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Cypen & Cypen
February 14, 2013

Stephen H. Cypen, Esq., Editor

1.   FEWER HAVE RETIREMENT FUNDS, BUT MORE RAID THEM:  The proportion of working Americans with pensions of any kind has steadily decreased since 2001, according to a University of Michigan analysis that suggests trouble ahead for U.S. seniors.  Reported by, the report says the decline in the percent of employed workers with defined benefit pensions was actually expected. But, the study also found that participation in defined contribution plans declined, from 33 percent of employed men in 1999-2001 to 30 percent in 2007-2009 -- the opposite of what was expected.  Changes in the U.S. economy, notably 9/11 and the Great Recession of 2008, affected how families handled their IRAs, annuities, 401(k)s and other financial resources of defined contribution accounts. Many families treat these retirement accounts as sources of ready cash for current needs and discretionary spending rather than as sources of income in retirement. About six percent of young adults ages 25 to 44 reported cashing in some of their pension money.  And at age 59½ -- when early withdrawal penalties for most people are removed -- about 15 percent withdrew from their accounts, a proportion about equal to the rate of withdrawal those ages 65 and 66.  Once again, this situation does not present a pretty picture.  
2.      WHAT ARE FLORIDA’S PRIORITIES, ANYWAY?:  Florida legislators are once again pulling out the "Retirement Systems; Killing America play-book" to cause fear and unrest in order to deflect the real issues facing our state. Claiming the need to resolve Florida's economic crisis, they want to close the Florida Retirement System -- a retirement program that in the governor's own words is one of the best run retirement plans in the nation -- and allow the investors on shady street to do the same thing Washington legislators allowed them to do on Wall Street: gamble with the savings of Florida's workers.  While legislators continue to claim that closing one of the nation's best retirement systems is good public policy, they fail to mention that doing so will push unfunded mandates down on local governments, causing higher contribution rates that will result in higher taxes and fewer services.  Floridians need to ask themselves what are the state's priorities? Do we really want to lead the nation in gun permits rather than high school graduates? Are higher taxes really keeping first-time home buyers from achieving the American Dream, not the 100 percent increase in home owner insurance rates when there has not been more than a thunderstorm since 2005?  While large insurance corporations continue to line the pockets of Florida legislators, the rest are left with making a choice: paying higher deductibles to care for loved ones, or risk their well-being in order to pay the higher cost of gas? Do we not see that this philosophical issue has pitted American worker against American worker, while politicians continue to cater to shady street investors and insurance lobbyists?  No worries, though. Teachers will continue to teach, law enforcement will continue to fight crimes and fire rescue personnel will continue to respond to your everyday emergencies, all while legislators convince you that their "playbook" will help Florida keep gas in their car, a roof over their heads, and health insurance for their families.  John K. McNamara, president of Broward County Council of Professional Firefighters, wrote this piece for the Miami Herald “Readers’ Forum.” 
3.      S&P LAWSUITS SHOW IMPROVED STATE/FEDERAL RELATIONS: reports the state attorneys general got a gift a while ago: a landmark case against the country’s largest credit ratings agency, wrapped in a pretty bow and all but literally dropped at their doorstep.  The collaboration has begun between state attorneys general and the U.S. Department of Justice in their pursuit of Standard & Poor’s. The lawsuits are the first -- but probably not the last -- to be filed against a ratings agency in connection with the 2008 financial crisis.  The suits allege that S&P misrepresented its investment analysis services as being objective, independent and not influenced by its own or its clients’ financial interests.  Citing internal memos and emails, DOJ alleges that the ratings agency was motivated by profits to give mortgage-backed bonds favorable ratings. Federal investigators say those misrepresentations contributed to more than $5 billion in losses to institutional investors from bonds rated between March 2007 and October 2007, the period just before the financial crisis.  S&P denies the claims, calling the lawsuits without factual or legal merit.  (Doesn’t every defendant say the same thing?)  Several state attorneys general are amazed at the level of information sharing from the federal government.  
4.      FLORIDA LEGISLATURES BLAST CITY OF HOLLYWOOD: State lawmakers took the City of Hollywood to task over an audit that showed gross mismanagement of the city’s finances and called into question whether city officials actually needed to declare “financial emergency” status in 2011, which led to layoffs and pay cuts to employees and higher taxes for residents (See C & C Newsletter for December 6, 2012, Item 2).  The Miami Herald reports that city officials have acknowledged that finances were a mess, and have pledged to improve.  “We concede. Absolutely. The city was in terrible financial straits.  Certainly parts of that were due to mismanagement.”  The state auditors have said money was available in the city’s utility funds, and that the city could have approved a transfer of that money to the general fund.  Irritated law makers repeatedly question why the money was not moved around in the budget.  Said one state senator: “to me, you don’t call a ‘fire’ unless you really, really mean fire.”  The proceeding took place before a joint house and senate panel that reviewed the state’s audit.  
5.      MUNNELL’S BOOK HITS THE STREETS:  We recently previewed Dr. Alicia Munnell’s new book: State and Local Pensions: What Now? (See C & C Newsletter for November 1, 2012, Item 1). Now that the book has been published, we refer to the inside book jacket. In the wake of the financial crisis and Great Recession, the health of state and local pension plans has emerged as a front burner key issue. Elected officials, academic experts and the media alike have pointed to funding shortfalls with alarm, expressing concern that pension promises are unsustainable or will squeeze out other pressing governmental priorities. A few local governments have even filed for bankruptcy, with pensions cited as a major issue.  Dr. Munnell draws on both her practical experience and her research to provide a broad perspective on the challenge of state and local pensions. She shows that the story is big and complicated, and cannot be viewed through a narrow prism, such as accounting methods or the role of unions.  By examining the diversity of the public plan universe, Munnell debunks the notion that all plans are in trouble. In fact, she finds that while a few plans are basket cases, many are functioning reasonably well.  Munnell's analysis concludes that the plans in serious trouble need a major overhaul. But, even the relatively healthy plans face three challenges ahead: an excessive concentration of plan assets in equities; the risk that steep benefit cuts for new hires will harm workforce quality; and the constraints plans face in adjusting future benefits for current employees. Here, Munnell proposes solutions that preserve the main strengths of state and local pensions while promoting needed reforms.  Another fine piece of work from the Director of the Center for Retirement Research at Boston College.  
6.      PENSION COSTS ON DEPARTMENT OF DEFENSE CONTRACTS:  In a report to congressional requesters, the United States Government Accountability Office found that additional guidance is needed to ensure costs are consistent and reasonable on DOD contracts.  Labor costs are included in the prices contractors negotiate with the Department of Defense, and include pension costs, as these are a normal element of employee compensation. Contractors make two sets of calculations for their defined benefit pension plans, following two sets of standards: (1) Cost Accounting Standards, which determine how pension costs are allocated to government contracts; and (2) Employee Retirement Income Security Act of 1974, which establishes the minimum contribution requirement to fund plans. In 2008, revised ERISA rules altered the minimum funding requirements, causing CAS costs and ERISA contributions to diverge further. ERISA contributions have therefore greatly exceeded CAS pension costs reflected in contract prices. In December 2011, almost 4 years after ERISA changes took effect, the CAS Board, which is part of the Office of Management and Budget, made changes to CAS that harmonized them with ERISA in order gradually to reduce the difference between the two calculation methods.  GAO analyzed the defined benefit plans of the 10 largest DOD contractors, and found that nearly all of them -- as well as a peer group of companies -- maintain some form of tax-qualified, defined benefit plan for their employees. The largest contractors invest in similar types of pension plan assets as their peer group, and do so somewhat more conservatively. GAO also found that CAS pension costs reported by the contractors grew considerably over the last decade, from less than $500 million in 2002 to almost $5 billion in 2011, although not all of these costs were allocated to DOD contracts. Contractor CAS pension costs grew as the market downturn increased unfunded liabilities. Although pension cost projections are highly sensitive to economic assumptions, both contractors and DOD officials expect CAS pension costs to increase starting in 2014 due to harmonization. The CAS discount rates used to value liabilities will now be tied to the more volatile ERISA-based rates, making it harder to forecast future CAS pension costs, and reducing the consistency of cost projections used in contract pricing. DOD issued limited guidance on projecting ERISA-based discount rates for CAS calculations, but lack of specificity in the guidance can lead to great variation among the rates contractors use. Moreover, when a contractor curtails a plan, DOD and the contractor must settle pension costs; however, the discount rates used for settlements were not updated as part of harmonization, meaning liabilities will be calculated differently under CAS and ERISA rules. A schedule has not been set for addressing this issue.  GAO-13-158 (January 2013) 
7.      REVISED 60’s HITS FOR BABY BOOMERS:  Bobby Darin -- Splish, Splash, I Was Havin' a Flash.  
8.      PROFOUNDITIES:  Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries.  Douglas Case
9.      ON THIS DAY IN HISTORY: In 1929, St. Valentine’s Day Massacre in Chicago, 7 gangsters killed.
10.    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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