Cypen & Cypen
JANUARY 21, 2010
Stephen H. Cypen, Esq., Editor
1. CalPERS RELEASES PLACEMENT AGENT DISCLOSURES: The California Public Employees’ Retirement System has released more than 600 placement agent disclosures obtained by the pension fund from its external managers. The disclosures were obtained voluntarily from CalPERS’s external investment partners, as well as under CalPERS’s new policy that mandates disclosure on use of placement agents and fees on proposed new investments and amendments to existing investments that occur after May, 2009 (see C&C Newsletter for April 30, 2009, Item 8 and C&C Newsletter for May 14, 2009, Item 5). The disclosures contain information voluntarily disclosed by external managers with ongoing commitments to pay a placement agent in connection with an existing CalPERS investment. Over 90 percent of CalPERS’s external managers who were asked voluntarily to respond to either an ongoing placement agent relationship or a retroactive payment responded with disclosures. Curiously, the release contains no details. However, separately, sfgate.com reported that so-called placement agents received more than $125 Million from private investment funds for gaining business with giant CalPERS, $59 Million of which went to a former CalPERS board member's company!
2. NEW YORK CITY FIRE EXAMINATIONS DISCRIMINATE: For over 200 years, the New York City Fire Department has served the people of New York with uncommon bravery, skill and determination. New York's status as one of the world's great cities is owed in no small part to the commitment and unflagging effort of its firefighters, who provide the city with a degree of security that is rarely acknowledged only because it is so rarely called into question. On September 11, 2001, the world witnessed the magnitude of that commitment, and nobody who was in the city on that day or in the years after will forget the heroism that was displayed by firefighters as the tragedy unfolded, or the role that the Fire Department played in rallying and sustaining the city during the aftermath. Nonetheless, there has been one persistent stain on the Fire Department's record. For decades, black and other minority firefighters have been severely underrepresented in the Department's ranks. According to the most recent census data, black residents make up 25.6% of New York City's population; in 2007, black firefighters accounted for only 3.4% of the Department's force. In other words, in a city of over eight million people, and out of a force with 8,998 firefighters, there were only 303 black firefighters. This pattern of underrepresentation has remained essentially unchanged since at least the 1960s. While the city's other uniformed services have made rapid progress integrating black members into their ranks, the Fire Department has stagnated and at times retrogressed. When it comes to being a New York City firefighter, blacks and other minorities face entry barriers that other applicants do not. In July 2009, a federal judge found that the written examinations that the Fire Department used to screen and rank applicants between 1999 and 2007 had discriminatory effects on certain minority applicants, including black applicants, and failed to test for relevant job skills. These examinations unfairly excluded hundreds of qualified black applicants from the opportunity to serve as New York City firefighters. That same federal judge has now ruled that the City violated a wide array of constitutional and statutory prohibitions, the essence of which is simple. The aggrieved-black applicants have marshaled extensive statistical, testimonial, and anecdotal evidence to create a prima facie case that the City's examination policies constituted a pattern or practice of intentional discrimination. The City's burden -- its legal obligation -- was to respond in kind or to undercut their proof. Instead of shouldering this burden, the City has tried to cast it off entirely. Attempts of this sort are rarely rewarded in the law. The City has failed to raise a triable issue of fact with respect to either the applicants' prima facie case or its own evidentiary burden, and as a result the applicants are entitled to judgment as a matter of law. What the applicants have demonstrated -- and what the City has failed to rebut -- is that the City's use of written exams with discriminatory impacts and little relation to the job of firefighter was not a one-time mistake or the product of benign neglect. It was a pattern, practice and policy of intentional discrimination against black applicants that has deep historical antecedents and uniquely disabling effects. The consequences that this illegal policy had for blacks who wished to serve their city as firefighters have already been levied; the consequences that this illegal policy will have for the City will be addressed at the remedial stage. Accordingly, applicants' motion for summary judgment with respect to their claims against the City under the Equal Protection Clause, Title VII, 42 U.S.C. § 1981 and New York State/New York City Human Rights Laws is granted and the City’s motion for summary judgment on their equal protection claim against the City is denied. United States of America vs. The City of New York, Case No. 07-CV-2067 (ED NY, January 13, 2010).
3. TEACHERS PENSION FUND IS GOOD FOR STATE: Responding to a recent article in the Columbus (Ohio) Dispatch profiling Ohio's public employee pension funds, the writer says that article missed the mark. Most people fail to realize that teachers do not get Social Security benefits in retirement, unlike nearly every other American. So while the private sector pays into Social Security, school districts and teachers instead pay into the State Teachers Retirement System pension fund. The defined benefit pension fund is the best deal for Ohio taxpayers. Private sector employers pay 16.75 percent and employees pay 10.55 percent for both Social Security benefits and health insurance. STRS receives 14 percent from employers (a rate that has not increased in 25 years) and 10 percent from employees to fund both pension benefits and health insurance for retirees. Simple math indicates that the pension structure saves school districts millions of dollars, while providing better benefits for employees. Pension benefits help support the local economy. In 2006, more than 357,000 Ohio residents received a total of $8.41 Billion in pension funds from state and local pension plans. According to a study by the National Institute on Retirement Security, every dollar paid to a retiree in benefits returns $1.33 to the economy, as those retirees spend that money in their communities. If Ohio joined other states that do not tax teachers' retirement incomes, the amount spent locally would increase, because retired teachers would likely flock back to the Buckeye State. STRS is well-managed and sustainable. And, in the final analysis, public pensions save taxpayers money and strengthen the state's economy.
4. PENSION OBLIGATION BONDS POSE RISKS: State and local government officials are facing a perfect storm of problems. On one hand, a sharp decline in equity markets has resulted in a large increase in underfunded liabilities among state and local pensions. Research suggests that public pensions are now less than 80 percent funded and will require an additional $200 Billion spread over the next five years to compensate for the increased shortfall. On the other hand, the recession has cut into state and local tax revenues, limiting ability of governments to make up these shortfalls. The U.S. Census Bureau reports that second-quarter 2009 tax revenues dropped over 12 percent from the second quarter of 2008. Historically, governments have turned to two “solutions” for managing their pension commitments in times of fiscal stress. Some governments choose to defer part of their annual contribution to the pension fund. However, some are obligated by statute to make the annual required contribution. In these cases, governments may choose to issue a pension obligation bond to fund their pension system. This instrument, which is a general obligation of the government, alleviates pressure on the government’s cash position, and may offer cost savings if the bond proceeds are invested in risky assets that realize a high return through the pension fund. Use of POBs is controversial, and many state and local governments remain wary of these transactions. Some view POBs as being unfair to future generations, and others see them as overly risky. For example, New Jersey Governor Jon Corzine called POBs “the dumbest idea I ever heard . . . . It’s speculating the way I would have speculated in my bond position at Goldman Sachs.” Nonetheless, some see an important role for POBs in the future, especially after the global financial crisis. For example, Standard & Poor’s recently said that POBs might offer state and local governments some relief from looming pension costs. Moreover, in 2009, governments from the state of Alaska to San Luis Obispo, California, are once again considering POBs to alleviate some of the financial strain. A new Issue Brief from Center for State & Local Government Excellence entitled “Pension Obligation Bonds: Financial Crisis Exposes Risks,” examines POBs, evaluating whether they represent viable pension financing instruments or are simply a device used by cash-strapped governments. The brief concludes that POBs transfer a current pension obligation into a long-term, fixed obligation of the government. While POBs may seem like a way to alleviate fiscal distress or reduce pension costs, they pose considerable risks. After the recent financial crisis, most POBs issued since 1992 are in the red. Nevertheless, it appears that POBs have the potential to be useful tools in hands of the right governments at the right time. Issuing a POB may allow well-heeled governments to gamble on the spread between interest rate costs and asset returns or to avoid raising taxes during a recession. Unfortunately, most often POB issuers are fiscally stressed and in a poor position to shoulder the investment risk. As such, most POBs appear to be issued by the wrong governments at the wrong time. In other words, timing is everything.
5. ILLINOIS PENSION FUND SUES GOLDMAN OVER BONUSES: Central Laborers' Pension Fund has sued Goldman Sachs in connection with bonuses the banking giant paid to employees despite having accepted billions in government bailout funds. According to FOXBusiness, the suit alleges that the fund bought shares in Goldman Sachs in January, 2009. Goldman Sachs’s conduct shows that, even though Goldman is supposedly owned by public shareholders, it has scant regard for interests of those shareholders. The suit said the company was on track to pay employees $22 Billion in 2009, despite previously requiring a $10 Billion injection from the federal government's Troubled Asset Relief Program, and receiving $13 Billion from insurer AIG after the government bailed it out. It’s good to be the king.
7. SEC TO ENCOURAGE COOPERATION AND ASSISTANCE IN INVESTIGATIONS: The Securities and Exchange Commission has announced a series of measures further to strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency's investigations and enforcement actions. The new initiative establishes incentives for individuals and companies fully and truthfully to cooperate and assist with SEC investigations and enforcement actions, and provides new tools to help investigators develop first-hand evidence to build the strongest possible cases. The cooperation initiative is expected to result in invaluable and early assistance in identifying the scope, participants, victims and ill-gotten gains associated with fraudulent schemes. First, the Division of Enforcement is authorizing its staff to use various tools to encourage individuals and companies to report violations and provide assistance to the agency. The new cooperation tools, not previously available in SEC enforcement matters, include Cooperation Agreements, Deferred Prosecution Agreements and Non-prosecution Agreements. Second, the SEC streamlined the process for submitting witness immunity requests to the Justice Department for witnesses who have capacity to assist in its investigations and related enforcement actions. Third, the Commission has set out, for the first time, the way in which it will evaluate whether, how much and in what manner to credit cooperation by individuals to ensure that potential cooperation arrangements maximize the Commission's law enforcement interests. The developments are the latest in a series of initiatives that are part of the most significant reorganization of the Enforcement Division in more than 30 years. Release 2010-6 (January 13, 2010).
8. NO CHARGES AGAINST ATTORNEY FOR GRENADE STUNT: The Kansas Attorney General’s Office has declined to file charges against a defense attorney who brought a dead grenade into a Reno County courtroom. The Associated Press reports that the Attorney General does not believe that the attorney had the specific intent to reduce the jury to terror when he showed the grenade during closing arguments. (Gee, is that the test for determining criminal liability?) The lawyer previously explained that he was trying to demonstrate"imminent threat" and compulsion to show how his criminal defendant/client was threatened with violence to commit crimes. (See C&C Newsletter for January 7, 2010, Item 4.)
9. JOB OUTLOOK FOR BEST CAREERS IN 2010: Here is US News & World Report’s take on the best careers for 2010:
Each job is accompanied by its own text, but we particularly like what the magazine said about the career of firefighter: “job growth through 2018 is likely to be about 19%, which is above the average for all occupations. But there’s a lot of competition for jobs, since firefighting is stable, government-supported work that often comes with a pension, and is recession-resistant.”
10. FIELDS OF DREAMS: Apropos the above item, staffing giant Robert Half International took a recent look at the information technology and finance industries, and identified ten fields where pay overall is steady or rising, and starting salaries in 2010 will be more generous than average. They are
Companies now want to invest in staff members with specific expertise who can help them capitalize on opportunities that are just emerging from all the economic turmoil. What turmoil?
11. CHANGE IN PARADIGMS OF INVESTMENT SPACE: In the investment world, cliches and jargon lie behind every bush. Two in the bush may be worth one in the hand, but such terms can be terribly confusing for the uninitiated. With that in mind, Pensions & Investments has performed a public service by providing a layman's explanation for most commonly abused terms:
Obviously News Editor Rick Baert has a good sense of humor.
12. “WE NEED A CITY ATTORNEY WHO CAN COUNT TO FORTY”: Who said that? The answer is a Georgia city councilman regarding a numerical mistake that the city attorney made in counting the number of days required between the call of a Sunday alcohol sales referendum and the actual vote. The miscalculation meant that the city was three days shy of the state-mandated time period. Bulletin: the city attorney was not reappointed.
13. IF FAMOUS CHARACTERS THROUGHOUT TIME HAD JEWISH MOTHERS: NAPOLEON'S JEWISH MOTHER: “You're not hiding your report card? Show me! Take your hand out of your jacket and show me!”
14. FABULOUS RANDOM THOUGHTS: More often than not, when someone is telling me a story all I can think about is that I can’t wait for them to finish so that I can tell my own story that’s not only better, but also more directly involves me.
15. QUOTE OF THE WEEK: “One thing I’d like to point out is that the system worked.” Homeland Security Secretary Janet Napolitano. (The next day she clarified her quote to refer to the system of notifying other flights as well as law enforcement on the ground about a Christmas incident in Detroit soon after it happened.) Heck of a job, Brownie.
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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.