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Cypen & Cypen
NEWSLETTER
for
FEBRUARY 9, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. RISK AND REWARD IN VOLATILE TIMES ... HOW DO TRUSTEES COPE?:
In the lead article in February 2004's Employee Benefits Digest, our good friend Tom Mackell says that, economically, this country could very well be where it was in the 1930s. In order to cope in this environment, trustees are challenged to take bold steps. Dr. Mackell suggests that trustees first review and analyze current asset allocation. For example, they should question the once-secure haven of bonds, because with such low interest rates, a potential upwards swing in rates will prove problematic for the fixed income allocation. Additionally, commercial banks’ exposure to mortgage markets through aggressive lending practices has the potential of bursting a mortgage bubble that could unleash broader financial disruptions than the S&L crisis of the 1980s. Second, Dr. Mackell believes that alternative investment classes warrant trustees’ attention. They should look at properly constructed and well-diversified fund-of-fund hedge funds with all of the appropriate protection and transparency; private equity funds that are worker-friendly and will enhance a local community’s economy; job-creating real estate programs; and for the more adventuresome, venture capital, commodities and forestry funds. However, the overriding caveat is trustees’ education in conjunction with an extremely thorough and intensive due diligence process as evidenced by the prospective managers and conducted by the consultants to the funds. Dr. Mackell does not envision a magic bullet to correct what he calls “our benefits crises.” Instead, the world will continue to change and trustees will be challenged to deal with those changes. Thus, it is critical that trustees and administrators remain vigilant, be innovative and lead the way for participants and their families. Nice job, as usual, Tom.

2. RANDOM, SUSPICIONLESS DRUG TESTING OF FIREFIGHTERS VIOLATES FOURTH AMENDMENT:
The City of Mesa, Arizona, implemented a substance abuse program for its fire department. The program requires testing of firefighters (1) if the department has reasonable suspicion to believe an individual firefighter has abused drugs or alcohol; (2) after a firefighter is involved in an accident on the job; (3) following a firefighter’s return to duty or as a follow-up to “a determination that a covered member is in need of assistance;” and (4) “on an unannounced and random basis spread reasonably throughout the calendar year.” The primary purpose of the random testing component “is to deter prohibited alcohol and controlled substance use and to detect prohibited use for the purpose of removing identified users from the safety-sensitive workforce.” This purpose supposedly advances the city’s goal of establishing “a work environment that is totally free of the harmful effects of drugs and the misuse of alcohol.” A firefighter filed a complaint seeking declaratory and injunctive relief, alleging that the random testing component violated his rights under the Fourth Amendment to the United States Constitution. The trial court agreed with him, but the court of appeals reversed, holding that the program’s random testing component is reasonable under the United States Constitution. The court of appeals reasoned that the city’s “compelling need to discover specific but hidden conditions representing grave risks to the health and safety of the firefighters and the public” outweighed firefighter’s privacy interests. In an En Banc decision, the Supreme Court of Arizona reversed, holding that the program’s random testing component is unreasonable and therefore violates the Fourth Amendment to the United States Constitution. Balancing the firefighter’s interests against the interests the city advances in favor of the program’s random component, the high court concluded that the city’s generalized and unsubstantiated interest in deterring and detecting alcohol and drug use among the city’s firefighters by conducting random drug tests is insufficient to overcome even the lessened privacy interests of firefighters. The situation cannot be described as one of those “limited circumstances, where the privacy interests implicated by the search are minimal, and where an important governmental interest furthered by the intrusion would be placed in jeopardy by a requirement of individualized suspicion, and in which a search may be reasonable despite the absence of such suspicion.” Rather, the increased intrusion occasioned by the program’s random, suspicionless testing component represents the very type of “arbitrary and invasive acts by officers of the government or those acting at their direction” against which the Fourth Amendment is meant to guard. Petersen v. City of Mesa, Case No. CV-03-0100-PR (AZ, January 27, 2004).

3. FLORIDA ATTORNEY GENERAL ANSWERS QUESTIONS ON MILITARY LEAVE:
Answering four interrelated questions, the Florida Attorney General concluded that a state employee who is ordered into military active duty other than for training pursuant to the provisions of 10 U.S.C. §12301(d) is entitled to a leave of absence, receiving full pay for the first 30 days. After that time, the employing authority may supplement the employee’s military pay in an amount necessary to bring the employee’s total salary, including his or her base military pay, to the level earned at the time the employee was called into active military duty. The period of military leave to which a state employee is entitled would be governed by the provisions of the Uniformed Services Employment and Reemployment Rights Act, which limits reemployment rights, with certain exceptions, to a cumulative period of service in the uniformed service that does not exceed five years. In addition, such employee would be entitled to continued coverage under all health insurance and other existing benefits required under the federal act. That act also provides for a maximum period of coverage of 18 months and further provides that an employee who elects to continue his or her health plan may be required to pay not more than 102% of the full premium associated with such coverage. AGO 2004-02 (January 21, 2004).

4. INVESTORS USUALLY DO WELL IN ELECTION YEARS:
From Bloomberg News we learn that the Standard & Poor’s 500 Index has averaged a 9% gain during election years in the last half century. The median advance is 12%. Conditions that have helped lift share prices before -- tax cuts, higher government spending and low interest rates -- are in place as the President seeks reelection this November. Market history shows that stocks rise more in the second half of a 4-year presidential term than in the first -- true in 8 of the past 10 presidential terms. The S&P 500 declined 33% during President Bush’s first 2 years in office. Statistics show that the stock market’s best performance happens in the third year of the term, and 2003 produced a 26% gain for the Index. Economic growth also conforms to the election cycle. The economy expands at a 2.7% rate in years 1 and 2 of a presidential term but accelerates to 4.3% in years 3 and 4. The economy grew .5% in 2001 and 2.2% in 2002. Last year’s growth was 3.1%, projected to increase by 4.6% this year. Many economists attribute last year’s expansion to the $330 Billion of tax cuts, together with the lowest interest rates in almost 50 years. In his $2.4 Trillion budget proposed earlier this month, the President seeks to make tax breaks permanent.

5. SERVICE MEMBERS GET NEW FEDERAL LAW:
President Bush signed the Servicemembers Civil Relief Act on December 19, 2003. The SCRA revises, clarifies, restates and renames the Soldiers’ and Sailors’ Civil Relief Act of 1940. The earlier act was designed to assist and protect servicemembers and their families during periods of active military duty by insuring that active military personnel were not placed at a disadvantage in legal, personal or financial matters because of their deployment. One provision set a maximum interest rate of 6%, during periods of active duty, with respect to debts incurred by service members before being called to military duty. However, the earlier statute did not spell out what debt instruments were covered or how the reduction in interest rate was to be administered. Significantly, during World War II, 401(k) plans did not exist, so plan loans were not addressed. The 2003 amendments clarify application of the 6% maximum interest rate. An obligation or liability incurred by a service member before entering active military duty cannot bear a rate in excess of 6% during a period of military service. Thus interest rates in excess of 6% must be reduced to 6% during periods of military service, if so requested. Interest in excess of 6% that otherwise would have been incurred must be forgiven. The periodic repayment amount calculated to pay off a debt eligible for the 6% maximum interest rate must be recalculated to reflect any reduction in interest payments. The SCRA makes clear that in order for the maximum 6% interest rate to apply, the service member must provide written notice and a copy of his military orders to the creditor no later than 180 days following release from active service. Note, SCRA provides that a court may grant a creditor relief from having to limit interest to 6% if it determines that a servicemember’s ability to pay a higher interest rate is not materially affected by reason of his military service. (Although in today’s low interest rate environment that situation may be moot, it sure sounds like a can of worms to us.) Finally, the amendments apply to any case that was not final before December 19, 2003. This summary was adapted from a piece prepared by Mellon H R & I S. For further information on SCRA and frequently asked questions for reservists being called to active duty, visit http://www.dol.gov/ebsa/faqs/faq_911_2.html.

6. AARP ISSUES “REPORT CARD”:
AARP has issued a report entitled “The State of 50+ America,” to answer the question of how we are doing over the past 10 years and over the past year. The report card gauges change over the past 10 years and also year-to-year changes in 20 key measures of well-being. These measures cover economic and health status; consumption and lifestyles; long-term care and independent living; and attitudes about the future. Looking back 10 years, the picture is mostly one of real progress: the rising tide has not lifted all boats, but the average indices show substantial improvements. Median family incomes have grown about 10% over the past decade, while median assets have grown more than 50%. The distribution of income and assets has grown more disparate, so gains have not been uniformly enjoyed. The proportion achieving a minimally adequate standard of living has improved by only 4 percentage points in this period. Although the proportion of workers covered by a pension plan has increased 10%, that rate still falls short of covering a majority of working Americans. More 50+ Americans are working today than 10 years ago; fewer are unemployed. Despite the long-term good news documented, older Americans can best be described today as vulnerable. Half the population 62 and older depends on Social Security for at least half of their income. Health costs are continuing to soar. The cost of long-term care grows more unaffordable for most every year. The challenge for society grows larger, as baby boomers near traditional retirement age, and as greater risk and responsibility are shifted to individuals to plan and provide for their own retirement futures. The foregoing is from the Executive Summary. You can view the entire report at http://www.research.aarp.org/general/fifty_plus_2004.pdf.

Copyright, 1996-2004, 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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