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Miami

Cypen & Cypen
NEWSLETTER
for
JANUARY 6, 2011

Stephen H. Cypen, Esq., Editor

1.      ANNUAL REPORT ON FLORIDA’S LOCAL GOVERNMENT RETIREMENT SYSTEMS: The Florida Department of Management Services Bureau of Local Retirement Systems has presented its 30th Annual Report on Florida’s Local Government Retirement Systems, as statutorily required by January 1. Within DMS, the local retirement section of the Division of Retirement issues the annual report. In 1981, Section 112.63, Florida Statutes, established the local government retirement systems review function, to ensure that local government retirement plans are funded on an actuarially sound basis. The number of defined benefit local government retirement plans has increased from 355 to 489 in the last thirty years. The plans provide retirement, death and disability benefits to 67,724 retirees, beneficiaries or vested-terminated participants. Active plan membership for municipalities and special district retirement plans is 107,007. School board early retirement program active plan membership is 9,157. Total plan assets were valued at approximately $23.1 Billion for municipalities and special districts and $61.6 Million for school boards’ early retirement programs, as of September 30, 2010. The number of active employees in municipal and special district defined benefit plans increased 4.7%, while covered employees’ payroll for such plans increased 11.73%. Local government plans’ retirees, beneficiaries and vested terminees also increased for municipalities and special districts. While the number of retirees increased 3.5% for municipalities and special districts, the actual dollar amount of contributions made to those retirement plans increased 14.1%. The average annual retiree pension for municipal and special district retirement plans is now $23,854. A city may operate several plans: for general employees, police officers, firefighters, elected officials and utility employees; or there may be various combinations of such plans. There are 411 incorporated cities in Florida, with 334 sponsoring at least one type of retirement system (defined benefit or defined contribution). As of September 30, 2010 the count in municipal defined benefit systems is 489. Here are some details: 

  • 154 general employees plans (31.5%)
  • 141 police officers plans (28.9%)
  • 137 firefighters plans (28.0%)
  •  41 combined police and fire plans (8.4%)
  •     7 general, police and fire combined plans (1.4%)

Over 52% of plans offer cost of living adjustments and deferred retirement option programs. Two Hundred Twenty-six plans accrue benefits at between 3% and 5%, followed by 174 plans providing variable benefit rates. The most common average final compensation period is 5-year (278 plans/56.9%), followed by 3-year (136 plans/27.8%). The following display indicates asset market values held by defined benefit pension trust funds as of September 30, 2010: 

  • Equities – 63%
  • Fixed Income – 30.3%
  • Cash and Equivalents – 3.5%
  • Drop Reserve Accounts – 2.3%
  • Insurance Contracts -- .9%

2.      ASSETS OF MAJOR PUBLIC-EMPLOYEE RETIREMENT SYSTEMS REACH HIGHEST LEVEL IN TWO YEARS:  According to the U.S. Census Bureau, for the 100 largest public-employee retirement systems in the country, total holdings and investments were up after last quarter’s 5.3% decline. With a quarter-to-quarter increase of 6.2%, total holdings and investments rose from $2,350.1 Billion in the second quarter of 2010 to $2,495.4 Billion in the third quarter of 2010, reaching the highest level in two years. Total holdings and investments continue to show a year-to-year increase for the fourth consecutive quarter, rising 5.2% from $2,372.1 Billion in the third quarter of 2009. Among the cash and security holdings of these public pensions, corporate stock showed a quarterly increase of 9.8%, from $727.2 Billion in the second quarter of 2010 to $798.3 Billion in the third quarter of 2010. Corporate bonds showed the first quarter-to-quarter increase since the third quarter of 2009, rising 3.2% from $414.1 Billion in the second quarter of 2010 to $427.3 Billion in the third quarter of 2010. International securities reached the highest level in over two years, rising 13.9% from $396.5 Billion in the second quarter of 2010 to $456.6 Billion in the third quarter of 2010. Federal government securities had a 1.1% decrease from $166.2 Billion last quarter to $164.4 Billion. Employee and government contributions total $24.7 Billion in the third quarter of 2010, a decrease of 6.8% from $26.5 Billion last year. Note, the data are from the 100 largest public-employee retirement systems as determined by their total cash and security holdings reported in the 2007 census of governments. These 100 systems represent 89.4% of financial activities among such entities. 

3.      HYPOCRISY OF PROPONENTS OF RISK FREE INVESTMENTS FOR PUBLIC PENSIONS: Gary Findlay, Executive Director, Missouri State Employees’ Retirement System, has not unexpectedly weighed in on academic and think tank hypocrisy in the public retirement arena. Reported in orta.org, Finlay notes the onslaught of academic and think tank diatribe regarding public employee defined benefit pension plans targets discount rates used in assessing public plans’ financial position and determining annual required contribution.   Here is Finlay’s assessment of the academic party line:

Liabilities of these plans are risk free to participants, meaning that benefits are based on a formula defined by law, which is independent of the fund’s investment earnings, so there is little risk of those benefits not being paid.  Accordingly, liabilities should be matched against assets (a portfolio of securities) that are also risk free. While there is not universal agreement regarding what constitutes “risk free,” suffice it to say that the anticipated return will be something well south of what might reasonably be expected over the long term from a diversified portfolio of stocks, bonds and alternative investments.

The academic party line then continues with the thinking that when DB plan liabilities are measured using a discount rate that can only be achieved by investing in a diversified portfolio, the plan may ultimately come up short and impose an unanticipated higher cost on future generations who were not participants in the deal when it was struck. Accordingly, actuarially-assumed rates of return being used should be reduced to some risk free rate that will reveal their version of the truth about public retirement plan liabilities.

Given their vehement opposition to putting retirement assets at risk, academics would be expected to avoid risk in investment of their own retirement savings. Surprisingly, when one looks at how they are investing their defined contribution accounts, one finds a distribution of holdings not at all different from that one would find at a DB plan today (although fees they are paying are probably significantly higher).  If academics wish to invest in that fashion, fine, but, to avoid apparent hypocrisy of their ways, it seems reasonable to insist that they also be required to waive future rights to any governmental entitlement programs if they come up short during retirement. Or, as an alternative, these academics should be required to put their personal retirement savings in risk free investments and lower their expectations about personal financial resources during retirement.  State and local retirement systems have long embraced the Government Finance Officers Association’s Guidelines for the Preparation of a Public Employee Retirement System Comprehensive Annual Report. Public plans were quick to adopt the guidelines, initially released in 1980, resulting in extensive transparency regarding all aspects of retirement system operations.  Sources of revenue supporting the so-called academic research on public pension issues is sorely lacking in transparency. To assure that this research is conflict free, it would seem reasonable for researchers to disclose their sources of funding. Clearly there are organizations that would benefit financially from demise of DB plans with replacement DC plans or the wholesale transition of DB portfolios to so-called risk free securities. If these organizations simply disclose their funding sources, readers of their reports could assess for themselves whether the information is potentially suffering from financially motivated bias. Academics should either freely disclose information regarding their financial support or explain why they have a problem with transparency.  To support their theory, academics seem to be fond of using the first decade of this century, which included the bursting of the tech-bubble and the global credit crisis. Conveniently, they omit reference to the past eight decades. While it may not be necessarily indicative of future returns, it is more comforting to look at eighty years than ten. For the record, the annualized return for the past eighty years on a plain vanilla 60/40 domestic stock/bond portfolio was 8%. Of course, this period includes financial crises of the 1930s, as well as the recent credit debacle.   There is no doubt that there are some very smart academics who are strong proponents of the risk free method of measuring pension liabilities and even investing pension assets. They are smart -- but remember that a number of very smart academics were the brains behind a now-defunct Long Term Capital Management. Enough said.

4.      UNIVERSITY OF CALIFORNIA EXECS DEMAND MILLIONS; THREATEN SUIT: The San Francisco Chronicle reports that three dozen of the University of California's highest-paid executives are threatening to sue unless UC agrees to spend tens of millions of dollars dramatically to increase retirement benefits for employees earning more than $245,000 a year.  The demand comes as UC is seeking ways to try to eliminate a vast, $21.6 Billion unfunded pension obligation. The fatter executive retirement benefits would add $5.5 Million a year to the pension liability, plus $51 Million more to make the changes retroactive to 2007, as demanded.  The 36 executives who signed the letter include the dean of UC Berkeley law school and the chief investment officer for the UC pension system. They want UC to calculate retirement benefits as a percentage of their entire salaries, instead of the federally-instituted limit of $245,000.  The difference is significant for more than 200 UC employees who currently earn more than $245,000. Under UC's formula, which calculates retirement benefits on only the first $245,000 of pay, an employee earning $400,000 a year who retires after 30 years would get a $183,750 annual pension. Lift the cap, and the pension rises to $300,000. The executives say the higher pensions are overdue because the regents agreed in 1999 to grant them once Internal Revenue Service allowed them to lift the $245,000 cap, a courtesy often granted to tax-exempt institutions like UC.  IRS approved the waiver in 2007.   Roots of the pension dispute go back to 1999, five years after IRS limited how much compensation could be included in retirement package calculations.  But even after IRS granted UC's waiver in 2007, nothing changed. (Sidebar: UC’s then-president resigned in 2007 after it was discovered that UC was awarding secret bonuses, perks and extra pay to executives.)  In fairness to the executives, a retirement task force recently offered UC several options for closing the gap, and one to widen it:  increasing executive pensions.  Do you have change for a hern? 

5.      BOOMERS PREPARE TO PAY THE PIPER: Through a combination of procrastination and bad timing, many baby boomers face a personal finance disaster just as they hope to retire. Starting this month, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.   The boomers, who in their youth revolutionized everything from music to race relations, are set to redefine retirement. But a generation that made its mark in the tumultuous 1960s now faces a crisis as it hits its own mid-60s, according to LexisNexis.com. There are several reasons to be concerned:

  • The traditional pension plan is disappearing.  In 1980, some 39 percent of private-sector workers had a pension that guaranteed a steady payout during retirement; today that number stands at 15 percent. 
  • Reliance on stocks in retirement plans is greater than ever. Although 42 percent of those workers now have 401(k)s, the past decade has been a lost one for stocks, with a total return of just 4 percent since the beginning of 2000. 
  • Many retirees banked on their homes as their retirement fund.  But the crash in housing prices has slashed almost a third of a typical home's value.  Now, 22 percent of homeowners, nearly 11 million people, owe more on their mortgage than their home is worth.  (Surely, many are boomers.) 

Too many boomers ignored or underestimated the worsening outlook for their finances. By far, the greatest shortcoming has been a failure to save. The personal savings rate – the amount of disposable income unspent – averaged close to 10 percent in the 1970s and 80s. By late 2007, the rate had sunk to negative 1 percent. True, recession has helped improve the savings rate to back about 5 percent, yet typical boomers are still woefully short on retirement savings. Hey, Buddy, can you spare a dime? 

6.      LAW ENFORCEMENT FATALITIES SPIKE DANGEROUSLY IN 2010: Following a two year decline, law enforcement fatalities in 2010 spiked to 160, an increase of nearly 40% compared to last year’s 117 officers killed in line of duty. Preliminary data from National Law Enforcement Officers Memorial Fund show that for the thirteenth year in a row, traffic fatalities were the leading cause of officer fatalities, with 73 officers killed in line of duty – an increase of 43% from 2009. Firearm fatalities increased 20%, from 49 deaths in 2009 to 59 in 2010. Even more alarming, multiple fatality shootings accounted for nearly 20% of all fatal shootings. Thirty nine states, along with the District of Columbia and Puerto Rico, experienced officer fatalities during 2010. For the third year in a row, Texas (18), California (11) and Florida (9) had the most fatalities – a combined total of 38, or, 24% of the national total for 2010. Average age of the officers killed in 2010 was 41; average length of their law enforcement service was 12 years; and, on average, each officer left behind two children. A very sad commentary on today’s society. 

7.      EDITORIAL ON LAW ENFORCEMENT DEATHS: The Washington Post has published a significant editorial apropos the law enforcement deaths referred to in the above item. (First, a stark reality: the 160 number became outdated as soon as it was released, because there were at least two deaths the following week.) The statistics are a reminder of the dangers faced each day by hundreds of thousands of federal and local officers. The nation they serve too often takes them, and the risks they encounter, for granted.  Several explanations have been offered for the rise in deaths, from slashed budgets that have fewer police working longer hours to more distracted and dangerous drivers.  Although crime is on the decline, there are criminals who will not think twice -- indeed, are even eager -- to kill an officer of the law.  Nothing is ever routine about police work.  Just ask the families of those who lost loved ones. Really. 

8.      OHIO SCHOOL EMPLOYEES SUE WACHOVIA OVER SECURITIES LENDING LOSSES: School Employees Retirement System of Ohio has filed suit in federal court against Wachovia Bank, N.A. and Wells Fargo Bank, N.A. for losses SERS sustained arising from Wachovia’s improper investment of cash collateral as part of the securities lending program that Wachovia operated on SERS’s behalf. The lawsuit concerns nearly $30 Million in losses sustained by SERS, the vast majority of which came from Wachovia’s investment of cash collateral in Sigma Finance Corporation – an investment that Wachovia never should have made in the first place or should have liquidated long before SERS sustained losses. We reproduce some of the complaint’s allegations, because they capture the essence of securities lending in relatively few words: 
The practice of securities lending has been aptly described as "Heads, we win together. Tails, you lose - alone." … This description reflects the fact that firms operating securities lending programs, which are typically Wall Street banks, structured the relationship so that they stood to share in whatever gains their clients made from the investments the banks made.   However, their clients, which are typically public and corporate pension funds, were exposed to the exclusive risk of loss. 

The securities lending concept is relatively simple. In general, an institutional investor temporarily loans a security from its portfolio to a broker/dealer to support the broker/dealer's trading activity. In return, the lender of the security receives collateral, usually in the form of cash, which can then be invested by the lender's agent, usually a bank, until the security must be returned.   Of course, when the security is returned to the lender, the lender must simultaneously return the collateral to the borrower. If the collateral was in the form of cash, that means any investment of that cash must be liquidated and the cash collateral returned to the borrower. To the extent the investment earned any interest or a return to the lender, it is shared between the lender and the lender's agent (the bank), purportedly as compensation for administering the securities lending program. 

Wachovia, like other firms engaged in securities lending, marketed their programs as being a low-risk way to earn small additional returns on securities held in the portfolios of public and private pension funds. Indeed, "these trades were supposed to be safe enough to make a little extra money at little risk."…While the programs were marketed as being low risk, "What happened is that the banks got greedy and they looked at the return they were getting on the collateral and said, 'Why don't we go further with this?'"   
SERS seeks compensatory damages, including interest; rescission of the Sigma investment and other investments; and such other and further relief as may be just and proper, including any extraordinary equitable or injunctive relief as permitted by law or equity to attach, impound or otherwise restrict Wachovia’s and Wells Fargo’s assets to assure that SERS has an effective remedy. (Lots of luck on that last one.) School Employees Retirement System of Ohio v. Wachovia Bank, N.A., Case No. 2-10-cv-1160.

9.      FLORIDA MINIMUM WAGE DID NOT RISE:  On January 1, 2011, the minimum wage in Florida did not rise from the federal rate of $7.25 per hour.  The current federal minimum wage went into effect July 24, 2009.  Federal law requires that employers pay the higher of the federal or state minimum wage. The federal minimum wage will prevail over the state rate until such time as the Florida minimum wage becomes higher than the federal rate.
Florida law requires the Agency for Workforce Innovation to calculate an adjusted minimum wage rate each year and to publish the minimum wage in Florida on October 15.  The annual calculation is based on the percentage change in the federal Consumer Price Index for urban wage earners and clerical workers in the South Region for the 12-month period prior to September 1, 2010.  With the higher federal minimum wage taking precedence over the state rate, that calculation will not affect the 2011 minimum wage in Florida.
On November 2, 2004, Florida voters approved a constitutional amendment that created Florida’s minimum wage.  The minimum wage applies to all employees in the state who are covered by the federal minimum wage. 

10.    CALIFORNIA LEGISLATION ADEQUATELY PRESCRIBES BENEFITS THAT MUST BE PROVIDED TO JUDGES:   On remand of a taxpayer’s suit against county, challenging its annual payment of employment benefits to judges beyond salary prescribed by Legislature and in addition to employment benefits, including health care, disability insurance and life insurance provided to judges by the state, and following the Legislature’s enactment of recent legislation that addressed constitutional defects in the underlying case, trial court’s judgment in favor ofcounty is affirmed, as legislation fell within the scope of Governor’s proclamation, adequately prescribed benefits that must be provided to judges and did not intrude upon any judge’s right to equal protection of the laws. Sturgeon v. County of Los Angeles, Case No. D056266 (Cal. App. 4th , December 28, 2010). (Summary provided by findlaw.com.) 

11.    REMARKABLE QUOTES FROM REMARKABLE JEWS: Let me tell you the one thing I have against Moses. He took us forty years into the desert in order to bring us to the one place in the Middle East that has no oil. Golda Meir

12.    BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  You're just jealous because the voices only talk to me. 

13.    AGING JOKES:   THE SENILITY PRAYER: Grant me the senility to forget the people I never liked anyway, the good fortune to run into the ones I do, and the eyesight to tell the difference. 

14.    FABULOUS RANDOM THOUGHTS:   When I meet a new girl, I'm terrified of mentioning something she hasn't already told me but that I have learned from some light internet stalking. 

15.    QUOTE OF THE WEEK:    “Experience is not what happens to a man; it is what a man does with what happens to him.” Aldous Huxley

16.    KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items? Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources. 

17.    PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm. Thank you. 

Copyright, 1996-2011, all rights reserved.

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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