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Cypen & Cypen
FEBRUARY 17, 2011

Stephen H. Cypen, Esq., Editor

1.      EXPERTS DOCUMENT THAT PUBLIC PENSIONS ARE WEATHERING FINANCIAL CRISIS:   The following is a statement issued by National Council on Teacher Retirement, reported by  Keith Brainard, Research Director of National Association of State Retirement Administrators, told the U.S. House of Representative's Judiciary Committee that state and local government pensions are weathering the financial crisis, making measured changes to ensure long-term sustainability and do not require Federal assistance.  Mr. Brainard said that many public pension critics lack sound knowledge and understanding of how public pensions work, or rely on methods and assumptions that are inappropriate and inapplicable to the way these plans operate. Mr. Brainard expressed particular concern with research conducted by certain academics, who promote confusion by mixing apples with oranges. For example, one such report compares, for many states, local governments' unfunded pension liabilities with the tax effort of only the state.  However, local governments are also responsible for funding pension liabilities, and excluding local sources of revenue produces a distorted and misleading measure, akin to measuring the mortgage capability of a working couple, yet considering income of only one of them. Pension funds hold $2.8 Trillion in trust from which they pay benefits, roughly 14 times the amount they distributed in benefits last year. Even using conservative estimates, pension funds representing the vast majority of public employees will be able to continue to pay benefits for decades, if not into perpetuity.  Furthermore, the percentage of all state and local government spending on pensions has hovered around three percent during the last decade. (Florida’s spending is 2.37 percent.) Impact of the financial crisis will likely require spending to increase somewhat, but most recent studies find that the share of state and local budgets dedicated to pension contributions would need to rise to only about five percent on average.  The assertion that public employee pensions are contributing in a meaningful way to state insolvency is simply not supported by facts. Mr. Brainard's conclusion was echoed in a report from Center for Economic and Policy Research entitled "The Origins and Severity of the Public Pension Crisis," reviewed in the next item. 

2.      ORIGINS AND SEVERITY OF THE PUBLIC PENSION CRISIS:   Center for Economic and Policy Research has issued "The Origins and Severity of the Public Pension Crisis," written by economist Dean Baker. There has been considerable attention given in recent months to shortfalls faced by state and local pension funds. Using current methodology of assessing pension obligations, shortfalls sum to nearly $1 Trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, shortfalls could be more than three times the size. Based on these projections, many political figures have argued the need drastically to reduce generosity of public sector pensions, and possibly to default on pension obligations already incurred. The paper shows: 

  • Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009.  If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 Billion greater than they are today, which is by far the major cause of pension funding shortfalls.  While there are certainly cases of pensions that had been underfunded even before the market plunge, prior years of underfunding are not the main reason that pensions face difficulties now.  Another $80 Billion of the shortfall results from the fact that states have cutback their contributions as a result of the downturn. 
  • The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over timing of market fluctuations, and individual investors, who must be very sensitive to market timing.  This argument also fails to recognize the fact that over a long period, future stock returns are inversely related to current price-to-earnings ratios.  If the current PE ratio is relatively low, as it is now, then the assumption that the market will provide below average returns implies a further decline in the PE ratio, given the generally-accepted growth projections for the economy.  As a practical matter, the stock market has provided an average real return of more than 8 percent for 30-year periods when the PE ratio at the start was under 15 to 1. It is worth noting that if pension funds stop investing in equities, as some have advocated, it would imply higher taxes and lower benefits for public employees.  It would also mean that other investors could expect to see higher future returns on their stock holdings. 
  • The size of the projected state and local government shortfalls measured as a share of future gross state products appears manageable.  The total shortfall for pension funds is less than 0.2 percent of projected gross state product over the next 30 years for most states.  Even in cases of states with larger shortfalls, the gap is less than 0.5 percent of projected state product. It is also worth noting that some of the shortfall has likely already disappeared as a result of the recent rise in the stock market.  If the rise is not subsequently reversed, then a substantial portion of the funding shortfall has already been eliminated. 

In sum, most states face pension shortfalls that are manageable, especially if the stock market does not face another sudden reversal. The major reason that shortfalls exist at all was the turndown in the stock market following collapse of the housing bubble, not inadequate contributions to pension funds. Given the low PE ratios in the stock market, pension fund assumptions on the future rate of return on their assets are consistent with most projections of economic growth and past experience.  

3.      IMPACT OF PENSIONS ON STATE BORROWING COSTS IS MODEST:   A new Issue Brief from Center for State & Local Government Excellence deals with “The Impact of Pensions on State Borrowing Costs.” The municipal bond market is large and diverse. In 2010, state and local debt amounted to $2.4 Trillion or about 6% of total debt outstanding from business and government. Municipal bond prices are tumbling, and rates rising just as public borrowers face pressures to refinance deals cut during the financial crisis. At the same time, the funded status of public pension plans has declined, and states and localities will have to come up with more money to meet future benefit payments. In the private sector, numerous studies have shown that pension underfunding affects corporate bond ratings. And Moody’s just announced that it would combine unfunded pension liabilities with outstanding bonds when evaluating a state’s leverage position. These developments raise the question of how future pension commitments affect today’s borrowing costs in the public sector. The first section of the brief describes the municipal bond market. The second describes factors that traditionally have been considered in the bond rating process. The third section summarizes what other researchers have found regarding relationship between pension commitments and borrowing costs in the private and public sectors. The fourth presents a model for the period 2005-2009 that relates borrowing costs to factors generally considered by rating agencies, such as the state’s management, finances, economy and debt structure. Pensions are a component of debt structure, and the extent to which states make their Annual Required Contribution has a statistically significant, albeit modest, impact on cost of debt. A side finding is that a bond’s rating explains relatively little about variation in interest cost, and the effect of pensions remains significant even including the bond’s rating in the equation. The final section concludes that while pension underfunding had only a small effect on borrowing costs in the 2005-2009 period when pension expenses were only 3- to 4-percent of state budgets, its impact could become significant as the cost of pensions increases. 

4.      CHICAGO I.G. REPORTS IMPACT OF CITY’S FURLOUGHS ON EMPLOYEE PENSIONS: The City of Chicago’s Inspector General has issued a report entitled “Impact of the City of Chicago’s 2009-2011 Furloughs on Employee Pensions.” Since mid-2000, one of the City of Chicago’s cost cutting strategies in response to its mounting structural deficit has been to require a substantial portion of the City’s workforce to take unpaid time off. This strategy, commonly known as furloughs, is seen as a way to reduce payroll spending, while deferring the need for layoffs. The reported savings from implementing furloughs have been an estimated $134 Million. While the savings derived from this strategy have been substantial, they are $11.05 Million, or 8.25%, lower than savings reported by the City. This situation arises because one of the effects of the furloughs is to reduce employee contributions to the City’s pension funds without any reduction in pension benefits of affected employees. With no corresponding reduction in pension liabilities, the estimated $11.05 Million decrease in pension funding caused by the furloughs will have to be balanced by increased funding to the City’s pension funds in the future. Assuming that the City intends fully to meet the pension benefits promised to its employees, the present reduction in pension funding resulting from the furlough program should not be reported or considered as savings. In addition, the City’s mandatory contribution to the City’s pension funds is tied to the employee contribution. The $11.05 Million decrease in employee contributions as a result of the furlough program also results in a $13.5 Million decrease in present City payments to the funds. While reduction in the City’s contributions to the pension funds correctly was not claimed as a savings, as it merely constitutes deferral of a portion of the City’s contributions to a future time, reductions in both employee and City contributions as a result of the furlough program increase the already grave funding gap in the City’s pension funds. Lesson: be careful what you wish for … .

5.      MILLIMAN 100 MONTHLY PENSION FUNDING INDEX:    Funded status of the 100 largest corporate defined benefit pension plans improved by $41 Billion during January 2011, as measured by the Milliman 100 Pension Funding Index. The pension funding deficit declined to $250 Billion from $291 Billion at the end of December 2010, primarily due to an increase in corporate bond interest rates that are the benchmarks used to value pension liabilities.  Though not as significant, financial markets also performed well in January.  As of January 31, 2011, the funded ratio increased to 82.2%, up from 79.8% at the end of 2010. January's $6 Billion increase in market value brings the Milliman 100 PFI asset value to $1.151 Trillion, up from $1.145 Trillion at the end of December, based on an investment gain of 0.8% for the month.  By comparison, the Milliman 2010 Pension Funding Study published in April 2010 reported that the median expected monthly investment return during 2010 on pension assets for the Milliman 100 PFI companies would be 0.65% (8.10% annualized). The projected benefit obligation, or pension liabilities, decreased by $35 Billion during January, lowering the Milliman 100 PFI value to $1.401 Trillion from $1.436 Trillion at the end of December.  Over the last 12 months (February 2010 – January 2011), the cumulative asset return has been 12.5%, and the Milliman 100 PFI funded status has improved by $15 Billion.  For these 12 months, the funded ratio of the Milliman 100 companies improved from 80.3% to 82.2%. For the past 10 years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The Milliman 100 Pension Funding Index projects funded status for pension plans included in the study, reflecting impact of market returns and interest-rate changes on pension funded status, utilizing actual reported asset values, liabilities and asset allocations of the companies' pension plans. 

6.      FANS SHUT OUT OF SUPER BOWL FILE CLASS ACTION:   Several fans filed a federal class action lawsuit on behalf of disappointed Super Bowl ticket holders who were turned away because of problems with temporary seats installed at Cowboys Stadium. Named as defendants in the civil lawsuit are the Dallas Cowboys, owner Jerry Jones, the National Football League and four companies connected to the team or its stadium. According to the Pittsburgh Tribune-Review, Steve Sims is one of about 400 people who bought tickets and traveled to North Texas, only to be told the stadium did not have a seat for him. Mike Dolabi is a member of the Founders of Cowboys Stadium, a group with members who paid $100,000 each to help build the stadium, in return for a guarantee of seats with the best sightlines in the stadium. He and other group members, instead, were assigned Super Bowl seating on metal folding chairs in an area with an obstructed view. (That’s real gratitude for you.) The Cowboys offered Sims and other displaced ticket holders a refund of triple the face value of their tickets (about $2,400 for the $800 tickets) and tickets to next year's Super Bowl. That amount does not cover what many of them even paid for the tickets, much less their travel costs. Incredibly, the team has not offered Founders members any compensation! The lawsuit seeks compensatory damages, trebled because of alleged violations of the Texas Deceptive Trade Practices Act, and punitive damages. 

7.      DO PUBLIC PENSION REFORMS THREATEN HARM?:   On February 9, 2011, the Public Employee Pension Transparency Act was reintroduced by Representative Dennis Nunes of California. Although Nunes has drawn praise from certain corners, now comes pushback from those who say Nunes and others on the right are exaggerating the pension problem to feed perceptions that state and local government workers are a coddled class with benefits that amount to taxpayer abuse. In fact, according to, some critics called the warnings a disguised attempt to strike out at public employee unions. Critics also say the legislation violates states’ rights, and could force states and municipalities into unwarranted cuts in basic services. The bill would require state and local government pension plans to reduce their margin for investment risk, and to disclose their assets, liabilities and funding assumptions to the Treasury Department and on the internet. Entities failing to comply would lose tax-exempt status of their bonds. The bill would also prohibit federal bailouts of government pension funds as a means of rescue (not something we have heard as otherwise being on the table). The Center on Budget Policy Priorities (see C&C Special Supplement for February 1, 2011), says the bill would force plans to peg their expected rate of return to ultra-conservative U.S. Treasury instruments instead of the market-based rates of return they have historically earned. The difference is roughly between 4% and 8%. To calculate based on the lower percentage greatly magnifies unfunded liabilities, and could force many states and localities into severe steps such as taking funding away from schools, health care and other services immediately to increase pension funding. In the extreme, localities could file bankruptcy to escape paying or force major benefits clawbacks. Although some cities are legally able to take that step, states have no means of filing bankruptcy, although a few Republicans are talking about Congress making it possible. The Rockefeller Institute believes most or all larger plans have quite substantial assets and thus will be able to meet their benefit payments for many years to come, even if they have some unfunded liabilities of a longer-term nature. 

8.      JOB STRESS MAY CAUSE HEART PROBLEMS FOR WOMEN:   Researchers at Harvard Medical School report that women with highly stressful jobs are 40% more likely to have poor cardiac health, such as heart disease, a heart attack or coronary artery surgery, compared to their less-stressed colleagues. Employee Benefit News reports that researchers are unclear on how job strain worsens cardiac health, although they believe work-related stress may aggravate inflammation in coronary arteries, which can lead to blood clots and a heart attack. In addition, stress makes it difficult to adopt heart-healthy habits, such as exercising, eating right, not smoking and getting enough sleep. Stress levels and job strain can also increase for working women who are caring for children, aging parents or other relatives. Similar studies in other countries have also discovered a strong link between on-the-job stress and heart trouble for women. A 15-year study of nurses in Denmark found that the greater the work pressure, the higher the risk for heart disease among women ages 51 and under.   The Harvard research also revealed that women who worry about losing their jobs are more likely to have high blood pressure and unhealthy cholesterol levels and to be obese. Harvard recommends the following steps to alleviate stress:

  • Foster mutually supportive relationships.
  • Get regular exercise.  It strengthens the heart, reduces anxiety and depression, and improves sleep.
  • Limit intrusions (such as work-related e-mails) on your life outside of work.
  • Practice relaxation techniques, such as meditation or deep breathing.
  • Seek help from a mental health professional.

9.      IS THERE TROUBLE AHEAD FOR FLORIDA LOCAL GOVERNMENTS AND RETIREMENT OBLIGATIONS?:   The  LeRoy Collins Institute at Florida State University says there are tough choices ahead for local and state policymakers wishing to alleviate problems concerning pensions and other post-employment benefits. The issues are complicated; the problems are more easily defined than the solutions.  In recognition of this complexity, the Institute has provided seven initial recommendations to help create solutions to the numerous problems in pension and OPEB management. The Institute recognizes that these recommendations are not the final answer, but are a beginning for a state dialogue on an issue that will not be easily or quickly resolved: 

  • Raise Retirement Benefit Recipient Age.  The minimum age before a retiree qualifies for benefits should be gradually raised.  A reasonable age to begin receiving benefits could be approximately 60.
  • Stabilize Retirement Contributions. Cities should set a minimum contribution rate to ensure minimal contribution levels during good years and reduce the need significantly to increase contributions during periods of fiscal stress. (We have been preaching employer contribution stabilization until we were blue in the face.) 
  • Review and Amend Benefit Calculation Methods.  Localities    should not include overtime or additional earnings/bonus pay in the base salary used to calculate pension benefits.
  • Revise Statutory Restriction on Premium Tax Dollars. The statutory restrictions on use of premium tax dollars that link increases in tax premium funds to provision of additional benefits should be reduced or removed. Cities and counties should be able to use premium tax dollars to cover their current pension obligations. (What, then, is the difference between public safety employees and general employees?)
  • Encourage Transparency of Local Retirement System.     Localities should improve accessibility of funding, actuarial reporting and liabilities information to their taxpayers.   (Considering Chapter 112, Part VII, the “Florida Protection of Public Employee Retirement Benefit Act;” Chapter 119, the “Florida Public Records Act;” and Chapter 286, the “Public Meeting Act;” Florida Statutes, it is hard to conceive anything even remotely akin to lack of transparency.)
  • Consider Repeal of Law Requiring Implicit Subsidization of Healthcare Benefits.  Florida lawmakers should give much consideration to repealing current Florida law requiring implicit subsidization of healthcare benefits for Florida local governmental retirees. “However, there is still government’s allocation to ensure a secure retirement for its employees and benefits are earned rewards for public service.” 
  • Provide State Oversight of Local Retiree Health Plans. State agency oversight should be provided in statute to manage local retiree health benefit obligations.  This agency should establish standards and provide technical assistance, if desired, to local governments.

The Institute recognizes that on the road to economic vitality, there are no villains.  From the cities and counties struggling to support critical community services, to the hard-working special risk employees who protect and serve Floridians, to union leaders fulfilling their mission by assuring their members are well taken care of now and in the future, all groups are vying for protection of their interests.  Local elected officials are trying to represent their citizens' needs by retaining a strong local workforce.  State officials want to assure that their constituents, also constituents of local governments, are well-served by local retirement programs.  Yet, these well-meaning groups have put together a route that Is expensive, perhaps leaving bills for future taxpayers. Most of the report has been previously responded to generically (see C&C Special Supplement for February 1, 2011 and C&C Special Supplement for February 8, 2011). [Having known Florida’s Greatest Governor for many years, we doubt he would have signed-on to all the suggestions put forth by the Institute that bears his name. And, before we are besieged with e-mails, we know Governor Collins’s daughter Jane is on the Board.]

10.    NEW YORK STATE JUDGES WILL GET RAISES…FINALLY:   Ruling on cross-motions for summary judgment, a New York State Supreme Court Justice, has ruled that New York’s 2009 Budget Appropriation obligated the state to pay raises to judges retroactive to April 1, 2009. The state did not dispute that the judiciary should be granted a raise in compensation, but opposed relief on the grounds that the 2009 Budget Appropriation, as enacted, did not increase judicial salaries and did not obligate the state to pay judicial officers the raises they seek. The court found that the 2009 Budget Appropriation was properly enacted by the Legislature and clearly met the constitutional requirement that judicial compensation be “established by law.” Lack of itemization in, and the absence of additional enabling legislation, are not fatal, and neither is absence of revisions to the judicial salary schedules set forth in the Judiciary Law.  The State Constitution does not mandate a specific format for judicial salaries. To hold otherwise would render the Budget Appropriation meaningless, under circumstances where all parties agree that an increase in judicial compensation is both warranted and deserved. Pines v. State of New York, Case No. 13518/10 (NY Sup. Ct., February 9, 2011). 

11.     JIMMY CARTER SUED OVER PALESTINE BOOK: Stephen Unterberg and others have filed a class action against former President Jimmy Carter and Simon & Schuster, Inc. seeking damages for those who purchased the book, Palestine: Peace Not Apartheid, written by Jimmy Carter and published by Simon & Schuster, Inc., and promoted by them as a work of non-fiction, deserving of special weight and consideration because of Carter’s standing as a former President, whichpurportedly provides an accurate factual record of historical events and key agreements related to negotiations between Israel and Palestinian Arabs. Those who bought the book did so in reliance on Defendants' representations that the events and agreements which are subject of the book were described accurately, fully and fairly as they actually occurred.  In truth, however, the book is filled with demonstrable falsehoods, omissions and knowing misrepresentations intended to promote Carter's agenda of anti-Israel propaganda, rather than a true and accurate picture of all matters and events described in the book. Since the book's publication and widespread dissemination based on such promotional efforts, some of Carter's closest aides, including distinguished public officials and scholars personally involved in the events described, have demonstrated with irrefutable evidence and credible detailed statements, the completely false nature of Carter's rendition of the historical record and certain key agreements, and have established the book's fully deceptive nature and Carter's correspondingly deceptive agenda. Notwithstanding such irrefutable proof that many of the representations in the book unequivocally held out as true are in fact demonstrably false, misleading and deceptive,  Simon & Schuster, Inc. steadfastly has refused to make any corrections of such false, misleading and deceptive provisions in the book, and both defendants continue unabashedly to promote sale of this deceptive product as a work of non-fiction filled only with a truthful account all matters depicted in it, denying all claims by those well respected officials that Carter has fabricated things in the book that he claims to be true.   Plaintiffs wish to be clear on what the lawsuit is not about. It is not in any way an attempt to challenge Carter's right to write a book or Simon & Schuster's right to publish a book that serves as a forum for Carter to put forward his virulently anti-Israel bias or any other agenda he or his financial backers wish to put forward.  Plaintiffs do not challenge his right to use falsehood, misrepresentations and omissions, misleading statements or outright lies, all of which characterize this book, to further his agenda.  Indeed, Plaintiffs fully recognize that such an agenda from Jimmy Carter should come as no surprise, given his well-known bias against Israel and the interests of Israel's sworn enemies who have given millions of dollars to support the Carter Center and Carter's work. Rather, Plaintiffs bring the action to challenge Defendants' actions in deceiving the public by promoting and selling the book as a factually accurate account in all regards of the events it purports to depict, rather than truthfully and accurately promoting and selling it as the anti-Israel screed that it is, intentionally presenting untrue and inaccurate accounts of historically-recorded events, as witnesses to and participants in such events pointedly have come forward to declare.  The lawsuit, filed in the United States District Court for the Southern District of New York, challenges Defendants’ actions in attempting to capitalize on Carter's status as a former President of the United States to mislead unsuspecting members of the reading public who thought they could trust their former President to tell the truth. The class action is brought pursuant to New York's consumer protection laws, which makes it unlawful to engage in deceptive acts in the conduct of business, trade or commerce or in furnishing any service in New York, and which expressly provides for a private right of action to recover damages when one has been the victim of such deception.  Among other things, plaintiffs ask the court to enter a declaratory judgment, finding defendants' conduct, in writing, promoting and encouraging purchase and sale of the book at issue by holding it out as a true account of events described in the book, knowing that, in truth, it is filled with falsehoods, omissions and misleading provisions, as described in the complaint, to have violated New York law. This one is really going to test the limits of freedom of speech. Unterberg v. Carter, Case No. 11civ0720 (SD NY, February 1, 2011). 

12.    BITING THE HAND THAT FEEDS YOU:   Newly-hired managers for part of New York City’s $108 Billion pension fund might be fired if they criticize workers’ benefits, according to proposals before the Police Retirement Fund and the General Employees Retirement System.  According to, the intent is not to chill analysts who provide legitimate information, but to prevent money managers from taking positions that are essentially opinions based on political viewpoints. Restricting pension fund managers’ comments would not run afoul of freedom-of-speech rights under the United States Constitution. Nothing prevents parties from incorporating speech restrictions into a contract between them. For your information, last year the $22 Billion Police Pension Fund paid $80 Million in fees to investment managers; the $38 Billion General Employees System paid more $140 Million.

13.    REMARKABLE QUOTES FROM REMARKABLE JEWS: Don't be humble; you are not that great. Golda Meir

14.    BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  Ever stop to think, and forget to start again?

15.    PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):   We never really grow up; we only learn how to act in public. 

16.    QUOTE OF THE WEEK:    “No more good must be attempted than the public can bear.” Thomas Jefferson

17.    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. 

18.    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 Thank you.

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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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