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Cypen & Cypen
NEWSLETTER
for
January 30, 2014

Stephen H. Cypen, Esq., Editor

1. FLAWS OF ADOPTING COST CUTTING IN SWITCHING TO DC PLAN: Thinking back to 2007, before the financial crisis, public pension plans in the aggregate had nearly 90% of assets on hand required to pay retirement benefits due decades in the future. However, says pionline.com, like all investors, public pension plans took a deep hit when the financial markets melted down in 2008. With markets in a downward freefall, pension assets plummeted, unfunded liabilities grew and pressure mounted on state policymakers to enact reforms. Even states with well-funded plans were prudent to examine closely their retirement systems, while policymakers in states that had fallen behind on their contributions prior to the Wall Street crisis faced tough decisions. Since that time, 48 states have enacted reforms to their pension plans. The overwhelming majority of states acted to ensure the sustainability of their traditional pension structures by adjusting benefits and increasing employee/employer contributions. Specifically, states enacted one or more reforms: 40 states reduced future pension benefits; 30 states required employees to increase their contributions; 21 states reduced cost-of-living adjustments for retirees; and 11 states statutorily increased the employers' pension contributions. Now, public pension systems appear poised to emerge stronger than before the financial crisis, thanks in large part to state policymakers' resistance to calls for extreme measures, while undertaking prudent state reforms and enjoying economic recovery. Indeed, a recent analysis by the Boston College Center for Retirement Research finds that such substantial reforms have put states on track to closing funding gaps, and many states might eventually reduce their pension costs to levels below what plans paid before 2008. Although the environment back in 2008 appeared fertile for a wholesale switch to individual defined contribution accounts from defined benefit pensions, it never happened. Begging the question, why did policymakers stick with their defined benefit plans in the face of financial pressure and the corporate trend away from them? One explanation is that the move away from DB plans in the private sector is rooted in federal regulations that are not applicable to public systems. These rules create sizable funding volatility and unpredictability for corporate plan sponsors. Another explanation is that state policymakers heeded the data in actuarial analyses that indicated closing public pensions would not address funding shortfalls. For example, West Virginia learned the hard way that a switch to defined contribution accounts from defined benefit plans does nothing to close unfunded pension liabilities, and can leave employees unable to retire. Other states have watched and learned from the West Virginia experience. Ultimately, kicking transition costs and unfunded liabilities down the road can have dire consequence for employees, employers and taxpayers. States have chosen to keep their DB pension model and are taking positive steps to fund their promises rather than embracing theories that there is no cost to switching to a DC plan from a DB plan.
 
2. MISDIRECTED IMPULSE TO SHIFT FROM DB PLANS: A piece in pionline.com says that although often assumed to save money, defined contribution plans are inefficient compared with defined benefit plans, which benefit from risk pooling, economies of scale and higher investment returns. Admittedly, private-sector employers that switched to defined contribution from defined benefit plans often were motivated by cost considerations and the desire to shed long-term liabilities, but only because switching plans gave them the opportunity to shift these costs and risks onto workers. Cost shifting is not cost saving, and overall costs went up even as retirement security plummeted. Impulses that drove the shift to DC plans in the private sector do not exist in the public sector. Public-sector workers already contribute to their pensions, so there is no reason to change plan type simply to allow more cost sharing. Because state and local governments almost never go out of business, government entities are well suited to taking on long-term pension obligations, as long as cities and states keep up with required contributions, which most do. Switching plans does not save taxpayers money, even if transaction costs are minimal. DB plans are more cost-effective than DC and hybrid plans in the short and long run because of higher net investment returns and costless risk pooling. These differences are not minor: participants and employers need to contribute almost twice as much to 401(k)s as to traditional DB plans to ensure a similar income in retirement. Although pension funds should be able to take on more risk than individuals saving for retirement, this belief is not founded on a naïve embrace of the fallacy of large numbers, but rather the fact that pension funds pool savings of overlapping generations of workers, allowing them to smooth the retirement outcomes of workers who retire during bull and bear markets. Thus pension funds have good reason to be less risk averse than individual savers, although in fact 401(k) participants now have a greater share of their assets invested in equities than do pension funds.
 
3. BETTER FUNDED PENSION PLANS COULD MAKE BIG ALLOCATION MOVES: The funded status of corporate pension plans improved in 2013. Analyses show an improvement of almost 15% for a representative open plan and 8% for a representative frozen plan: good news indeed. The change is big enough that a lot of plans may make some quite substantial changes in their asset allocation policy. Circumstances will vary from plan to plan. However, even though just about every corporate plan is likely to be funded better at the end of 2013 than it was at the start, the extent of improvement will not be the same in every case. The improvement mentioned above is based on an asset return of 11% (6% for the frozen plan): some plans will have fared better, especially those that had big allocations to the U.S. equity market. It assumed a liability duration of 12 years (8 years for the frozen plan). In 2013, plans with longer liability duration saw liability values fall faster than those with shorter liabilities. And the numbers assumed that new benefit accruals and sponsor contributions netted each other out; in practice, many plan sponsors will have contributed significantly more than that, others less. Nevertheless, expect a variation from case to case, but looking at the DB system as a whole, funded status saw a welcome jump. For some plans, the improvement will cause an automatic change in asset allocation as a result of a policy of liability-responsive asset allocation. Even plans that have not formally adopted LRAA policies will, in many cases, experience that same change in the cost-benefit of growth-oriented investment strategies. Many will choose to respond by dialing down the amount of risk they take. The result could mean that a substantial volume of pension assets moves from equities and other return-oriented investment classes into lower risk liability-driven investing strategies. At some point the pent-up demand for LDI is going to translate into activity as pension plans reduce the very substantial bet they currently have on interest rates. This piece was brought to us by Russell Investments. 

4. FLORIDA 2013 ANNUAL REPORT NOTICE: Sarah Carr, Benefits Administrator, Municipal Police Officers’ and Firefighters’ Retirement Trust Funds Office, Florida Department of Management Services, Division of Retirement, has sent a notice to chairmen, secretaries and plan administrators for Chapters 175 and 185 pension plans. In accordance with Section 175.261 and 185.221, Florida Statutes, each participating municipality or special fire control district must complete and submit an Annual Report to the Division of Retirement to be eligible for the distribution of state premium tax moneys. The Chairman of each fund is responsible for ensuring that the completed 2013 Annual Report forms are submitted to the Division, along with all required supporting documentation, by February 1, 2014 for Chapter plans and March 15, 2014 for Local Law plans. In an effort to conserve state resources and expedite the distribution process, the Division has made the 2013 Annual Report template available on its website: http://www.myflorida.com/frs/mpf. The files are in Microsoft Word/ Excel formats and will allow requested information to be filled-in and to print the Report in its proper format on legal-sized paper. For those who do not have Word or Excel, the Reports are also available in Acrobat Reader form and may be printed out for manual completion. If you wish to receive a hard copy of the template, please contact the Division to request one. In either case, you must submit a hard copy of the completed Annual Report to the Division with all required signatures and supporting documentation by the appropriate due date. If you have any questions, you can contact the Division at 850.922.0667 or toll free 877.738.6737.
 
5. CITIES WITH HIGHEST UNFUNDED PENSION LIABILITY: A new report from Governing examines pension liabilities for all types of retirement systems in select jurisdictions, showing sizable fiscal burdens in some cities. Closely scrutinized unfunded pension liability figures do not paint a pretty picture in cities’ financial statements. But in some cases, local taxpayers are responsible for greater unfunded liabilities: there are other overlapping governments sometimes saddled with unfunded pension liabilities of their own. So along with city governments, the same taxpayer base may need to foot the bill for state, school district and any other special district’s employee pension plans. The new report tallied the total unfunded pension burden for residents in the 25 most populous cities. The report found the median aggregate unfunded pension liability for the cities examined to be $3,550 per resident. Of course, no major city was higher than Chicago. Here is a table listing the per capita unfunded actuarial accrued liabilities for a few of the 25 states examined:
 
          City                       Per Capita City              Per Capita Total
                                        Pension UAAL               Pension UAAL
         
      Chicago                      $7,149                            $18,596
      New York                    $8,726                            $  9,842
      Boston                        $4,465                            $  7,802
      Philadelphia                $3,308                            $  7,057
 
Jacksonville, Florida came in thirteenth at $2,586 and $3,675. 
 
6. DONNING AND DOFFING TIME NOT COMPENSABLE UNDER FLSA: Sandifer filed a putative collective action under the Fair Labor Standards Act of 1938, seeking back pay for time spent donning and doffing pieces of protective gear he asserted the United States Steel Corporation required workers to wear because of hazards at its steel plants. U.S. Steel contended that this donning-and-doffing time, which would otherwise be compensable under the Act, is noncompensable under a provision of its collective bargaining agreement with Sandifer’s union. The validity of that provision depends on the Act, which allows parties collectively to bargain over whether time spent in changing clothes at the beginning or end of each workday must be compensated. The District Court granted U.S. Steel summary judgment in part, holding that Sandifer’s donning and doffing constituted “changing clothes”. It also assumed that any time spent donning and doffing items that were not clothes was de minimis, and hence noncompensable. The Seventh Circuit affirmed and on certiorari the United States Supreme Court affirmed. The court initially construed compensability under the Fair Labor Standards Act expansively. The Act was amended in 1949, however, to provide that the compensability of time spent changing clothes or washing at the beginning or end of each workday is a subject appropriately committed to collective bargaining. Whether Sandifer’s donning and doffing qualifies as “changing clothes” depends on the meaning of that statutory phrase. The term “clothes” which is otherwise undefined, is interpreted as taking its ordinary, contemporary, common meaning. “Clothes” denotes items that are both designed and used to cover the body and are commonly regarded as articles of dress. Nothing in the Act suggests anything other than this ordinary meaning. There is no basis for Sandifer’s proposition that the unmodified term “clothes” somehow omits protective clothing. The exception applies only when the changing of clothes is an integral and indispensable part of the principal activities for which covered workmen are employed, and thus otherwise compensable under the Act. Protective gear is the only clothing that is integral and indispensable to the work of many occupations, such as butchers and longshoremen. Sandifer’s position is also incompatible with the historical context of passage, contradicting contemporaneous Labor Department regulations anddictum. The interpretation here leaves room for distinguishing between clothes and wearable items that are not clothes, such as some equipment and devices. The view of U.S. Steel is that “clothes” encompassed the entire outfit that one puts on to be ready for work is also devoid of any textual foundation. It is evident that the donning and doffing in this case qualifies as “changing clothes”. Of the 12 items at issue, only 3 -- safety glasses, earplugs and respirator -- do not fit within the elaborated interpretation of “clothes.” Apparently concerned that federal judges would have to separate the minutes spent clothes changing and washing from the minutes devoted to other activities during the relevant period, some appellate courts have invoked the doctrine de minimis non curat lex (the law does not take account of trifles). But that doctrine does not fit comfortably within this statute, which is all about trifles. A more appropriate way to proceed is for courts to ask whether the period at issue can, on the whole, be fairly characterized as time spent in changing clothes or washing. If an employee devotes the vast majority of that time to putting on and off equipment or other non-clothes items, the entire period would not qualify as time spent in changing clothes under the statute, even if some clothes were also donned and doffed. However, if the vast majority of the time is spent in donning and doffing clothes as defined here, the entire period qualifies, and the time spent putting on and off other items need not be subtracted. The Seventh Circuit agreed with the District Court's conclusion that the time spent donning and doffing safety glasses and earplugs was minimal. And the Supreme Court is disinclined to disturb the District Court's additional factual finding, not addressed by the Seventh Circuit, that respirators were donned and doffed as needed during the normal workday and thus fell beyond the scope of the statute. Sandifer v. United States Steel Corporation, Case No. 12-417 (U.S. January 27, 2014).
 
7. FLORIDA SUPREME COURT VALIDATES PROPOSED CITIZEN INITIATIVE AMENDMENT TO FLORIDA CONSTITUTION ON MEDICAL MARIJUANA: The Attorney General of Florida petitioned the Florida Supreme Court for an advisory opinion as to validity of a proposed citizen initiative amendment to the Florida Constitution submitted by People United for Medical Marijuana, and the corresponding Financial Impact Statement submitted by the Financial Impact Estimating Conference. Review of the proposed amendment is limited to two issues: (1) whether the proposed amendment itself satisfied the single-subject requirement of Article XI, Section 3, of the Florida Constitution; and (2) whether the ballot title and summary satisfied requirements of Section 101.161(1), Florida Statutes. For the reasons explained, the court concluded that the proposed amendment embraced a single subject, which is the medical use of marijuana, and therefore complied with Constitution. The court also concluded that the ballot title and summary complied with the statute, because they are not clearly and conclusively defective. By reading the proposed amendment as a whole and construing the ballot title together with the ballot summary, the voters are given fair notice as to the chief purpose and scope of the proposed amendment, which is to allow a restricted use of marijuana for certain debilitating medical conditions. The voters will not be affirmatively misled regarding the purpose of the proposed amendment because the ballot title and summary accurately convey the limited use of marijuana, as determined by a licensed Florida physician, that would be authorized by the amendment consistent with its intent. The interpretation of the proposed amendment offered by the proponent that the intent is to allow marijuana use for a serious medical condition or disease, rather than for any medical condition for which a physician personally believes that the benefits outweigh the health risks, is a reasonable one supported by accepted principles of constitutional interpretation. Finally, the Financial Impact Statement was in compliance with Section 100.371(5), Florida Statutes. Therefore, the court approved the proposed amendment and Financial Impact Statement for placement on the ballot. Of course, the court expressed no opinion on merits of the proposal. Advisory Opinion To The Attorney General Re: Use Of Marijuana For Certain Medical Conditions, Case No. SC13-2006 (FL January 27, 2014).
 
8. OREGON STATE SUPREME COURT JUDGES NOT DISQUALIFIED TO DECIDE CHALLENGES TO PERS LEGISLATION BECAUSE OF INTEREST IN PROCEEDINGS:Current and former public employees challenged constitutionality of Oregon’s 2013 amendment to certain statutory provisions of the public employees retirement system. A public employer/intervenor filed a motion to disqualify the sitting Judges of the Oregon Supreme Court from hearing the case. The Supreme Court of Oregon denied the motion.  Under Oregon law, the only persons other than current members of the Supreme Court who may serve on the Supreme Court for purposes of deciding these cases are retired judges of the court or current judges of lower Oregon state courts. Any substitute judge authorized by Oregon law to decide the cases would have the same disqualifying interest. Because disqualification would leave the employees here without a tribunal to decide their claims, and in light of the legislature's express grant of jurisdiction to the Supreme Court to decide challenges to the 2013 PERS legislation, the court concluded that the rule of necessity applies, and that members of this court are not disqualified from deciding the case because of any interest in the proceedings. The court also concluded, as have other state and federal courts that have considered the issue, that application of the rule of necessity in these circumstances is not a denial of due process. Moro v. State of Oregon, Case No. S061452 (Ore. January 16, 2014).
 
9. INTERVIEW BLUNDERS: When it comes to a job interview, the first few minutes may be the most crucial. A new survey from CareerBuilder finds that nearly half of employers know within the first five minutes of an interview whether a candidate is a good or bad fit for the position, and 87% know within the first 15 minutes. When asked to share the most outrageous mistakes candidates made during a job interview, employers gave the following real-life examples: 

  • Applicant warned the interviewer that she had taken too much valium and did not think her interview was indicative of her personality.
  • Applicant acted out a Star Trek role.
  • Applicant answered a phone call for an interview with a competitor.
  • Applicant arrived in a jogging suit because he was going running after the interview.
  • Applicant popped out his teeth when discussing dental benefits.
  • Applicant kept her iPod headphones on during the interview.
  • Applicant set fire to the interviewer’s newspaper while reading it when the interviewer said “impress me”.
  • Applicant wanted to know the name and phone number of the receptionist because he really liked her. 

On a little more serious note, the top most detrimental blunders candidates make in interviews are often the most common, according to employers:

  • Appearing disinterested
  • Dressing inappropriately
  • Appearing arrogant
  • Talking negatively about current or previous employers

10.  FPPTA   TRUSTEES   SCHOOL: Florida   Public   Pension   Trustees Association Trustees School will take place on February 2 – February 5, 2014 at the Hyatt Regency Jacksonville Riverfront.  To access information please log on to www.fppta.org. All board of trustee members, and anyone interested in the administration and operation of the Chapters 112, 175 and 185 pension plans should attend the Trustees School.
 
11. ENLIGHTENED PERSPECTIVE BY ANDY ROONEY: I have learned... that the less time I have to work with, the more things I get done.
 
12. CLEVER SIGNS: In the front yard of a funeral home: "drive carefully. we'll wait."
 
13. TODAY IN HISTORY: In 2009, Irving Cypen, one of the greatest men who ever lived, died at the age 90.

14. 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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