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Cypen & Cypen
JANUARY 15, 2009

Stephen H. Cypen, Esq., Editor


Mercer reports that 2008 year-end funded status for S&P 1500 dropped to 75% compared to 104% at the end of 2007. Pension expense is likely to increase from $10 Billion in 2008 to $70 Billion in 2009. Weakened corporate balance sheets could reduce capital spending and affect loan covenants/credit ratings. The chaos that has been observed in the world’s financial markets over the last twelve months has had a major adverse impact on pension plan funding, and will negatively impact corporate earnings in 2009. The decline in funded status (ratio of assets to liabilities) equates to losses of an estimated $469 Billion over 2008, causing an aggregate surplus of $60 Billion at the end of 2007 to be replaced with an estimated aggregate deficit of $409 Billion at the end of 2008. And the trend in recent months has been one of alarming deterioration: the aggregate funded status fell by $129 Billion in December, $130 Billion in November and $110 Billion in October, while the aggregate deficit for the first nine months of 2008 was “only” $100 Billion. Three factors make it imperative that plan sponsors reevaluate the financial risks they are taking in their pension plans, and their tolerance for so doing. First, the significant change in funded status over the last twelve months results in a different risk profile. Second, plan sponsors themselves are likely facing different business challenges; pension plan risk tolerances need to be reviewed in the new business environment. Finally, the capital market outlook has changed significantly; investment decisions taken need to be revisited to ensure current investment strategy is appropriate given the current capital market outlook. These are the times that try men’s souls ... and other things.


Internal Revenue Service has kicked off the 2009 tax filing season by announcing a number of new steps to help financially distressed taxpayers maximize their refunds and speed payments, while providing additional help to people struggling to meet their tax obligations. Among the areas where IRS can provide assistance are

  • Postponement of Collection Actions - IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay.
  • Added Flexibility for Missed Payments - IRS is allowing more flexibility for previously compliant individuals in existing installment agreements who have difficulty making payments because of job loss or other financial hardship.
  • Additional Review for Offers in Compromise on Home Values - an Offer in Compromise, an agreement between a taxpayer and IRS that settles the taxpayer’s tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties.
  • Prevention of Offer in Compromise Defaults - taxpayers who are unable to meet periodic payment terms of an accepted Offer in Compromise will be able to contact IRS for available options to help them avoid default.
  • Expedited Levy Releases - IRS will speed delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons.

Hmmmmmm. Maybe “I’m from IRS and I’m here to help you” is not one of the three biggest lies in the world. IR-2009-002 (January 6, 2009).


The sixth and final Treasury issue brief on Social Security reform discusses Social Security’s effect on work incentives and implications for reform. Social Security must assess a net tax (lower benefits, higher revenues or both) exceeding $13.6 Trillion on current and future workers to finance net benefits that the system has paid or has promised to earlier birth cohorts. The issue brief applies long-standing principles of good tax policy to the question of how this net tax should be levied. A key insight is that it is essential to consider implications of the net tax for both fairness and work incentives when deciding how it should be apportioned and structured. Nearly all Social Security reform proposals impose a disproportionate share of the burden of Social Security reform on workers with relatively high lifetime earnings; that is, they increase progressivity of the system. In general, the more progressive the system, the greater is the adverse impact on work incentives. While the right balance between progressivity and work incentives is subjective, making an informed choice requires that the tradeoff be understood. There are many reforms that would enhance work incentives without necessarily affecting distribution of net taxes across income groups. Such reforms are of two types: those that help people make better informed choices and those that better focus Social Security’s net taxes on work that is least responsive to tax while not sacrificing fairness. Reforms of the first type include increasing transparency of forced savings so that workers better understand the degree to which earnings increase retirement benefits and changing the normal retirement ages, early retirement ages or both to improve people’s perceptions of what is prudent. Reforms of the second type include making Social Security’s net tax rates on earnings in potential retirement years lower than in earlier years and changing the design of couples’ benefits so that spouses with substantial unequal earnings face more similar tax rates. Reforms of both types would improve work incentives, lead to greater work effort and higher incomes, and would thus lessen the sacrifice necessary to make Social Security solvent.


A global credit crisis sparked the worst year for financial markets since the 1930s and a significant decline in market value for the Wisconsin Retirement System trust funds in 2008, according to a release from the State of Wisconsin Investment Board. The Core Fund, larger of the two WRS trust funds with diversified holdings in domestic stocks, international stocks, bonds, loans, real estate and private equity, ended the year with a -26.2% preliminary return. Preliminary market value of the Core Fund on December 31, 2008 was $57.8 Billion. The Variable Fund, an optional, U.S. and international stock fund, had a preliminary return of -39.0% for the year and a preliminary market value of $4 Billion on December 31. The Department of Employee Trust Funds, which administers WRS, will determine effective rates to be applied to active employee accounts and the WRS consulting actuary will recommend annuity adjustments for WRS retirees once preliminary 2008 investment returns are finalized. Based on these preliminary returns, the Department estimates that Core Fund effective rates will be in the approximate range of 3% to 3.5% and annuity adjustments will be in the approximate range of -2.5% to -3%. Final effective rates and annuity adjustments will likely be announced in March. We recently wrote about the anticipated situation in Wisconsin (see C&C Newsletter for November 13, 2008, Item 9). WRS provides benefits to over 550,000 current or former employees of state agencies, the university system, school districts and most local governments. WRS is the ninth largest U.S. public pension fund and the 24th largest pension fund in the world.


Many pension funds this year will begin an orderly rebalancing into more traditional investments such as “plain vanilla” equity, from illiquid investments whose performance was battered in 2008, according to Pension funds probably will not be a major source of funding for commodities, private equity and hedge funds. Researchers predict pension funds will increase interest in investment-grade corporate debt. Pension plans should follow long-term investment strategies that are not overly sensitive to market movements. Researchers predict the U.S. economy will remain in decline during the first quarter of the new year, but federal fiscal and economic policies should pay off, helping the economy start to rebound in the second quarter. (Don’t bet on that one.) Query: Why did pension funds ever get out of traditional investments?


New York state officials are close to cancelling a $2 Billion contract to build a statewide wireless network for emergency agencies after critical tests on the network failed late last year. According to the New York Times, lawyers for the vendor sent the state a letter threatening to sue if officials follow through on their plan to shut down the project, which was intended to improve radio communications throughout the state, but particularly in remote areas where police agencies have trouble talking to one another. The original plan, conceived after the attacks of September 11, 2001, was designed to link emergency agencies from the tip of Long Island to Niagara Falls via a series of radio towers. The network was meant cover 95% of New York’s area and 97% of its roadways, including some of the remote parts of the state. The Office for Technology is looking at other methods, including internet-based communications and cell phone technology, that are said to be more cost-effective and could provide more reliable and cheaper service than the radio technology called for in the original contract. The President of the Police Benevolent Association of the New York State Troopers said that until a statewide radio network has been built, his organization would push for the improvements in the present patchwork of networks. Stay tuned.


A Long Island surgeon embroiled in a nearly four-year divorce proceeding wants his estranged wife to return the kidney he donated to her, according to However, he says he will settle for $1.5 Million in compensation! The doctor has decided to go public with his demand for kidney compensation because he has grown frustrated with negotiations with his estranged wife. He gave his kidney to his wife in June 2001. She filed for divorce four years later, but the husband claims she began an extramarital affair shortly after receiving the kidney transplant. (We guess she was feeling like a complete woman.) Experts in the field believe a body part is not a marital asset on which a price tag can be put. If I give my heart to you, will you handle it with care?


Be careful about reading health books. You may die of a misprint. Mark Twain


“To stand in silence when they should be protesting makes cowards out of men.” Abraham Lincoln

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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