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Cypen & Cypen
NEWSLETTER
for
MARCH 31, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. PLANSPONSOR -- “THERE ARE SOME 7,000 HEDGE FUNDS. ONLY A HANDFUL SHOULD EVER MANAGE PENSION ASSETS. HERE’S WHY.”:

That provocative statement is the cover story in PlanSponsor’s March 2004 issue. And boy does the piece deliver! Very few hedge funds are equipped to take on pension assets, a function of both style and substance. Hedge fund managers often have little patience for the process that accompanies an institutional relationship: long and rarely transferable track records, endless presentations, client servicing, inquisitive demanding consultants, interference from trustees and a novel level of reporting transparency. As far as substance is concerned, only a small number of hedge funds has investment, compliance and operational processes that pension funds now demand in their asset managers. The compromise: plan sponsors need to accept higher, performance-related fees, suboptimal investment vehicles and somewhat less transparency. On the other hand, a new breed of hedge fund needs to evolve, where it is understood that pension funds have specific needs with respect to process; that compliance, risk control and operational competence matters as much as performance; and that some level of transparency is a must. In a sidebar, PlanSponsor lists a top ten institutional selection of hedge funds that are capable of handling institutional money. Selected in large part for their investment expertise, these funds also have demonstrated their ability to live up to the standards that institutional fiduciaries demand. The panel accented quality of people; integrity of the investment process; their understanding or risks, operational and compliant aspect of their business; and, most important of all, their ability to deliver profits to their investors consistently. Kudos to PlanSponsor.

2. CITY COMMISSIONER NOT AUTHORIZED TO REVIEW RECORDS OF EMERGENCY CALLS:
The Florida Attorney General was recently asked whether a City Commissioner is authorized by Section 401.30(4), Florida Statutes, to review records of emergency calls by the city’s fire-rescue department when those records contain patient examination and treatment information. In short, Section 401.30(4), Florida Statutes, provides that records of emergency calls that contain patient examination or treatment information may be released only on certain circumstances and to persons specified. For example, the statute authorizes disclosure to the emergency medical service’s supervising medical director, who may not be an employee, and to hospital personnel providing treatment to the patient. The Attorney General had previously concluded that records of emergency calls containing patient examination or treatment information maintained by the county may not be disclosed to local law enforcement officers except as provided in the statute. The statute also recognizes that regulatory agencies, such as the Department of Health, may be granted access to such records in their regulatory and supervisory capacity. No exceptions to the statutory scheme may be implied. Therefore, the Attorney General has now concluded that a City Commissioner is not authorized by Section 401.30(4), Florida Statutes, to review the records of an emergency call by the city’s fire-rescue department when those records contain patient examination and treatment information, except with consent of the patient. AGO 2004-09 (March 24, 2004).

3. SCHOOL DISTRICT MAY NOT AGGREGATE YEARS OF SERVICE OF RETIRED TEACHER FROM PRIOR EMPLOYMENT WITH SUBSEQUENT EMPLOYMENT TO INCREASE UNUSED SICK LEAVE PAY UPON ULTIMATE TERMINATION:
A school teacher retired after 30 years of service. Upon retirement, the teacher was paid for accumulated sick leave as part of terminal pay provided for in Section 1012.61(2)(a)4., Florida Statutes. The teacher was subsequently reemployed in a teaching position and voluntarily terminated again after teaching for several years. The teacher asserted that the number of years of service during the first term of employment should be added to the years of service during the second term in order to entitle the teacher to a higher repayment amount rather than to the lesser amount that would result from a calculation based solely upon the length of service during the second term of employment. The Florida Attorney General, however, concluded that Section 1012.61(2)(a)4., Florida Statutes, does not require or authorize a school district to aggregate the years of service of a retired instructional employee from a prior term of employment for which terminal pay for unused sick leave was received with the years of service from a second term of employment in order to increase the percentage factor used to calculate unused sick leave pay upon termination of the second period of employment. AGO 2004-10 (March 24, 2004).

4. BUFFETT’S 2004 LETTER TO SHAREHOLDERS WORTH READING:
Considering Warren Buffett’s track record at Berkshire Hathaway, his annual letter to shareholders has a certain credibility. Buffett’s company has shown an average annual increase in book value of 22.2% from 1965 to 2003 versus the 10.4% gain for the Standard & Poor’s 500 with dividends included. The gain in net worth during 2003 was $13.6 Billion, increasing the per-share book value of the stock by 21%. Under Buffett’s stewardship over the last 39 years, per-share book value has grown from $19 to $50,498. Ever the storyteller, Buffett relates, among others, the following tale:

On May 20, 2003, The Washington Post ran an op-ed piece by me that was critical of the Bush tax proposals. Thirteen days later, Pamela Olson, Assistant Secretary for Tax Policy at the U.S. Treasury, delivered a speech about the new tax legislation saying, “That means a certain midwestern oracle, who, it must be noted, has played the tax code like a fiddle, is still safe retaining all his earnings.” I think she was talking about me.

Alas, my “fiddle playing” will not get me to Carnegie Hall - or even to a high school recital. Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum equaling 2 1/2% of the total income tax paid by all U.S. corporations in fiscal 2003. (In contrast, Berkshire's market valuation is about 1% of the value of all American corporations.) Our payment will almost certainly place us among our country's top ten taxpayers. Indeed, if only 540 taxpayers paid the amount Berkshire will pay, no other individual or corporation would have to pay anything to Uncle Sam. That's right: 290 million Americans and all other businesses would not have to pay a dime in income, social security, excise or estate taxes to the federal government. (Here's the math: Federal tax receipts, including social security receipts, in fiscal 2003 totaled $1.782 trillion and 540 “Berkshires,” each paying $3.3 billion, would deliver the same $1.782 trillion.)

Our federal tax return for 2002 (2003 is not finalized), when we paid $1.75 billion, covered a mere 8,905 pages. As is required, we dutifully filed two copies of this return, creating a pile of paper seven feet tall. At World Headquarters, our small band of 15.8, though exhausted, momentarily flushed with pride: Berkshire, we felt, was surely pulling its share of our country's fiscal load.

But Ms. Olson sees things otherwise. And if that means Charlie and I need to try harder, we are ready to do so.

I do wish, however, that Ms. Olson would give me some credit for the progress I've already made. In 1944, I filed my first 1040, reporting my income as a thirteen-year-old newspaper carrier. The return covered three pages. After I claimed the appropriate business deductions, such as $35 for a bicycle, my tax bill was $7. I sent my check to the Treasury and it - without comment - promptly cashed it. We lived in peace.

One thing of passing interest: in telling that story, Buffett did not mention that Berkshire Hathaway actually owns over 18% of The Washington Post company, an investment worth almost $1.4 Billion, which he picked up for a mere $11 Million. Read the whole letter at http://www.berkshirehathaway.com/letters/2003ltr.pdf.

5. PARTICIPANTS IN A 401(a) PLAN WHO PURCHASED PAST SERVICE CREDITS WITH AFTER-TAX CONTRIBUTIONS MAY THEN PURCHASE SAME CREDITS WITH PRE-TAX AMOUNTS USING A PLAN-TO-PLAN TRANSFER BETWEEN 401(a) PLANS OR A SECTION 402(c) ROLLOVER:
In a private letter ruling, issued in mid- March, 2004 but with no number yet assigned, Internal Revenue Service ruled that participants in a 401(a) plan who purchased past service credits with after-tax contributions may then purchase the same credits with pre-tax amounts using a plan-to-plan transfer between 401(a) plans or a Section 402(c) rollover. IRS assumed that the amount of service credit purchased is the actuarial equivalent of the amount of transfer or rollover. As always, a private letter ruling is directed solely to the taxpayer requesting it. The Internal Revenue Code provides that a private letter ruling may not be used or cited by others as precedent.

6. SAN DIEGO CITY MANAGER RESIGNS IN WAKE OF PENSION SCANDAL:
Per a story in the San Diego Union-Tribune, the City Manager of San Diego has resigned amid a federal investigation into the City’s financial practices. San Diego is California’s second-largest city (a surprise to us), with 10,000 workers and a $2.3 Billion annual budget. The Securities and Exchange Commission and the U.S. Attorney’s Office have opened preliminary investigations into whether city officials provided fraudulent information to investors to sell more than $2 Billion in bonds. Investigators are also looking into the City’s $1.1 Billion pension fund deficit. City officials have disclosed that the City intentionally underfunded its pension system for the last 7 years in order to bridge budget shortfalls. Because San Diego’s charter provides for a strong City Manager government, the City Manager is basically the Chief Executive Officer, responsible for most City operations.

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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