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Cypen & Cypen
NEWSLETTER
for
January 9, 2014

Stephen H. Cypen, Esq., Editor

1.  FLORIDA FOURTH DISTRICT COURT OF APPEAL RULES IN FAVOR OF HOLLYWOOD FIREFIGHTERS: Yesterday, the Fourth District Court of Appeal determined that the Public Employee Relations Commission (“PERC”) failed to apply the proper standard for determining whether a financial urgency exists. The firefighters’ union filed unfair labor practice charges against the City of Hollywood, challenging the City’s declaration of financial urgency and its subsequent imposition of benefit reductions pursuant to Section 447.4095, Florida Statutes. PERC found that a financial urgency existed and upheld the City’s unilateral modification of the existing bargaining agreement. On appeal, the Fourth District found that PERC failed to examine whether the City had demonstrated that funds were “available from no other source” as required by the Florida Supreme Court’s decision Chiles v. United Faculty of Florida, 615 So.2d 671 (Fla. 1993). Consequently, the Fourth District remanded the matter to PERC, and directed PERC to apply the appropriate legal standard for determining whether the City had committed an unfair labor practice. The Fourth District also certified to the Florida Supreme Court that its decision is in conflict with a decision of the First District Court of Appeal. Hollywood Firefighters, Local 1375, IAFF Inc., v. City of Hollywood, 2014 WL 51693 (Fla. 4th DCA, January 8, 2014). To read a copy of the court’s entire opinion:http://www.4dca.org/opinions/Jan%202014/01-08-14/4D12-2861.op.pdf.

2. FPPTA COMMENTS ON MAINTAINING LOCAL CONTROL OF FLORIDA MUNICIPAL PENSIONS: In The Palm Beach Post, Florida Public Pension Trustees Association’s Raymond Edmondson addresses an earlier commentary by Florida TaxWatch President Dominic Calabro. The latter asserts that many municipal plans are significantly underfunded, but not only fails to offer any specifics, but also reveals a lack of understanding about the difference between unfunded liabilities and underfunded plans. The majority of Florida’s municipal pension plans are very adequately funded, although some did experience a spike in unfunded liabilities relative to assets following the stock market collapse of 2008-2009. However, calling those plans underfunded is a deliberate ploy used to exploit public concern about their financial stability. In fact, liabilities-to-assets ratios have been reduced as expected with the market’s recovery. There certainly has been no massive pension underfunding in the vast majority of Florida’s 490 municipal pension plans. At the close of the June 30, 2013 fiscal year, government funds had a three-year annualized median return of 11.4%, with assets exceeding pre-Great Recession peaks. The median gain for state and local pension funds for the year was 12.4%. Mr. Calabro completely misstates that Detroit’s financial collapse was due in any significant measure to public pension commitments, even though former public workers will likely pay a big price for the city’s mismanagement. (See C & C Newsletter for October 24, 2013, Item 7). Detroit had been losing its population base for decades, and while the city’s capacity to raise revenue declined, elected officials continued to spend. Florida is not Michigan and Tallahassee is not Detroit. Mr. Edmondson concurs with Mr. Calabro’s assertion that unfunded state mandates are counter-productive to municipal budgeting, and that municipalities should enjoy autonomy in determining the terms of employment and benefits with public workers. Let local officials and voters determine the value of compensation for first responders willing to serve and protect the public even at the cost of their own lives, and let tax accountants stick to ledger sheets. Florida TaxWatch would better serve Florida’s taxpayers by scrutinizing not just the cost of public services, but the hemorrhaging of revenue resulting from corporate tax breaks that are supposed to yield new jobs. It is time to quit playing the blame game with the livelihood of our public employees. Forty-seven states and countless municipalities already have put in place pension reforms ranging from expanded retirement ages, to increased employee contributions, to caps on COLAs and reductions in benefits. Public employees should not be saddled with the entire burden of pension reform. 

3.  ISSUES THAT STATE LEGISLATURES WILL BE TACKLING THIS YEAR: For states throughout the country this year, there is a common theme: a climate of uncertainty coupled with a sense of genuine opportunity. Governing reports that amid worries about the federal government’s failure to boost funding for infrastructure, many states are taking steps to produce that funding on their own. Congress seems to have stalled, again, in its efforts to reform the immigration system, but states are enacting bills designed to grant new rights to some of their undocumented residents. And after a period in which higher education programs faced dramatic cuts, states are putting money back into those programs -- some of them more efficiently than in the past. Here are 10 big issues states will look to tackle in 2014, and six smaller ones they will also address:
 

  • Medicaid.
  • Income Tax Revision.
  • Minimum Wage Laws.
  • Public Pensions (expanded upon below).
  • Immigration.
  • Safety Net.
  • Higher Education.
  • Employee Compensation (expanded upon below).
  • Transportation Funding.
  • Drones.

 

Public Pensions
 
     Courts and voters will play key roles in answering the next big question facing public pensions: are current retirees immune to cuts? Many court watchers expect bankruptcies in Detroit and San Bernardino, California to set precedent in this area, as both cities have taken the unusual move of including their pension debt in filings. The judge presiding over Detroit’s bankruptcy ruled that the state’s protection of pension promises does not apply at the federal bankruptcy court level. City employee unions are appealing that decision. San Bernardino’s judge has not issued an opinion. Some experts believe that the question will ultimately be decided by the U.S. Supreme Court, as the issue comes up in more states. They also predict many more court opinions on the subject. Meanwhile, in California, an effort is under way that could have major consequences for CalPERS, the state’s huge public employee pension fund. There is an initiative under way that would give government’s authority to negotiate changes to existing employee pensions. Retiree health benefits would be affected as well.
 
Employee Compensation
 
     States that enacted extended pay freezes and benefit cuts in recent years might soon have an opportunity to reduce the pinch on state workers as revenues rebound. Already, most Florida state employees saw their first across-the-board pay increase in seven years, while those in Virginia received their first permanent base pay raise since 2007. Missouri and Kentucky state employees are among those who have recently pushed legislatures for sustained compensation increases. Along with anticipating potential pay raises, more employees are looking at some of the underlying concerns with compensation systems. One of the prominent issues is finding the right mix of pay and benefits. Although most states still offer competitive benefits, their cash compensation often lags so far behind the private sector that it is difficult to attract and retain talent. For example, in Oklahoma, a legislative committee held hearings to discuss how the state’s compensation system was “out of whack.” 
 
The following six issues also could be big this year: abortion, fracking, GMOs, privacy, social impact bonds, and autonomous vehicles.

4. RETIRED ILLINOIS TEACHERS CHALLENGE PENSION REFORM: On December 27, 2013, the Illinois Retired Teachers Association, along with the Illinois Association of School Administrators, filed suit in Cook County Circuit Court, challenging constitutionality of a new law that radically diminishes retired teachers’ pension benefits. Among other allegations, plaintiffs allege the new law represents a clear violation of the Illinois Pension Code, as it protects retirement benefits of all educators, both retired and currently active. Plaintiffs seek a declaration that new law is void in its entirety because it violates the Pension Protection Clause of the Illinois Constitution. IRTA expects other aggrieved parties will file similar challenges to the constitutionality of the new law.

5. CONGRESS COULD RECONSIDER MILITARY PENSION CUTS:A cut to military retirement pay has already triggered such a backlash that Congress may vote to toss it out, according to the WashingtonPost. Some lawmakers who represent districts with a military presence -- and who voted for the overall budget -- are vowing to overturn the pension change. Several House and Senate lawmakers of both parties, responding to heavy lobbying from advocates for service members and veterans, already have introduced bills that would restore full cost-of-living increases for military retirees of working age. One bill would restore the annual cost-of-living adjustment for about 800,000 enlisted troops and officers who retire in their early 40s, then take other jobs outside the military. In the budget just passed, the COLA for working age retirees was reduced by 1 percentage point; once the retiree turn 62, he goes back to receiving the full increase. The cut is expected to save the government about $6 billion over 10 years, and is set to be phased in over three years. Even lawmakers who support the COLA cut agree that the provision should be changed to exempt at least disabled veterans who were forced to retire for medical reasons, as well as survivors. The budget legislation also requires newly hired civilian federal employees to contribute more to their pensions.

6.  CORPORATE PENSION FUNDING LEVELS UP SHARPLY: 
 
     A. Pension funded status of the nation’s largest corporate sponsors increased sharply in 2013 due primarily to rising interest rates (which lowered liabilities) and a strong stock market, according to Towers Watson.   In reviewing estimated year-end pension plan results, Towers Watson found that 2013 pension plan funding levels increased by 16% percentage points to reach their highest levels since 2007. The analysis examined pension plan data for the 418Fortune 1000 companies that sponsor U.S. tax qualified defined benefit pension plans and have a December fiscal-year-end. Results indicate that the aggregate pension funded status is estimated to be 93%, a sharp jump from 77% at the end of 2012. Overall, pension plan funding improved by $285 billion last year, leaving a deficit of $99 billion at the end of 2013.
 
     B. During the fourth quarter of 2013, the UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan rise by about three percentage points, to 95%. Overall, 2013 was a very strong year for corporate plans, as the average funding ratio rose by about 17 percentage points. Strong investment returns of 4.7% were the main contributor to improvement in the funding ratio during the quarter. Liability values were estimated to have increased by 1.1%. These estimates are based on the average corporate plan’s reported asset allocation weightings. The US equity market finished the year with a final surge upwards, as the S&P 500 Index recorded a 10.5% total return over the quarter. After a volatile quarter, the yield on 10-year US Treasury bonds increased by 42 basis points, ending at 3.03%. The yield on 30-year US Treasury bonds increased 29 basis points, ending at 3.97%. High quality corporate bond credit spreads, ended the quarter 27 basis points tighter. As a result, pension discount rates were flat. The passage of time caused liabilities for a typical pension plan to increase by about one percentage point over the quarter. Together, these effects caused liabilities to increase 1.1% for the quarter.
 
     C. Separately, Mercer said that funding levels of pension plans sponsored by S&P 1500 companies rose to 95% at the end of December, up 21 percentage points for the year.
  
Pension liabilities change over time as employees enter and leave a pension plan. For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan. The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company’s future pension payments. The higher the discount rate, the smaller the company’s pension liabilities.
 
7. RETIREMENT TIPS FOR 2014: Just in time for resolutions, USA TODAY offers 10 retirement tips for 2014: 

  • If you have not already, start thinking about retirement and retirement planning -- especially if you have turned 50. Spend more time on retirement planning and invest more dollars for retirement.
  • Have a plan for your life in retirement. Plan for some sort of transition, and have activities planned.
  • Do not let family members throw your retirement off track. We all love our kids, but financial planners warn to be careful not to let them hurt your retirement preparations.
  • It is never too late to start saving, but late starters need to temper lifestyle expectations. If you are 50 or older, you need to start thinking about changes you need to make to be able to retire.
  • The possibility of running out of money in retirement is real for millions of people. You should not underestimate your life span. There is probably a good chance you will live into your 80s or 90s.
  • If you are planning to continue to work in retirement, you may be in for a shock. Many people who have not saved enough plan to make up the difference by continuing to work and delaying retirement. The problem is, for a variety of reasons, many people are not able to work into their 60s. The biggest reason is health issues. But, yes, age discrimination is an issue, as well.
  • Do not underestimate health care costs in retirement. 
  • The less debt you have going into retirement, the more likely you are to find success in your retirement. 
  • Figure out how to make Social Security work best for you. Most financial planners recommend that you delay taking Social Security for as long as you can. Delaying makes sense in that every year you delay receiving Social Security, your check increases by 8%.
  • Do not be too conservative in your retirement savings. There is a tendency to for people in retirement to be way too conservative in their investments. They no longer feel the need to hedge against inflation. Most need exposure to the equity markets. They have to have some exposure, in most cases, if they are going to have a reasonable expectation of maintaining that nest egg during retirement. 

 

8.  A PERSPECTIVE ON RETIREMENT READINESS: Employee Benefit Research Institute says that approximately 44% of the Baby Boomer and Gen-Xer households are simulated to be at risk of running short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted. Nearly one-half (49.1%) of Gen Xers have at least 20% more than is simulated to be needed; approximately one-third (31.4%) have between 80-120% of the financial resources necessary to cover the retirement expenses and uninsured health care costs; and about 1 in 5 (19.4%) are projected to have less than 80% of what is needed. Among Gen-Xer single females simulated to have no future years of defined-contribution-plan eligibility, nearly two-fifths (39%) are in the most vulnerable (less than 80%) category, although the number shrinks to only 8% for those with 20 or more years of future eligibility in a defined contribution plan. Getting old is not for the faint of heart. 

9. HOW OBAMACARE COULD HURT FIRE DEPARTMENTS: The Affordable Care Act’s mandate that all large employers provide health care for their employees has an unintended target: the 26,000 fire departments across the U.S. that are either entirely or mostly composed of volunteers, according to governing.com. The health overhaul requires employers with more than 50 workers to provide health insurance, though that provision was delayed until 2015. The Internal Revenue Service considers volunteer firefighters to be employees for tax purposes because they often receive some benefit for their service, such as a small stipend (See C & C Newsletter for August 22, 2013, Item 6). Fire lobbying groups have pressed the agency to issue a rule clarifying how the health law relates to volunteers, but the National Volunteer Fire Council has yet to receive word, and its government relations director says he does not know when IRS will weigh in. Meanwhile, recently filed bills in both the House and the Senate seek to remove volunteer firefighters and emergency personnel from the tally of full-time workers calculated by employers as they prepare for compliance with the 2015 mandate. Under the Affordable Care Act, a full-time employee is anyone who works at least 30 hours a week. Both bills have wide bipartisan support, but neither has yet received a committee vote. Nationally, volunteers account for nearly 70% of the 1,130,000 total firefighters in the U.S. About 26,000 of the 30,000 total departments are either all or mostly volunteer-based. Some fire departments are part of a municipal or county government, but many are private nonprofits. Nonprofits could be hit especially hard, but even larger governmental organizations would feel the strain. If nothing changes, fire departments would likely limit hours for volunteers, cut positions, eliminate whatever benefits volunteers do receive or take other actions to avoid outright closure. Some departments are preparing for the worst. Burlington, Washington, has nine full-time employees and 30 volunteers on its staff. Full medical benefits for volunteers would cost the city $750,000, out of an entire budget of $1.6 million.

10. ENLIGHTENED PERSPECTIVE BY ANDY ROONEY: I have learned... that opportunities are never lost; someone will take the ones you miss.
 
11. CLEVER SIGNS: In a Veterinarian's waiting room: "Be back in 5 minutes. Sit! Stay!"
 
12. TODAY IN HISTORY: In 1979, K-Mart pulls Steve Martin’s “Let’s Get Small” for being in “bad taste.”

13. 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.
 
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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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