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Cypen & Cypen
MARCH 4, 2010

Stephen H. Cypen, Esq., Editor

1.         JUDGE ORDERS BACK PAY FOR SOME FURLOUGHED CALIFORNIA WORKERS:  A county judge in California has ordered back pay for tens of thousands of state workers who he had previously ruled were illegally furloughed by the Governor.  According to the Sacramento Bee, the judge ordered the state immediately to pay all employees of specific departments and agencies their full salary without any reductions, and cease and desist the furlough of such employees.  If upheld on the appeal the state has already announced it will take, the order would cost the state more than $1 Billion officials thought they would save when furloughs were instituted a year ago.  The judge's decision affects employees in nearly 70 departments that receive all or most of their budget money from sources other than the state's general fund, regardless of their union affiliation.  Neither the state nor the unions have yet figured out exactly how much pay those workers have lost to furloughs of 2-3 unpaid days off a month.

 2.            COMMENTATOR CALLS FOR END TO ALASKA PUBLIC PENSION “EXPERIMENT”:  In 2005, the Alaska state legislature ended defined benefit pensions for public employees, and replaced them with defined contribution plans based in stocks.  With the crash in the market, many public employees now have little in the way of retirement savings, and by state law, are also excluded from Social Security.  (Over 30 years ago, the state opted out of Social Security, replacing it with a defined benefit plan.)  Listen to educator Ginny Blackson, who would like legislators to bring this unfair experiment to an end, at 

 3.            PROPOSED REGULATION TO INCREASE WORKERS’ ACCESS TO HIGH QUALITY INVESTMENT ADVICE:  The Pension Protection Act of 2006 amended the Employee Retirement Income Security Act of 1974 to create a new statutory exemption from the prohibited transaction rules to expand availability of investment advice to participants in 401(k)-type plans and individual retirement arrangements, subject to safeguards and conditions.  The Department of Labor is publishing in the Federal Register a proposed rule to implement these PPA provisions and make investment advice more accessible for millions of Americans in 401(k)-type plans and individual retirement arrangements.  The United States Department of Labor, Employee Benefits Security Administration, is responsible for administering and enforcing the fiduciary, reporting and disclosure provisions of Title I of ERISA.  The agency oversees approximately 708,000 private pension plans, including 483,000 participant-directed individual account plans such as 401(k)- type plans and millions of private health and welfare plans that are subject to ERISA.  As of 2007, more than one-half of private-sector employees participated in defined contribution plans that allow for participant direction,  these plans covering 60 million active participants and holding about $3 trillion in assets.  In general, investment advice given by an investment adviser to plan participants on investments that pay additional fees to the adviser or its affiliates can violate the prohibited transaction rules of ERISA and the Internal Revenue Code, which has limited types of investment advice arrangements available to participants in 401(k) plans and IRAs.  Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America's workers increasingly depends on their investment decisions.  Thus, there is increased recognition of the importance of investment advice in helping participants avoid costly investment errors.  After review, the Department decided to propose a revised rule limited to the implementation of the PPA statutory exemption relating to investment advice.  The proposed regulation allows investment advice to be given under the statutory exemption in two ways.  One is through use of a computer model certified as unbiased.  The other way is through an adviser compensated on a "level-fee" basis (that is, fees do not vary based on investments selected by the participant).  Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive.  The regulation contains some key safeguards and conditions, including: 

  • Requiring that a plan fiduciary (independent of the investment adviser or its affiliates) select the computer model or fee leveling investment advice arrangement.
  • Imposing recordkeeping requirements for investment advisers relying on the exemption for computer model or fee leveling advice arrangements. 
  • Requiring that computer models must be certified in advance as unbiased and meeting the exemption's requirements by an independent expert.
  • Establishing qualifications and a selection process for the investment expert who must perform the above certification. 
  • Clarifying that the fee-leveling requirements do not permit investment advisers (including employees) to receive compensation from affiliates on basis of their recommendations. 
  • Establishing an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider. 
  • Requiring disclosures by advisers to plan participants.

The Department estimates that the regulation will affect 16,000 investment advisory firms, including broker-dealers.  The main components of cost of the regulation are 1)  preparation and sending of 15 million disclosure statements to plan participants by plans annually, 2) preparation of policies and procedures to assure compliance with conditions of the exemption, 3) preparation and maintenance of records, 4) certification of computer model investment advice arrangement and 5) audit of investment advice arrangement. 

 4. IRS TARGETS WISCONSIN STATE FUND FOR BACK TAXES:  Internal Revenue Service has targeted Wisconsin’s state pension fund, saying that it owes the federal government millions in back income taxes from profits made years ago.  The move by IRS officials comes despite the fact that the State of Wisconsin Investment Board is tax-exempt.  SWIB officials continue to fight IRS, most recently filing an appeal with the IRS Appeals Division.  At issue, according to, is the 2001 sale of the former private Wisconsin-based media group Shockley Communications Corp.  IRS filed a tax notice in late 2008 against the six largest former Shockley shareholders, including SWIB, which manages $70 Billion in investments for state workers and retirees. IRS officials claim the State Board must pay it $28 Million plus interest, because the Shockley stock sale was really an asset sale, and, as such, former- shareholders are liable for corporate income taxes from it.  Including penalties and interest, the amount due could approach $40 Million.  In a very reassuring statement, the Board said whatever payment is made to IRS would not have a negative impact on SWIB's investment assets or income in the future.  Right. 

 5. OHIO POLICE OFFICERS GET DRUNK ... ON PURPOSE:  Law enforcement officers in Ohio were chugging down alcoholic drinks recently as part of a training exercise on how to give sobriety tests.  A report from The Associated Press indicates that several police officers and deputy sheriffs volunteered to drink so colleagues could practice conducting tests given to suspected drunk drivers. Officials wanted officers to drink until they had slurred speech, glassy eyes and a lack of coordination.  One test required intoxicated officers to walk heel-to-toe down a line and then hold up one leg to demonstrate balance.  Officials hope the exercise at the Police Academy helped officers gain a better understanding of how to deal with impaired drivers.  We’ll drink to that. 

 6. TITLE OF PEW REPORT IS SCARE TACTIC:  The Pew Center on the States has issued a report entitled “The Trillion Dollar Gap.”  Of all of the bills coming due to states, perhaps the most daunting is the cost of pensions, health care and other retirement benefits promised to their public sector employees.  The Pew analysis found that at the end of fiscal year 2008, there was a $1Trillion gap between the $2.35 Trillion states and participating localities had set aside to pay for employees' retirement benefits and the $3.35 Trillion price tag of those promises.  To a significant degree, the $1 Trillion gap reflects states' own policy choices and lack of discipline:  failing to make annual payments for pension systems at levels recommended by their own actuaries; expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care without adequately funding it.  Nationally, the report found that states’ systems were 84% funded -- a relatively positive outcome, because most experts advise at least an 80% funding level.  Obviously, the report could have been entitled “States’ Systems 84% Funded.”  P.U.

 7. NASRA AND NCTR RESPOND TO PEW REPORT:  The National Association of State Retirement Administrators and the National Council on Teacher Retirement have issued a statement regarding the above report.  NASRA and NCTR commend the Pew Center on the States for examining the retirement benefit programs for some 20 million workers and retirees across the country, especially given the severe economic stress facing American households, businesses and governments.  The study finds that in fiscal year 2008, states' pension plans had $2.8 Trillion in long-term liabilities, with more than $2.3 Trillion socked away to cover these costs.  In aggregate, states' systems were 84% funded -- a relatively positive outcome, because most experts advise at least an 80% funding.  Pew's decision, however, to couple retiree healthcare with pension liabilities distracts from the issues states face with these very different benefits. When properly dissected, it is clear that the vast majority of the "financing gap" is not attributable to pensions, but rather to health care programs that until recently were funded primarily on a pay-as-you-go basis.  In contrast to assets currently held in trust to pay pensions, states currently have set aside just five percent of their future retiree healthcare obligations. Retiree health care cost containment options, financing structures and benefit protections are entirely different from those of pensions, and are mired in a debate over the nation's healthcare system.  NASRA and NCTR commend state and local governments, their pension plans and their employees for proactively engaging in a process to examine benefit levels and financing structures in order to rebuild reserves in wake of the financial crisis.  The Pew report affirms these actions, indicating that states are taking action to change how retirement benefits are set, how they are funded and how costs are managed.  NASRA and NCTR believe the report provides an important contribution to ongoing discussions concerning ways in which the public pension process can be improved to the benefit of public pension plan sponsors, their participants/beneficiaries and taxpayers.  Public pension funds distribute more than $165 Billion in benefits annually to more than 7.5 million Americans, paying an average yearly benefit of some $22,000.  The organizations are pleased that Pew recognizes that public sector retirement benefits provide a reliable source of post-employment income for government workers, and they help public employers retain qualified personnel to deliver essential public services.  Benefit payments provide an important source of economic stimulus that reaches every city and town of every state, and are estimated to support 2.5 million jobs and to add more than $350 Billion annually in economic output.  Look at it this way, folks:  if you had a $100,000 mortgage on your house and had $84,000 in the bank, would you be at all worried? 

 8. CalPERS MAY CUT RATE OF RETURN:  California Public Employees' Retirement System is considering whether to reduce the projected rate of return used by giant pension fund to make investment decisions.  A cut could force cash-strapped governments in California to pay millions more each year to cover their employee pension obligations, according to The Wall Street Journal.  Since 2003, CalPERS has assumed that the value of its stocks, bonds and other holdings will increase by 7.75% a year.  However, the likelihood of an extended period of modest economic growth world-wide is fueling doubts inside CalPERS that the pension fund can continue aiming so high.  No specific alternate targets have been discussed by CalPERS officials, but the board has been encouraged to shrink its projected rate of return to as low as 6%.  (Over 10 years, a pension fund the size of CalPERS would earn $64 Billion more on the 7.75% annual return than a 6% return.)  It hasn’t helped that last July BlackRock Inc.’s Chairman and CEO told CalPERS board members "You'll be lucky to get 6% on your portfolios, maybe 5%."  Note, he did not say that BlackRock would reduce its fees. 

 9. CLASS ACTION CHALLENGES COLORADO LAW REDUCING COLA:  Two Colorado Public Employees’ Retirement Association retirees, on behalf of approximately 100,000 PERA members, have filed a class action challenging the newly-passed amendments to PERA that reduced the annual increase to the retirees' pension benefits.  The class comprises PERA members who became eligible to retire or who have retired since March 1, 1994, when annual pension increases were first guaranteed under state law.  Citing PERA’s underfunding, the Colorado legislature recently passed Senate Bill 10-001, which eliminated the 3.5% annual increase in effect since 2001.  In a 2004 formal Opinion, then-Attorney General Ken Salazar acknowledged that when a PERA member retires from active service and begins receiving a pension, the member's pension becomes a vested contractual obligation of the pension program that is not subject to unilateral change of any type by the state.  Florida courts have taken the same position in several appellate decisions.  Incidentally, a public employee who retired in 2002 and who was eligible for $2,772 a month (the average PERA benefit) will lose more than $165,000 in promised benefits during the next twenty years.  Bet on the plaintiffs. 

10. THE DISTRIBUTION OF LIFETIME HEALTH CARE COSTS FROM AGE 65:  The Center  for Retirement Research at Boston College has released a new Issue in Brief entitled “What is the Distribution of Lifetime Health Care Costs from Age 65?”  Medical and long-term care costs represent a substantial uninsured risk for most retired households.  In 2007, spending on Medicare premiums and co-payments among married couples age 65 and over averaged $7,600.  But such statistics are of limited value to households trying to determine how much to set aside for health care costs in retirement or how to manage wealth decumulation during retirement.  Households care not only about average costs, but also about the risk of incurring unusually high costs.  Furthermore, calculations of the distribution of health care costs incurred by households in any particular year tell us little about lifetime risk unless we also know the extent to which the same individuals are incurring high health care costs every year.  The brief outlines findings of new research that calculates distribution of lifetime health care costs.  The research shows that the expected present value of lifetime uninsured health care costs for a typical married couple age 65 is about $197,000 -- including insurance premiums, out-of-pocket costs and home health costs (excluding nursing home care).  But a typical household has a 5-percent risk that the present value of its lifetime uninsured health care costs will exceed $311,000.  And when nursing home costs are included, the amount for a typical couple increases from $197,000 to $260,000, with a 5-percent risk of exceeding $570,000.  Even at the peak of the stock market in 2007, less than 15 percent of households approaching retirement had accumulated that much in total financial assets, much less financial assets available for health care costs.  Poverty is just around the corner.

11. OXYMORON:  Why do you press harder on the buttons of a remote control when you know the batteries are dead? 


13. FABULOUS RANDOM THOUGHTS:  Answering the same letter three times or more in a row on a multiple choice test is absolutely petrifying.  

14. QUOTE OF THE WEEK:  “Lack of money is the root of all evil.”  George Bernard Shaw

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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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