support. U.S. House Agriculture Committee Chairman Collin Peterson, who played a major role securing rural lawmakers’ support for cap-and-trade legislation last summer, said in early January 2010 he would vote “no” if a similar bill returned to the House for final passage.
From a producer’s perspective, for the most part, these markets have not been a legitimate business opportunity, relative to the traditional commodity markets. The lack of legitimacy is not just due to fluctuating or low prices, but is related to a lack of market organization.
Illusive ecoservices
We define ecoservices as public goods generated by conservative land management: practices yielding fertile soil, clean water, wildlife habitat and carbon and nutrient sequestration. Those striving to encourage these markets find it difficult to identify buyers and sellers and place a price tag on those items.
Imagine trying to sell the corn produced in a 40-acre field without the ability to measure volume or weight. Creating a market for soil stewardship, clean water, habitats and other ecoservices faces a similar challenge. Further complicating the situation, beneficiaries are not a specific processing plant or farm operation, but society as a whole, which benefits from a healthy ecosystem. And, don’t forget agribusiness, which relies on enduring soil productivity.
After decades of developing natural resource monitoring methods that prove marginally successful, we might conclude direct measurement of non-point source pollution, and most ecoservice quantities and sources, is not only difficult, but likely impossible.
Because proponents designed most existing ecoservice markets from the perspectives of policymakers and ecoservice buyers, the markets’ frameworks tend to serve their self-interests. They describe an ecoservice demand “package” that meets their accounting and oversight needs, and trades ensue. However, the discussion of ecoservice supply and demand interaction is absent.
Organizing an ecocommerce structure
The next-generation ecoservice market must allow producers to take advantage of the multiple benefits of a singular conservation practice, recognizing the many benefits to society. And, the ecoservices must be placed within the context of the landscape.
Both market attributes can be created by using agro-ecological indices that measure the immeasurable. The USDA NRCS, universities and institutions across the nation have developed and implemented agro-ecological indices for the purpose of quantifying ecoservices. These include the soil conditioning index, habitat suitability index and various methods to score water quality.
Ecoservice portfolios and their values become the ecocommerce process as described in EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy.
Graphic courtesy of Gieseke.
For someone not versed in the language of indices, these measurements may seem daunting. Most or all of the agro-ecological indices have been developed independently of each other, and the language describing them today is more like the “Tower of Babel,” rather than a common language.
In the future, ecocommerce indices could be created using similar indices, but with a coordinated effort and standardized units. This language can then develop landscape intelligence as it pertains to management of watersheds and biofuel sheds, and it could provide the foundation for a sustainability index, such as what is now proposed by Walmart.
According to Walmart’s Web site, the company developed a sustainability index initiative in order to meet customers’ requests for more efficient, longer-lasting, higher-performance products. The company’s goal is to create a more transparent supply chain, driving product innovation and providing customers with information to assess products’ sustainability, the site says.
Because the value of ecosystem services is generated by resource management outcomes, rather than the cost of conservation practices, a role reversal occurs. Farmers become the conservation supplier for ecoservice demands, rather than the conservation customer for government programs.
Imagine a farmer sitting down to evaluate his production plan for the year. He considers the price of traditional agricultural commodities and how to produce these in certain quantities.
Now, add a value for soil conditioning, water quality, habitat and carbon sequestration indices.
For example, what if a water quality score of 80 meets the criteria for multiple beneficiaries? It may meet the objectives of a USDA incentive program, and/or an EPA Total Maximum Daily Load regulatory assurance requirement. It also may provide market access via Walmart’s sustainability index, generate a tax rebate from the local watershed district, or become an eligibility requirement to engage in a water quality trading program for a wastewater treatment plant.
A compilation of these resource indices becomes the farm’s ecoservice portfolio that can be recalculated yearly.
These ecoservice portfolios and their values, applied by public and private stakeholders, become the ecocommerce process as described in EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy.
The ecoccommerce process is significant, because it is more than a compilation or organization of ecoservice markets. It also provides the framework to build an ecological intelligence system, allowing the public arena of commerce to define sustainability.
Jerry Hatfield, Director, National Laboratory for Agriculture and the Environment, wrote in the EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy foreword, "… this [intellectual framework] is a unique feature because what has been lacking in the discussions of ecosystems or their monetary value has been a framework from which the value could be evaluated.”
He also says EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy will be a valuable tool to understanding the emergence of this ecoservice economy, especially to policymakers and traders who will serve as the driving force for the development of policies related to ecosystem services.
To learn more about this book, visit www.ecocommerce.us.com.
About the Writer: Tim Gieseke farms part-time in southern Minnesota and through Ag Resource Strategies, LLC provides agro-environmental assessment services. His book is titled, EcoCommerce 101: The Emergence of an Invisible Hand to Sustain the Bio-Economy and is scheduled for release in May 2010.
Thursday, March 11, 2010
Go Green: The 4 Day Work Week
Being a worker bee myself the idea of a 4 day work week makes me giddy, but for upper level management and senior staff it probably makes their stomach churn. After doing quite a bit of research I believe this idea will be the future of the American working landscape because of the benefits it offers to not only the employees, but the company and Mother Nature.
The traditional 5 day 8 hour work week was instituted by the Fair Labor Standards Act passed in 1938. 70 years ago this was a vast improvement for the many Americans who worked 10 plus hours and 6 days a week. In a time when change now comes daily how is it that this is a model that has endured? Innovation has become a must in today’s working environment, and Utah just might be the innovators we all need to change our reality from living to work to working to live.
In 2008 the state of Utah implemented a 4 day work week for it’s 17,000 state employees. Utah state workers now work 10 hour shifts 4 days a week, which has cut energy use by 13% and saved employees as much as $6 million in gas cost. The state is estimating it will cut green house gas emissions by more than 12,000 metric tons a year. In 2006 the United States green house gas emissions were 7,181.4 million metric tons. Comparing the two numbers makes 12,000 look like small potatoes, but if a 4 day work week was implemented on a national scale just imagine the impact we can have on the planet. The force behind this mandate was to reduce energy costs for the state, but the extra incentives are what will keep the initiative trucking along.
The benefits of a 4 day work week for companies and employees go hand in hand. With the implementation of a 4 day work week comes a sharper focus and more productive workplace. In 2007 salary.com did a survey and concluded the average employee spends 2 work hours a day surfing the internet or interacting with friends. That is your 5th work day, so why not just cut it out all together? With more personal time employees might not feel the need to create personal time on the clock. In 1930 W.K. Kellog decreased his companies work week from 40 hours to 30, and had this to say about it, “The efficiency and morale of our employees is so increased, the accident and insurance rates are so improved, and the unit cost of production is so lowered that we can afford to pay as much for six hours as we formerly paid for eight.”
Happy employees are efficient employees and study after study has proven this. With an extra personal day a week employees are less distracted by tasks they need to get done at home, play “hooky” less, and need less time off during working hours for doctor’s appointments and the like.
The last benefit I would like to point out is the benefit to your customers. The state of Utah saw an unexpected benefit to the 4 day work week. Having longer office hours 4 days a week made Utah’s government offices more accessible to people who in the past had to miss work to get there in time.
4 day work weeks might not be something every workplace in America will be able to implement, or implement right away. But with advances in technology and mobilization soon many companies will not even need a physical office and will move to a virtual one. 4 day work weeks or less in office work time creates healthy employees, a healthy bottom line and a healthy earth.
By Gracie Mohr
Sources:
http://www.time.com/time/magazine/article/0,9171,1919162,00.html
http://www.groovygreen.com/groove/?p=2223
The traditional 5 day 8 hour work week was instituted by the Fair Labor Standards Act passed in 1938. 70 years ago this was a vast improvement for the many Americans who worked 10 plus hours and 6 days a week. In a time when change now comes daily how is it that this is a model that has endured? Innovation has become a must in today’s working environment, and Utah just might be the innovators we all need to change our reality from living to work to working to live.
In 2008 the state of Utah implemented a 4 day work week for it’s 17,000 state employees. Utah state workers now work 10 hour shifts 4 days a week, which has cut energy use by 13% and saved employees as much as $6 million in gas cost. The state is estimating it will cut green house gas emissions by more than 12,000 metric tons a year. In 2006 the United States green house gas emissions were 7,181.4 million metric tons. Comparing the two numbers makes 12,000 look like small potatoes, but if a 4 day work week was implemented on a national scale just imagine the impact we can have on the planet. The force behind this mandate was to reduce energy costs for the state, but the extra incentives are what will keep the initiative trucking along.
The benefits of a 4 day work week for companies and employees go hand in hand. With the implementation of a 4 day work week comes a sharper focus and more productive workplace. In 2007 salary.com did a survey and concluded the average employee spends 2 work hours a day surfing the internet or interacting with friends. That is your 5th work day, so why not just cut it out all together? With more personal time employees might not feel the need to create personal time on the clock. In 1930 W.K. Kellog decreased his companies work week from 40 hours to 30, and had this to say about it, “The efficiency and morale of our employees is so increased, the accident and insurance rates are so improved, and the unit cost of production is so lowered that we can afford to pay as much for six hours as we formerly paid for eight.”
Happy employees are efficient employees and study after study has proven this. With an extra personal day a week employees are less distracted by tasks they need to get done at home, play “hooky” less, and need less time off during working hours for doctor’s appointments and the like.
The last benefit I would like to point out is the benefit to your customers. The state of Utah saw an unexpected benefit to the 4 day work week. Having longer office hours 4 days a week made Utah’s government offices more accessible to people who in the past had to miss work to get there in time.
4 day work weeks might not be something every workplace in America will be able to implement, or implement right away. But with advances in technology and mobilization soon many companies will not even need a physical office and will move to a virtual one. 4 day work weeks or less in office work time creates healthy employees, a healthy bottom line and a healthy earth.
By Gracie Mohr
Sources:
http://www.time.com/time/magazine/article/0,9171,1919162,00.html
http://www.groovygreen.com/groove/?p=2223
Will March bring the Luck of the Irish?
This week marked the 1 year anniversary of the current bull market. In the 13 bull markets experienced since 1930 that have lasted a year, return averaged 153% and total length averaged 4.4 years.
According to these statistics, the market has 54% more to go over the next 3+ years. This is one case where no one will complain should history choose to repeat itself! Happy investing.
Wills: The Cornerstone of Your Estate Plan
Alright, I admit I went to the archives for this one. What can I say, its tax season and everyone is a bit busy around here. I hope you don’t mind my knocking the dust off of this ever so important issue of estate planning.
During this month of St Patrick’s Day, I have taken a few minutes to reflect upon the vast changes that have occurred in how we view, accept, and move on after death. For many years, and even still today in some Irish villages, death was viewed as a new beginning for the unfortunate sole it had come to take. When reading old newspaper clips from Ireland, death often came in some dramatic fashion; a fall from the roof top, a trampling of a farm animal, or often in the midst of a jig and a good pint at the local pub.
A few days later, the entire town would parade through the village, following the deceased, wailing all the way to the final resting place. Within an hour of the burial everyone was back at the pub toasting and remembering Uncle Liam whether he really deserved it or not. They celebrated the grand afterlife, cherished the thought of the old bloke watching over them, and the family inherited what was rightfully theirs within days and moved on. Things are needless to say, much different now.
Today, if you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them.
Wills avoid intestacy and distribute property according to your wishes
Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms that may not be what you would have wanted. Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose.
Wills allow you to nominate a guardian for your minor children
In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.
Wills specify how to pay estate taxes and can help minimize taxes
The way in which estate taxes and other expenses are paid can be directed by your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.
A will also gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.
There are many other advantages to having a will, and even more should one choose to complete the package with living wills and health care directives. These additions will protect your rights and desires should you ever become incapacitated or unable to communicate. So while things are much different today than they were years ago on the “Isle of Green” there is still much we can do to keep our legacy prosperous and easy to administer. So this March, take a few minutes to get your affairs in order. I for one like to imagine my heirs and well wishers toasting the night away at my wake then mired by taxes, intestacy, and family strife. The traditional lyrics below bring to mind the contentment one with only a will could have. Happy St. Patrick’s Day!
Oh all the money that e'er I had, I spent it in good company
And all the harm that e'er I've done, alas, it was to none but me
And all I've done for want of wit to memory now I can't recall
So fill to me the parting glass, good night and joy be with you all
~Traditional Irish Tune
by Andy Pulsfort
According to these statistics, the market has 54% more to go over the next 3+ years. This is one case where no one will complain should history choose to repeat itself! Happy investing.
Wills: The Cornerstone of Your Estate Plan
Alright, I admit I went to the archives for this one. What can I say, its tax season and everyone is a bit busy around here. I hope you don’t mind my knocking the dust off of this ever so important issue of estate planning.
During this month of St Patrick’s Day, I have taken a few minutes to reflect upon the vast changes that have occurred in how we view, accept, and move on after death. For many years, and even still today in some Irish villages, death was viewed as a new beginning for the unfortunate sole it had come to take. When reading old newspaper clips from Ireland, death often came in some dramatic fashion; a fall from the roof top, a trampling of a farm animal, or often in the midst of a jig and a good pint at the local pub.
A few days later, the entire town would parade through the village, following the deceased, wailing all the way to the final resting place. Within an hour of the burial everyone was back at the pub toasting and remembering Uncle Liam whether he really deserved it or not. They celebrated the grand afterlife, cherished the thought of the old bloke watching over them, and the family inherited what was rightfully theirs within days and moved on. Things are needless to say, much different now.
Today, if you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them.
Wills avoid intestacy and distribute property according to your wishes
Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms that may not be what you would have wanted. Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose.
Wills allow you to nominate a guardian for your minor children
In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.
Wills specify how to pay estate taxes and can help minimize taxes
The way in which estate taxes and other expenses are paid can be directed by your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.
A will also gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.
There are many other advantages to having a will, and even more should one choose to complete the package with living wills and health care directives. These additions will protect your rights and desires should you ever become incapacitated or unable to communicate. So while things are much different today than they were years ago on the “Isle of Green” there is still much we can do to keep our legacy prosperous and easy to administer. So this March, take a few minutes to get your affairs in order. I for one like to imagine my heirs and well wishers toasting the night away at my wake then mired by taxes, intestacy, and family strife. The traditional lyrics below bring to mind the contentment one with only a will could have. Happy St. Patrick’s Day!
Oh all the money that e'er I had, I spent it in good company
And all the harm that e'er I've done, alas, it was to none but me
And all I've done for want of wit to memory now I can't recall
So fill to me the parting glass, good night and joy be with you all
~Traditional Irish Tune
by Andy Pulsfort
The Rip Off
Two weeks ago, I was in Washington DC speaking to a CEO roundtable. At the end of my talk, one of the participants said to me “I am sure you are worth every penny you charge, but I have been ripped off by a financial advisor and don’t know if I can ever trust another one. Do you have a case study on how to recover from a bad advisor?”
Great question. If you don’t want to be ripped off by an advisor or the financial system in general, you first have to start thinking about these things differently. Finding the right advisor is about personality, communication and knowing what you need. Do you need a wealth advisor to assist you in creating sustainable wealth? Or are you your own wealth advisor, and just looking for some special expertise in a narrow discipline?
Most of us are unknowingly looking for wealth advisors and hire specialty advisors. Let me explain.
Here’s a common scenario. I need tax advice, so I seek out a tax specialist, i.e. a CPA. My need for insurance is met by a specialist - my insurance agent. My new will is drafted by my legal specialist – my attorney. My investments are handled by another specialist – my stock broker. Question: Who is handling my wealth?
We treat all these facets of wealth management as separate…and they’re not. Creating sustainable wealth is most effectively done by beginning with the end in mind – the end being the freedom that comes with planning for a prosperous future.
If asked “Do you want to leave a legacy for your children?” your answer might be “Yes, absolutely.” But what if funding that legacy means you have to shave 10% off of your annual spending? Is that really what you want? The answer may still be ‘yes’, but without looking at the whole wealth picture, you would not have considered all the consequences to answering one narrowly focused question.
A good wealth advisor begins the process with a plan. He or she may call it a financial plan, a wealth plan, or in our case, The Prosperity Experience®. This plan is not a one-size-fits all; it must be tailored to meet the goals and intentions of the client. It includes a decision-making model that supports the person or couple in reaching their full wealth potential.
Specialty advisors like insurance agents, investment advisors and estate planning attorneys are brought in as needed to provide detailed expertise in a focused area. The wealth advisor may have these professionals in-house or they may be available via contract. Either way, the wealth advisor coordinates their work and uses the planning process with the client to facilitate decision making.
If you have been ripped off, there is nothing to do but get back on your horse and begin again, with the wisdom you gained from the experience. Take it slow. Trust your intuition. Do your homework. Find out who you are talking to.
Sustainable wealth creation is a lifelong process. While no single decision may change the trajectory of your wealth and prosperity, any single decision can. Don’t wait until you have made that one big, bad decision to begin again.
Mackey McNeill
Great question. If you don’t want to be ripped off by an advisor or the financial system in general, you first have to start thinking about these things differently. Finding the right advisor is about personality, communication and knowing what you need. Do you need a wealth advisor to assist you in creating sustainable wealth? Or are you your own wealth advisor, and just looking for some special expertise in a narrow discipline?
Most of us are unknowingly looking for wealth advisors and hire specialty advisors. Let me explain.
Here’s a common scenario. I need tax advice, so I seek out a tax specialist, i.e. a CPA. My need for insurance is met by a specialist - my insurance agent. My new will is drafted by my legal specialist – my attorney. My investments are handled by another specialist – my stock broker. Question: Who is handling my wealth?
We treat all these facets of wealth management as separate…and they’re not. Creating sustainable wealth is most effectively done by beginning with the end in mind – the end being the freedom that comes with planning for a prosperous future.
If asked “Do you want to leave a legacy for your children?” your answer might be “Yes, absolutely.” But what if funding that legacy means you have to shave 10% off of your annual spending? Is that really what you want? The answer may still be ‘yes’, but without looking at the whole wealth picture, you would not have considered all the consequences to answering one narrowly focused question.
A good wealth advisor begins the process with a plan. He or she may call it a financial plan, a wealth plan, or in our case, The Prosperity Experience®. This plan is not a one-size-fits all; it must be tailored to meet the goals and intentions of the client. It includes a decision-making model that supports the person or couple in reaching their full wealth potential.
Specialty advisors like insurance agents, investment advisors and estate planning attorneys are brought in as needed to provide detailed expertise in a focused area. The wealth advisor may have these professionals in-house or they may be available via contract. Either way, the wealth advisor coordinates their work and uses the planning process with the client to facilitate decision making.
If you have been ripped off, there is nothing to do but get back on your horse and begin again, with the wisdom you gained from the experience. Take it slow. Trust your intuition. Do your homework. Find out who you are talking to.
Sustainable wealth creation is a lifelong process. While no single decision may change the trajectory of your wealth and prosperity, any single decision can. Don’t wait until you have made that one big, bad decision to begin again.
Mackey McNeill
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