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Cypen & Cypen
NEWSLETTER
for
FEBRUARY 1, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. KEY FACTS REGARDING STATE AND LOCAL GOVERNMENT DEFINED BENEFIT RETIREMENT PLANS:

National Association of State Retirement Administrators (NASRA) has just issued “Key Facts Regarding State and Local Government Defined Benefit Retirement Plans.” Here are the highlights:

  • Public Pension Plans are in Good Financial Condition. As a group, state and local pension systems have nearly 90 cents for every dollar they owe in liabilities. The assets are professionally managed and invested on a long-term basis using sound investment policies. The almost-$3 Trillion (in real assets, not IOUs) held by these plans are an important source of liquidity and stability in the nation’s financial markets.
  • The Bulk of Public Pension Benefit Funding is Not Shouldered by Taxpayers. On a national basis, employer (taxpayer) contributions to state and local pension systems make up only one-fourth of all public pension revenue. Earnings from investments and employee contributions compose the remainder. In 2005, investment earnings accounted for 74% of all public pension revenues; employer contributions were 17%. Unlike corporate workers, most public employees are required to contribute to their pension plans.
  • Public Retirement Plans Attract and Retain the Worforce that Provides Essential Public Services. There are more than 20 million working and retired state and local government employees in the U.S. Retired public employees live in virtually every city and town in the nation. (About 90% stay in the same jurisdiction where they worked.) Active public employees make up more than 10% of the nation’s workforce, and two-thirds are employed in education, public safety, corrections or the judiciary. Retention of experienced and trained personnel in these and other positions is critical to the continuous and reliable delivery of public services.
  • State and Local Pension Plans are an Integral Component of National, State and Local Economies. Public plans distribute more than $140 Billion annually (an amount greater than the total economic output of 22 states) in benefits to nearly seven million retirees, beneficiaries and other recipients, with an average annual pension benefit of roughly $20,400. These payments are steady and continuous, and provide a robust and reliable economic stimulus to local economies throughout the nation. Recent studies have found that public pension funds and the benefits they distribute make important contributions to local, state and the national economies.
  • State and Local Plans are Subject to Comprehensive Oversight. While private sector plans are subject solely to federal regulation, state and local plans are creatures of state constitutional, statutory and case law and must comply with a vast landscape of state and local requirements, as well as industry accounting standards. These plans are accountable to the legislative and executive branches of the state; independent boards of trustees including employee representatives and/or ex-officio publicly elected officials; and ultimately, the taxpaying public.
  • State and Local Pension Funds Earn Competitive Investment Returns. For the 10- and 20-year periods ended June 30, 2006, public pension plans generated strong investment returns of 8.5% and 9.5%, respectively, exceeding investment benchmarks and closely tracking returns generated by corporate pension plans.

We appreciate NASRA’s regular reminders of these important data. We just do not understand why so many local officials and local governments still don’t get it.

2. NEW ORGANIZATION WILL TOUT DB PLANS:

And speaking of defined benefit plans, Pension Security Institute is a new organization being set up to promote defined benefit plans. It is being formed by Council of Institutional Investors, National Association of State Retirement Administrators and National Council for Teachers Retirement. The Institute will be a separate entity with its own board of directors. Based in Washington, D.C., it will search for an executive director once its board is formed and decides on how to proceed. The three groups are using the name Pension Security Institute, but have not formally adopted a permanent name. CII’s board last September discussed an idea for creating and funding a new organization, designed to educate policy makers and the public on the virtues of defined benefit plans, including their important role in promoting interests of shareholders. Bravo.

3. CEO PENSIONS -- DISCLOSURE, RENT EXTRACTION AND INCENTIVE CONTRACTING:

A working paper from the Pension Research Council at The Wharton School of the University of Pennsylvania recognizes that chief executive officers often receive pensions that provide life annuities of up to 60% of their final salary plus bonus. The paper investigates the extent to which pensions are rent extraction and/or the result of incentive contracting. Specifically, the paper examines whether CEOs exploit limited disclosure requirements to hide and/or camouflage excess pension benefits, whether pensions are associated with CEO power and/or contracting determinants and whether prior to retirement CEOs with pensions manage earnings to increase final pension benefits. Overall, the results provide some support for both the rent extraction and incentive contracting views of pensions. However, economic contracting variables appear to explain pension benefit levels to a greater extent than measures of CEO power. This suggests that although pensions can be used for rent extraction, the practice appears to be limited. In addition, the results suggest that rent extraction can be detected using public disclosures, implying that recent SEC changes in pension disclosure requirements are likely to have little effect on investors’ ability to value pensions. (What, you ask, in the world is “rent extraction?” Well, in economics, “rent extraction,” sometimes called “rent seeking,” is the process by which one seeks to capture economic rent through exploitation or manipulation of the economic environment, rather than earning profits through trade and production of added wealth. It generally implies extraction of uncompensated value from others without making any contribution to productivity. “Economic rent” is distinct from economic profit, which is the difference between a firm’s revenues and the opportunity cost of its input.)

4. FEDERAL APPELLATE COURT EASES STANDARD OF PROOF UNDER USERRA:

The United States Court of Appeals for the First Circuit was recently presented with the unique issue of proper allocation of the burden of proof in cases of alleged discriminatory treatment under the Uniformed Services Employment and Reemployment Rights Act of 1994. Carlos Velázquez-García sued his former employer, alleging that he had been fired from his job due to his military service, in violation of USERRA. The district court granted summary judgment in favor of the employer. On appeal, the appellate court found that the trial court had incorrectly applied USERRA’s burden-shifting analysis, and reversed. The higher court applied a two-part analysis: the employee first has the burden of showing, by a preponderance of the evidence, that his protected status was “a substantial or motivating factor in the adverse employment action.” The employer may then avoid liability only by showing, as an affirmative defense, that the employer would have taken the same action without regard to the employee’s protected status. The language of the statute and the legislative history make clear that the employee need only show that military service was one motivating factor in order to prove liability, unless the employer can prove that the adverse employment action would have been taken regardless of the employee’s military service. Note that this two-pronged burden-shifting analysis is markedly different from the three-pronged burden-shifting analysis in Title VII actions, in which the burden of persuasion always remains with the employee. Velázquez-García v. Horizon Lines of Puerto Rico, Inc., Case No. 06-1082 (U.S. 1st Cir., January 4, 2007).

5. SEVEN QUESTIONS TO ASK WHEN CHOOSING A TRANSITION MANAGER:

A panelist at Plansponsor’s 2006 DB Summit suggested seven questions plan sponsors should ask in process of hiring a transition manager:

  • What are the execution and performance risks imbedded in the portfolio to be sold?
  • What are the operational needs of the portfolio being sold?
  • What is the risk tolerance of the plan sponsor?
  • What is the time constraint of the transaction?
  • What do answers to the first four questions tell the sponsor about the best approach for the transition and the type of transition manager that can carry out the best approach?
  • Which transition managers fit the profile of the firm that can carry out the best approach?
  • What is the definition of success of the plan sponsor to communicate to the transition manager (in terms of time, asset loss, cost, etc.).

Weeks, or even months, in advance of portfolio changes, plan sponsors should send out very detailed requests for proposal, including the above inquiries.

6. IRS PROPOSED TABLE COULD INCREASE PLAN LIABILITIES TEN PERCENT:

According to Pensions & Investments, corporations could be forced to make substantial new contributions to their pension plans this year, thanks to an Internal Revenue Service proposal that would boost pension liabilities. IRS is proposing a new mortality table that employers are supposed to use to calculate funding requirements. The new table would raise the average plan’s liability as much as 10%. The official announcement of the table and its effective date is expected any day now, pending approval from the Department of Treasury. The new table is supposed to go into effect for plan years beginning January 1, 2007. However, some lobbyists have been urging the Treasury Department to put a hold on it until January 2008, when many of the Pension Protection Act’s funding requirements go into effect. Key industry lobbyists do not dispute the need to update the existing mortality table, but they say postponement would give the industry time to prepare for a complex transition to a new system of funding obligations.

7. MILEAGE REIMBURSEMENT RATE FOR FEDERAL EMPLOYEES WILL RISE:

The U.S. General Services Administration has announced an increase in the mileage reimbursement rate which federal employees receive for use of privately owned automobiles for official travel when deemed advantageous by their agencies. The mileage rate will increase from 44.5¢ to 48.5¢ per mile. The latest rate mirrors the optional standard mileage rate announced on November 1, 2006 by Internal Revenue Service for use by federal employees, self-employed individuals or other taxpayers in calculating the deductible cost of operating an automobile for business, charitable, medical or moving expenses. By law, in consultation with U.S. Department of Transportation, the U.S. Department of Defense and representatives of employee organizations of the federal government, GSA conducts periodic investigations of costs associated with travel and operation of privately owned vehicles on a yearly basis. GSA may not exceed the privately owned automobile standard mileage reimbursement rate set by IRS. Once approved by the Office of Management and Budget, the new rate will be published in the Federal Register and become effective February 1, 2007.

8. NOT SUCH A HOT IDEA:

A man was struggling to combat an “aggressive” grease fire on his stove, when he remembered those words of wisdom from a high school teacher: fight fire with fire. He immediately reached for the FireMaster flame thrower kept under the kitchen sink (huh?). When firefighters arrived he was still flame throwing, intent on carrying out his new approach to firefighting. The Fire Chief said they probably could have saved the structure, but with somebody shooting flames all over the place, they didn’t really have much of a chance. The genius-homeowner now realizes it’s just an expression.

9. QUOTE OF THE WEEK:

“Nature abhors a vacuum, but not as much as cats do.” Nelson Crawford

Copyright, 1996-2007, 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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