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Miami

Cypen & Cypen
NEWSLETTER
for
February 20, 2014

Stephen H. Cypen, Esq., Editor

1. 2014 FACTS ON STATE AND MUNICIPAL BANKRUPTCY/MUNICIPAL BONDS/STATE AND LOCALPENSIONS: Eleven prestigious organizations have released a paper with 2014 Facts on State and Municipal Bankruptcies; Municipal Bonds; and State and Local Pensions. 

     A.  State and Local Bankruptcy. States do not seek bankruptcy protection. Any federal law allowing states to declare bankruptcy would increase interest rates, rattle investors and markets, raise the costs for state government, create more volatility and uncertainty in financial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution. In 2011, the National Governors Association issued a preemptive statement and a joint leadership letter with the National Conference of State Legislatures that declared opposition to any Congressional legislation that would permit states to file for bankruptcy protection. Opposition to such legislation continues to this day. The mechanics of bankruptcy are inapplicable to a sovereign entity like a state. Bankruptcy is not a legal option for states, as constitutionally recognized sovereigns. States have taxing authority and constitutional or statutory requirements to balance their budgets. By contrast, bankruptcy may be an option for some municipalities under Title IX of the federal Bankruptcy Code, depending on state law and other factors. Municipalities are legal corporations, not sovereign entities. Eligibility for Chapter IX relief is narrowly tailored by several factors. States determine whether their municipalities, as political subdivisions, public agencies, or instrumentalities of the state, may pursue this option. One key eligibility factor is that a municipality must be insolvent and unable to meet its obligations when they fall due. Chapter IX is uniquely designed to allow certain public entities to reorganize debts while continuing to provide essential public services; however, it is inapplicable to states, as well as to a majority of counties and cities. Only 12 states specifically authorize Chapter IX filings for their general purpose local governments and 12 states conditionally authorize such filings. Twenty-six states either have no Chapter IX authorization outlined, or such filings are prohibited. 
 
     B.  Municipal Bonds. Municipal securities are predominantly issued by state and local governments for governmental infrastructure and capital needs purposes. Most debt is issued not for operating budgets, but for capital projects, such as construction or improvement of schools, streets, highways, hospitals, bridges, water and sewer systems, ports, airports and other public works. The recovery rate of payment for governmental debt exceeds the corporate recovery rate. Municipal debt takes two forms: (1) General Obligation, backed by the full faith and credit of a general purpose government like a state, city, or county, and (2) Revenue Debt that is issued by governments and special entities usually backed by a specific revenue source (special taxes, fees or loan payments) associated with the enterprise or borrower. Between 2003 and 2012, states, counties, and other localities invested $3.2 trillion in infrastructure through long term tax exempt municipal bonds; the federal government provided $1.3 trillion in support of public works. Municipal securities existed prior to formation of the federal income tax in 1913. When first enacted and still today, the Internal Revenue Code exempts municipal bond interest from federal taxation. Many states also exempt from taxation the interest earned from municipal securities when their residents purchase bonds within their state. Due to the reciprocal immunity principle between the federal government and state/local governments, state/local governments are prohibited from taxing the interest on bonds issued by the federal government. Municipal securities are considered to be second only to Treasuries in risk level as an investment instrument. From 1970 through 2012, there were 73 rated municipal bond defaults of which only five were rated city or county governments. Historically, municipal bonds have had lower average cumulative default rates than global corporates overall and by like rating category. Except for Arkansas, no state has defaulted on its debt in the past century. In that 1933 Arkansas default, bondholders ultimately were paid in full. Debt service is typically only about 5% of the general fund budgets of state and municipal governments.
 
     C.  State and Local Government Pensions. State and local retirement systems are legally separate trusts, which currently hold $3.72 trillion in assets for over 15 million working and 8 million retired employees of state and local government. The pre-recession high was $3.2 trillion. Public retirees and their employers contribute to their pensions while the employees were working. Public employees typically are required to contribute five to ten percent of their wages to their state or local pension.  Public pension assets are accumulated, invested, and paid out over decades, not as a lump sum.  Funded levels -- the degree to which a plan has accrued assets to pay expected benefits for current and future retirees -- among pension plans vary substantially. While some plans are more than 100% advance-funded, the average funded level in 2012 was 73%. State and local employee retirement systems do not seek federal financial assistance. One-size-fits-all federal regulation is neither needed nor warranted, and would only inhibit recovery efforts at the state and local levels. Between 2009 and 2013, 49 states have made changes to benefit levels, contribution rate structures, or both; local governments have made similar fixes to their plans. While pension obligations are often backed by explicit constitutional or statutory provisions, states are generally free to change their retiree health plans, including termination, as they do not carry the same legal protections. It is misleading and inappropriate to combine unfunded pension liabilities with unfunded retiree health benefits. For the 25 year period ending June 30, 2013, which saw three economic recessions and four years of negative median public fund investment returns, actual public pension investment returns averaged 8.6%; the 10-year return was 7.1%. As of December 2013, the average public plan investment assumption was 7.72%. On average, the portion of combined state and local government spending dedicated to retirement system contributions is less than five percent. As to pension trusts that are not fully funded, the modest increase in contributions to take advantage of compounded interest, modifications to employee eligibility and benefits, or both, will be sufficient to remedy the underfunding problem. The issuing organization are National Governors Association (www.nga.org); National Conference of State Legislatures (www.ncsl.org); The Council of State Governments (www.csg.org); National Association of Counties (www.naco.org); National League of Cities (www.nlc.org); The U.S. Conference of Mayors (www.usmayors.org); International City/County Management Association (www.icma.org); National Association of State Budget Officers (www.nasbo.org); National Association of State Auditors, Comptrollers and Treasurers (www.nasact.org); Government Finance Officers Association (www.gfoa.org); and National Association of State Retirement Administrators (www.nasra.org).

2. RETIRED EMPLOYEES HAVE NO IMPLIED VESTED RIGHT TO POOLING OF HEALTH CARE PREMIUMS WITH THOSE OF CURRENT EMPLOYEES: The U.S. Court of Appeals for the Ninth Circuit has affirmed the district court’s summary judgment in favor of Orange County, California, in an action brought by retired employees alleging that they had an implied vested right to the pooling of their health care premiums with those of current employees. The court held that the retirees failed to raise a genuine issue of material fact regarding their alleged implied contract right to the pooled premium, leaving their implied contract claim without factual or legal support. The court held that a practice of policy extended over a period of time does not translate into an implied contract right without clear legislative  intent  to  create  that  right -- an  intent  that  the retirees had  not  demonstrated  in  this  case.  The court held that the nature of the retirees’ evidence underscored absence of any definitive intent or commitment on the part of the county to provide for the pooled premium. Retired Employees Association of Orange County, Inc., v. County of Orange, Case No. 12-56706 (U.S. 9th Cir. February 13, 2014). 

In Florida, Section 112.0801, Florida Statutes, provides:

(1)  Any state agency, county, municipality, special district, community college, or district school board that provides life, health, accident, hospitalization, or annuity insurance, or all of any kinds of such insurance, for its officers and employees and their dependents upon a group insurance plan or self-insurance plan shall allow all former personnel who retired before October 1,1987, as well as those who retire on or after such date, and their eligible dependents, the option of continuing to participate in the group insurance plan or self-insurance plan. Retirees and their eligible dependents shall be offered the same health and hospitalization insurance coverage as is offered to active employees at a premium cost of no more than the premium cost applicable to active employees. For retired employees and their eligible dependents, the cost of continued participation may be paid by the employer or by the retired employees. To determine health and hospitalization plan costs, the employer shall commingle the claims experience of the retiree group with the claims experience of the active employees; and, for other types of coverage, the employer may commingle the claims experience of the retiree group with the claims experience of active employees.

For purposes of this section, “retiree” means any officer or employee who retires under a state retirement system. 

3. RAISING THE MINIMUM WAGE WOULD BOOST THE MIDDLE CLASS: An opinion piece in Governing says in this political season, both the minimum wage and income inequality have become hot-button political issues. Because the minimum-wage debate has tended to revolve around opponents arguing the employment consequences and the proponents arguing its anti-poverty value, what has been lost is that the minimum wage is fundamentally about the middle class. Everybody claims to be speaking in the name of the middle class, but nobody has a serious proposal for helping to sustain and grow it. The political left focuses on new programs financed through higher taxes on the rich, while the political right recycles thelaissez faire policies of lower taxes and reduced regulation. If government would simply unleash the marketplace, the argument goes, everyone would prosper. Meanwhile, the gap between the top and the bottom only continues to grow. Income inequality is important because of what it symbolizes, which is a two tiered or dual economy with highly educated and skilled workers at the top of the wage distribution and poorly educated workers with little if any skills at the bottom. The issue is not income inequality per se, because it is fantasy to believe that we can all be equal. We are not all born with the same natural endowments and we do not all make the same choices. In a market economy where freedom of choice reigns, there will always be inequality. Rather, the issue is the increase in income inequality, because it is with this widening gap that we are able to see that the middle class is being squeezed out. Rebuilding the middle class requires boosting the purchasing power of workers so that they can drive the economy by increasing their aggregate demand for goods and services. Here is where the minimum wage, income inequality and the middle class can be spoken about in the same breath. The minimum wage should not be increased simply because it is a matter of economic justice. On the contrary, the minimum wage needs to be raised because its macroeconomic benefits would shore up the middle class. Its benefits are broader than opponents would like you to believe. Increasing minimum wage will create a floor, and wage increases will ripple through the wage distribution. Moreover, a policy that can shore up the middle class will also reduce income inequality and serve as a foundation for job creation. The real reason income inequality has been increasing and the middle class has been shrinking is because of stagnating wages. Increasing the minimum wage would go far toward reversing that trend. 

4. DETAILS OF PROPOSED RHODE ISLAND PENSION CASE DEAL:  The Associated Press report the details of the proposed settlement to the legal challenge to Rhode Island's 2011 public pension overhaul.  Here are some:

  • The state's pension bills would increase by $13 million to a total of $293 million staring in 2015 to pay for some of the changes in the settlement. Cities and towns would see their pension bills increase by $11 million to $217 million.
  • The settlement would give cost-of-living increases to retired government workers sooner than the current law would allow. It calls for a one-time 2% cost-of-living pension increase on the first $25,000 of a retiree's pension. Additional increases of up to 3.5% would be given every four years beginning in 2017 until the retirement fund is 80% funded, at which point regular increases would be reinstated. The fund is now about 60% funded.
  • Employees would contribute more of the cost of their own retirement benefits. The contribution rates of state workers and teachers, for example, would go from 8.75% to 11%.
  • Employees with 20 or more years of service can keep their existing pension plan instead of receiving a hybrid plan that combines a pension with a 401(k)-type account. The hybrid would be mandatory for all other workers. 
  • The settlement must be approved by state legislatures, union members and retirees, a process that could take a few months. Any changes would nullify the settlement and the lawsuit would continue.

5. HOW TO AVOID REGRET: Blogger Stuart Sheldon has posted “How to Avoid Regret.” A palliative care nurse spent time at the bedsides of patients who went home to die. In the last days of their existence, many shared with her their regrets and things they would do differently. Here are excerpts from the top five: 

  • I wish I had had the courage to live a life true to myself, not the life others expected of me.  Most people did not honor even half their dreams, and died knowing they made the wrong choices. You will never be younger than you are now, and health brings freedom few realize until the moment you lose it … and then it is too late.  
  • I wish I had not worked so hard. Every male patient said this regret. (Women did, too, but most were from an earlier generation where fewer worked). They missed their children’s youth and their partner’s companionship. And deeply regretted spending so much of their lives on the hamster wheel. We all have to work, but try to reframe the whole notion by replacing the word work with productivity, so that you put more value on achieving other things critical to your self actualization.
  • I wish I had the courage to express my feelings. Many suppressed their feelings to keep peace with others. And many developed illnesses relating to the bitterness and resentment they carried inside. Honesty raises any relationship to a new and healthier level. Or, it releases the unhealthy relationship from your life. Either way, you win.
  • I wish I had stayed in touch with my friends. When they are dying everyone misses friends. Yet, many had become so caught up in their own lives that they had let golden friendships slip by over the years. One of the few truly irreplaceable things in life is a person with whom you share decades of history. Money and status fade to nothing as it all comes down to love and relationships in the end. 
  • I wish I had let myself be happier. So many did not realize until the end that happiness is a choice. Fear of change had them pretend to others, and to themselves, that they were content. Deep within, they longed for more laughter and silliness.

 Lighten up. 

6.  DATING ADS FOR SENIORS: MINT CONDITION: Male, 1932 model, high mileage, good condition, some hair, many new parts including hip, knee, cornea, valves. Is not in running condition, but walks well.

7. ADULT TRUTHS: How many times is it appropriate to say "what?" before you just nod and smile because you still did not hear or understand a word they said?
 
8.  TODAY IN HISTORY: In 1962, John Glenn is the 1st American to orbit Earth.  (Friendship 7).

9. 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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