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Cypen & Cypen
MARCH 13, 2008

Stephen H. Cypen, Esq., Editor


Late last year, there was a discussion concerning Pension Benefit Guaranty Corporation’s investment policy and strategy. According to the Executive Summary, PBGC’s current investment strategy is

  • relatively undiversified, dominated by long duration high quality bonds
  • sensible for well-funded investors with predictable liabilities seeking to maximize short-term volatility of funded status
  • NOT expected to erase the current deficit over any reasonable time period
  • NOT expected to address possibility that the deficit could grow significantly because of large claims
  • NOT maximizing opportunities associated with PBGC’s long-term investment horizon

The recommendation is that PBGC adopt a long-term investment policy that allocates 42% to fixed income (long duration nominal bonds, TIPs and high yield); 42% to equities (U.S., developed non-U.S. and emerging); and 16% to a mix of alternatives (real estate, emerging market debt, private equity, commodities and hedge funds). The recommended change in asset mix is expected to

1. Enhance long-term expected return significantly versus PBGC’s current asset mix (7.8% versus 5.7% annually)

2. Take advantage of the full range of capital market opportunities

3. More fully utilize PBGC’s long-term investment horizon

4. Prudently diversify PBGC’s portfolio on both an absolute basis and relative to its liabilities

5. Improve PBGC’s expected financial position and chances of meeting its current and future obligations

6. Reduce expected size of PBGC’s shortfall in worst case environments.

Although the recommended asset mix materially reduces the size of a shortfall in worst case scenarios, it does NOT address possibility that PBGC’s deficit could grow significantly due to large claims in the future.


Frank Kinney was a Superior Court Judge in Connecticut, who, collapsed at home and died of an apparent heart attack. Because of the stress of Judge Kinney’s duties, his widow sought workers’ compensation benefits, but a court ultimately determined that a state court judge is not an “employee” for purposes of workers’ compensation. Mrs. Kinney did not, however, give timely notice of her intent to sue the state for damages. Years later, the state legislature passed a law, which, literally extended her time for giving such notice. On ultimate review by the Supreme Court of Connecticut, the Court invalidated the subject special act, because it constituted an unconstitutional exclusive public emolument or privilege that did not serve a public purpose. In its opinion, the Court reviewed Mrs. Kinney’s unsuccessful half-dozen lawsuits in state and federal courts (including the United States Supreme Court), which ran for over twenty years. Kinney v. State of Connecticut, Case No. SC 18020 (Conn. March 4, 2008).


The U.S. Securities and Exchange Commission has issued a report reminding public pension funds of their responsibilities under federal securities law, and warning them that they assume a greater risk of running afoul of anti-fraud and other provisions if they do not have adequate compliance policies and procedures in place to prevent wrongdoing in their money management functions. The Commission’s Report of Investigation stems from an insider trading inquiry into stock purchases by The Retirement Systems of Alabama, a state pension fund. RSA purchased shares in The Liberty Corporation while in possession of material, non-public information about prospective acquisition of Liberty. RSA learned about the transaction because it was to provide financing for the acquisition. RSA did not have any program, policy, practice or training to ensure that its investment staff understood and complied with federal securities laws in general, or insider trading laws in particular. When the information became public, the value of RSA’s Liberty shares increased by more than $700,000. The report reminds public pension funds of their obligations to prevent fraud and protect investors. While public pension funds are exempt from most federal securities laws governing other money managers, they are not exempt from important anti-fraud provisions that prohibit insider trading and other manipulative and dishonest behavior that threatens integrity of our markets. It is vitally important, therefore, that they have appropriate policies and procedures. When public pension funds and other unregulated money managers come into possession of material non-public information, they operate at their own peril if they do not have safeguards specifically designed to prevent misuse of inside information. In resolving its inquiry into RSA’s trading with a Report of Investigation, the Commission took the following into consideration:

  • RSA took remedial action that the Commission might have sought in an enforcement proceeding, including adoption of a compliance program and compensation to sellers of the Liberty stock that it purchased.
  • RSA cooperated in the investigation.
  • RSA’s trading was directed by its CEO, who cooperated in the investigation and authorized RSA’s remedial action. No individual personally profited from RSA’s trading.

Although the lesson is clear, SEC’s admonition is probably applicable only to pension plans that do not engage outside professional money managers (who are regulated by most federal securities laws), but rely on an in-house investment staff. Release No. 57446 (March 6, 2008) is available at


Wilshire Consulting has released its latest annual report on State Retirement Systems’ funding levels and asset allocation. Because the findings are so extensive, we quote at length from the Summary:

  • Wilshire Consulting estimates that the ratio of pension assets-to-liabilities (funding ratio) for all 125 state pension plans included in the study was 95% in 2007, up from an estimated 88% in 2006.
  • For the 56 state retirement systems that reported actuarial data for 2007, pension assets and liabilities were $924.2 Billion and $1013.0 Billion, respectively. The funding ratio for these 56 state pension plans was 91% in 2007, up from 85% for the same plans in 2006.
  • For the 56 state retirement systems that reported actuarial data for 2007, pension assets grew 14.7%, or $118.3 Billion, from $805.9 Billion in 2006 to $924.2 Billion in 2007. Meanwhile, liabilities grew 6.8%, or $64.3 Billion, from $948.8 Billion to $1013.0 Billion. The dramatically faster pace in rising asset values compared with the continued steady growth in liabilities for the 56 state pension plans led to a significant reduction in the aggregate shortfall, as the $142.9 Billion shortfall in 2006 narrowed to $88.8 Billion in 2007.
  • For the 116 state retirement systems that reported actuarial data for 2006, pension assets and liabilities were $2,109.9 Billion and $2,356.0 Billion, respectively. The funding ratio for all 116 state pension plans was 90% in 2006.
  • Of the 56 state retirement systems that reported actuarial data for 2007, 75% have market value of assets less than pension liabilities (that is, they are underfunded). The average underfunded plan has a ratio of assets-to-liabilities equal to 82%.
  • Of the 116 state retirement systems that reported actuarial data for 2006, 77% are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 83%.
  • State pension portfolios have, on average, a 69.0% allocation to equities -- including real estate and private equity -- and a 31.0% allocation to fixed income. The 69.0% equity allocation is notably higher than the 61.0% equity allocation in 2002. The increasing equity allocation suggests that pension funds remain committed to stocks.
  • Asset allocation varies widely by retirement system. Thirty-eight of 125 retirement systems have allocations to equity that equal or exceed 75%, and three systems have equity allocations below 50%. The 25th and 75th percentile range for equity allocation is 63.8% to 75.0%.
  • Wilshire forecasts a long-term median plan return equal to 7.6% per annum, which is 0.4 percentage points below the median actuarial interest rate assumption of 8.0%.

As usual, the Wilshire Report is chock full of very interesting (and useful) information.


Apropos of the above item, the United States Government Accountability Office has issued a report entitled “STATE AND LOCAL GOVERNMENT RETIREE BENEFITS Current Funded Status of Pension and Health Benefits.” Three key measures help to understand different aspects of the funded status of state and local government pension and other retiree benefits. First, government’s annual contributions indicate the extent to which governments are keeping up with benefits as they are accumulating. Second, the funded ratio indicates the percentage of actuarially approved benefit liabilities covered by the actuarial value of assets. Third, unfunded actuarial accrued liabilities indicate the excess, if any, of liabilities over assets in dollars. Governments have been reporting these three measures for pensions for years, but new accounting standards will also require governments to report the same for retiree health benefits. Because a variety of methods and actuarial assumptions are used to calculate funded status, different plans cannot be easily compared. Currently, most state and local government pension plans have enough invested resources set aside to keep up with benefits they are scheduled to pay over the next several decades, but governments offering retiree health benefits generally have large unfunded liabilities. Many experts consider a funded ratio of about 80% or better to be sound for government pensions. GAO found that 58% of 65 large pension plans were funded to that level in 2006, a decrease since 2000. Low funded ratios would eventually require the government employer to improve funding, for example, by reducing benefits or increasing contributions. However, pension benefits are generally not at risk in the near term because current assets and new contributions may be sufficient to pay benefits for several years. Still, many governments have often contributed less than the amount needed to improve or maintain funded ratios. Low contributions raise concerns about the future funded status. For retiree health benefits, studies estimate that the total unfunded actuarial accrued liability for state and local governments lies between $600 Billion and $1.6 Trillion in present value terms. The unfunded liabilities are large because governments typically have not set aside any funds for future payment of retiree health benefits as they have for pensions. Just another wake-up call. The full report can be read at


In December 1999, when, faced with a threat of layoffs, several law enforcement unions, including the Sheriff Officers Association, agreed to permit Nassau County, New York, to institute a lag payroll procedure during calendar year 2000, subject to satisfaction of certain conditions. Under the lag procedure, ten days of pay of each union member would be deferred over the course of ten bi-weekly pay periods, and the deferred pay would be returned when the union member separated from service. However, the requisite conditions in the agreement between the Sheriff Officers Association and the County were not met, and as a result, even as it began lagging pay of employees who belonged to other unions, the County did not implement the lag procedure on Sheriff Officers Association members’ paychecks. Years later, the County announced it would begin to lag Sheriff Officers Association member salaries, claiming the authority therefor under the conditional 1999 agreement. The Sheriff Officers Association and members sued the County, claiming that imposition of the lag procedure violated the New York State Constitution, state statutory law, a subsequent collective bargaining agreement, and the Due Process and Contracts Clause of the U.S. Constitution. The U.S. District Court issued a split decision: it granted summary judgment to defendants on plaintiffs’ substantive due process and contracts clause claims, but granted summary judgment to plaintiffs on their procedural due process claim. The District Court held that the County violated the Due Process clause because (1) plaintiffs’ earned salary constituted a “protectable property interest;” and (2) defendants, in unilaterally instituting the lag payroll procedure, deprived plaintiffs of that interest without providing a pre-deprivation hearing. On appeal by the County, the Court of Appeals reversed. The County informed the Sheriff Officers Association of the pay lag procedure more than a week before it was to be implemented, and more than three weeks before the lag would first have been reflected in paychecks. Thus, the Sheriff Officers Association had sufficient time to file a grievance under provisions of the collective bargaining agreement, challenging the lag procedure as a violation of the collective bargaining agreement’s terms setting wage rates and pay schedules. The Court had held on several previous occasions that there is no due process violation where, as here, pre-deprivation notice is provided and the deprivation at issue can be fully remedied through grievance procedures provided for in a collective bargaining agreement. Adams v. Suozzi, Case No. 06-5725 (U.S. 2d Cir., February 22, 2008).


IRS Tax Exempt and Government Entities Division has announced that its Office of Employee Plans will host a roundtable discussion with the governmental plans community as an initial step in an effort to raise awareness in the government plan sector of the need to comply with tax qualification requirements. IRS intends to gather interested representatives from the community, including public retirement fund compliance officers and general counsel, in order to begin a dialogue on how to accomplish this goal. The following will be discussed:

  • Why tax compliance is critical for plans maintained by governmental entities
  • The timely amendment requirements for governmental plans and voluntary determination letter program under the new staggered remedial amendment program
  • How IRS's Voluntary Compliance Programs can help you to find, fix and avoid plan errors
  • Enforcement efforts and methods to evaluate level of compliance in governmental plans
  • Technical and compliance issues of special interest to governmental plans
  • Development of new tools and programs to assist governmental plans in achieving compliance

The roundtable will be held in Washington, D.C. on April 22, 2008 from 9:00 A.M. to 4:00 P.M. If you are interested, you can reserve a space before March 28, 2008 by e-mailing However, you had better hurry, as space is limited to 52 participants (and may already be sold out by time this item is published).


“The greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.” Michelangelo

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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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