Cypen & Cypen
MARCH 18, 2010
Stephen H. Cypen, Esq., Editor
1. BARRON’S ARTICLE ON SO-CALLED PENSION ABUSE COVERS NO NEW GROUND: Barron’s recently published an article warning of the imminent collapse of state and local governments, citing in its premise, the burden of unfunded pension liabilities. The article references one of the old favorites of the press -- Vallejo, California -- which has filed for bankruptcy protection, but also, curiously, GM, which is hardly suitable as a comparison to any municipal government. While the article points out the deficiency in several states’ and localities’ pension funding ratios, and the way funding formulas have been massaged by some workers in some areas, implications for municipal credit are not necessarily in the near term. State and local governments have the flexibility to underfund their annual, actuarially driven pension requirements, and underfunding a pension payment is not the same as defaulting on general obligation debt. While employee pension costs are pressuring some state and local governments, and have been an element in some high profile downgrades -- Illinois in particular, and the negative rating revision of New Jersey by Moody's -- the pension funding concern is a highlight of current funding levels versus long term funding needs. The fact that there is a long term gap in the funding ratio for some municipal entities does not necessarily mean that the state or issuer is unable to cover the current pension obligation today. In the opinion of Wells Fargo Advisors, while significant underfunding of pensions can be an indicator of fiscal stress -- just as any deferment of a payment would be -- an underfunded pension liability in itself is not a precursor to default. Many of the states and localities identified in the Barron's article are not facing a pension benefit outlay problem for 15 years or more, and even that prediction can change with performance of the stock market, changes in contribution levels going forward and cuts to benefits for new government employees, to name just a few of the available fixes. States, in particular, and local governments, as well, have significant revenue raising and expense cutting flexibility at their disposal. The Barron's article does not identify anything new regarding pension funding that has not already been reported many times in many places before.
2. SEC WARNS OF PHONY WEBSITE TARGETING MADOFF FRAUD VICTIMS: The Securities and Exchange Commission is alerting investors about a web site that falsely claims to have recovered $1.3 Billion in funds hidden in Malaysia by convicted Ponzi schemer Bernard Madoff. The site asks Madoff victims to submit information to verify that they are on a refund list -- a ploy commonly used by con artists further to rip off financial fraud victims. The phony web site claims to be home to the "International Security Investor Protection Corporation," a fictitious entity. The ISIPC web site bears a certain likeness to the Securities Investor Protection Corporation's (SIPC) web site, mimicking its look, feel and content in an attempt to achieve an aura of authenticity with Madoff victims. The ISPIC Web site claims to partner with several governments, including the United States, and links to actual government web sites to signify an affiliation. ISIPC also falsely claims to be sponsored by the United Nations, the International Monetary Fund and the World Bank. Investors who lose money in widely publicized schemes are often targeted by con artists looking to cash in on the victim's desire to recover losses. Sort of a scam-on-scam, we guess. SEC Release 10-38 (March 10, 2010).
3. INVESTORS TAP INTO DEATHBED BOND DEAL: Billions of dollars in corporate bonds sold to retail investors come with an unusual provision that could be used to generate a fast profit. But, according to The Wall Street Journal, there is just one catch: investors must team up to buy the bonds with someone who is about to die. Major US. companies often issue bonds with what is known as a survivor's option. In a little-known practice, investors can recruit a terminally-ill person and together they can scoop up these bonds on the open market for a discount. When the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit. Companies have typically included this macabre provision as a way to allay fears among ordinary individual investors -- elderly couples who might worry that one spouse could die before the bonds mature, possibly exposing the survivor to a loss. (This investment is not the only macabre one ever to come through Wall Street. See C&C Newsletter for August 9, 2007, Item 5.) But the market's turmoil has made this arrangement more attractive for professional investors, since some bonds are trading at a steep discount. Legal and financial experts say there is nothing to prevent investors from buying bonds with a dying relative or even a stranger who is terminally-ill. It is not clear how many investors have piled into such bonds since the financial crisis hit, which initially pushed some below 50 cents on the dollar. Prices have rebounded from their lows, although so-called survivor's-option corporate bonds issued by major companies are still being offered at discounts of more than 20%. Companies typically issue the bonds because they want to tap into a regular, stable funding source through retail investors. Such companies often sell a small amount of bonds each week, say $25 Million, through brokers. Usually, there are two ways an investor can cash in a bond: by selling it to another investor on the open market or by waiting until the bond is redeemed upon maturity. There are $83 Billion in retail-oriented bonds outstanding, most with a survivor’s option. Query: will money managers now start trolling intensive care wards for co-investors?
4. NEW HAMPSHIRE SUED OVER PENSIONS: The city of Concord, New Hampshire, and two other plaintiffs have filed a lawsuit with 294 backers claiming New Hampshire violated the state Constitution by increasing what municipalities and school districts must pay into the pension system for police officers, firefighters and teachers. For years, the state had paid 35 percent of the employer contribution to the New Hampshire Retirement System for those employees, but the current budget reduced that portion to 30 percent this year and 25 percent next year. Citing testimony from the retirement system, the suit claims the change will cost local governments $9 Million this year and $18 Million next. Since police officers, firefighters and teachers are required to participate in the retirement system, increasing the portion local governments must pay amounts to an unfunded mandate, which has been unconstitutional since 1985. A municipal association organized the lawsuit and facilitated its funding by numerous municipalities, counties, school districts and administrative units. The suit seeks class-action status. The New Hampshire Retirement System was created in 1967 to coordinate four existing statewide programs for public employees: the New Hampshire Teachers' Retirement System, the New Hampshire Policemen's Retirement System, the New Hampshire Permanent Firemen's Retirement System and the Employees Retirement System of the State of New Hampshire. Each of these systems had different rules as well as ratios of cost sharing between the state and participating local governments. The state and local governments in 1977 began splitting the employer contribution for police, fire and teachers. The system is funded by employer contributions, employee contributions and earnings on investments.
5. MILLIMAN MONTHLY PENSION FUNDING INDEX IMPROVES: For the past nine years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The Milliman 100 Pension Funding Index projects funded status for pension plans included in the study, reflecting impact of market returns and interest-rate changes on pension funded status, utilizing actual reported asset values, liabilities and asset allocations of the companies' pension plans. Results of the Milliman 100 Pension Funding Index were based on actual pension plan accounting information disclosed in footnotes to the companies' annual reports for the 2008 fiscal year and for previous fiscal years. The 2009 Milliman 100 Pension Funding Study was published on March 24, 2009. In addition to providing financial information on the funded status of U.S. qualified pension plans, footnotes may also include figures for the companies' nonqualified and foreign plans, both of which are often unfunded or subject to different funding standards from those for U.S. qualified pension plans. They do not represent the funded status of the companies' U.S. qualified pension plans under ERISA. The funded status of the 100 largest corporate defined benefit pension plans improved by $11 Billion during February 2010. The funded status increase was primarily due to assets of these plans, as measured by the Milliman 100 Pension Funding Index, increasing by $10 Billion during February due to investment gains. Plan liabilities had a comparatively small decrease of $1 Billion as the discount rate movement had a minor increase. As of February 28, 2010, the funding status increased to 76.8%, up from 76.1% at the end of January 2010. February's $10 Billion increase in market value raises the Milliman 100 PFI asset value to $1.039 Trillion, up from $1.029 Trillion at the end of January 2010. Monthly asset return was approximately 1.26%. By comparison, the Milliman 2009 PFI Study found that companies' expected monthly asset return was 0.65% (8.10% annualized). If the companies were to achieve an expected return of 8.1% and the current discount rate of 5.32% were maintained for the balance of 2010, Milliman forecasts the funded status of the 100 surveyed pension plans would increase, with a projected pension deficit of $287 Billion and a funded ratio of 79.0% on December 31.
6. MANY DC PLAN PARTICIPANTS MISSED 2009 STOCK REBOUND: In the midst of financial crisis, defined contribution plan participants fled the stock market and remained too shell shocked to get back in when equity prices turned around. Effects of the market downturn shrank average defined contribution equity allocations to 41.1% of total assets in 2009 from 48.1% in 2008, according to Greenwich Associates, as reported by pionline.com. Allocations to stable-value funds and guaranteed investment contracts jumped to 23.8% of assets from 15%; money market allocations increased to 3.7% from 2.5%; and allocations to international stocks dropped to 7.3% from 9.7%. Not participating in the recovery, combined with possible elimination of a company contribution, has left many participants in a tough spot. Lamentably, people who are ready to retire are going to find an unhappy experience.
7. FRS MAY MOVE INTO HEDGE FUNDS: The Florida State Board of Administration is considering allocating $2 Billion to $5 Billion to hedge funds for a portable alpha strategy within the $113 Billion Florida Retirement System's traditional public equity and fixed-income portfolios to access better opportunistic investment manager skill. As part of that potential restructuring, pionline.com says FRS's defined benefit fund is considering an increase in passive investments. FSBA, which oversees a total of $138 Billion in assets, may eliminate high yield as a stand-alone asset class and allow opportunistic high-yield exposure by core-plus bond managers or managers in the strategic investments allocations, designed to make opportunistic investments. FRS’s defined benefit plan has 80% of its assets in domestic equities invested passively, as well 20% of its international equity and 20% of its fixed income. Twenty percent of its domestic equity, 99% of its international equity and 60% of its fixed income assets are externally managed. Separately, the board renewed its commitment to search for a manager to run a terror-free international equity fund as an investment choice for its $4.8 Billion 401(a) plan. The board failed to meet a March 1 deadline imposed by the Florida Legislature to begin offering such an option to participants.
8. SO, YOU WANT TO BE A MILLIONAIRE?: The answer to that question may very well be “I already am one,” as U.S. millionaires grew 16% to 7.8 million in 2009, according to Spectrem Group. The number of U.S. households with a net worth of $1 million or more, not including primary residence, grew from 6.7 million the year before. Similarly, the number of Ultra High Net Worth households, those with a net worth of $5 million or more, not including primary residence, advanced 17% to 980,000 in 2009. In addition to the millionaire groups, the broader affluent population, half-millionaires , grew by 12% in 2009 to 12.7 million. The number of Slumdog Millionaires, meanwhile, remained at one.
9. ONLINE BANKING, BILL PAYING AND SHOPPING -- TEN WAYS TO PROTECT YOUR MONEY: Internet commerce is fast and convenient, but as with the old-fashioned ways of doing business, it pays to take precautions, according to Federal Deposit Insurance Corporation. Online banking, bill paying and shopping are conveniences that most people want to enjoy. And most of the time, high-tech transactions are completed quickly and without a glitch. However, just as with other transactions, in a small percentage of cases something goes wrong. That is why you need to take precautions against theft and errors. Here’s FDIC’s latest collection of top tips:
Tip number 11 from us: Use your common sense.
10. POLICE CAPTAIN REQUIRED TO RESIGN POSITION TO QUALIFY AS CANDIDATE FOR MAYOR: Lewis was a captain with the Tampa police department, who, while still employed in such capacity, informed his supervisors that he wished to run for the office of Mayor. He met with the City Attorney, who concluded that Section 99.012(5), Florida Statutes, required Lewis to resign his position as captain upon qualifying as a candidate for the office of Mayor. The City Attorney also advised Lewis that he would be deemed by the City to have resigned his position as a captain upon qualifying as a candidate for the office of Mayor. Lewis qualified as a candidate, and was legally required and did sign the Sworn Oath of Candidate pursuant to Section 99.021l(1)(a), Florida Statutes, wherein he averred, among other things, that he had resigned from any office from which he was required to resign. For some reason, the City felt compelled to file a suit for declaratory judgment, seeking a declaration that (a) that Lewis was required to resign upon qualifying as a candidate for Mayor and (b) by operation of law, Lewis was deemed to have resigned his position when he took the Oath of Candidate. Lewis, himself, sought declaratory relief, wherein he requested a declaration that (a) he was not required to resign as a police officer to run for Mayor; (b) that he had not resigned; and (c) if he was not elected Mayor, he was entitled to return to his civil service job as a police captain. The trial court granted summary judgment in favor of Lewis, but the Second District Court of Appeal reversed, and held as a matter of law that (1) the incumbent Mayor had authority to supervise Lewis and (2) as such, Lewis was required to resign his position as a Tampa police captain in order to run for the office of Mayor. On remand, Tampa moved for entry of final judgment in its favor and against Lewis in accordance with the mandate of the Second District Court of Appeal. The trial court found that, while the Second District Court of Appeal's decision had definitively answered the question that Lewis was required to resign, the decision had left unanswered the remaining question of whether Lewis had, in fact, resigned his position when he executed the Oath of Candidate. The Court thereupon granted summary judgment in favor of the City, holding that, in addition to the Second District’s holding that Lewis was required to resign in order to qualify, Lewis did qualify to run for office of Mayor, did stand for election and his actions constituted a resignation from his position as a Tampa police captain by operation of law. Thus, Lewis’s claim for wrongful discharge has been completely negated. City of Tampa, Florida v. Lewis, Case No. 07-000838 (Fla. 13th Cir., February 8, 2010).
11. HOMICIDES DOWN IN ST. PETE: In 2009, in St. Petersburg, Florida, the number of homicides was only eleven, the lowest in 40 years. Homicides are down from a high of 44 in 1989 and 30 just five years ago, and have been declining for the past three straight years, but even the police cannot figure out why. We think we have the answer: people in St. Petersburg -- place of your editor’s birth -- cannot wait to be killed; they would rather just die first.
12. WOMAN CRASHES CAR WHILE SHAVING BIKINI AREA: Yes, you read that right -- only in the Florida Keys, where a woman crashed into another car as she attempted to shave her bikini area. According to AolNews.com, the woman told police she was on her way to Key West to meet her boyfriend, and that she "wanted to be ready for the visit." So, she had her ex-husband (no joke), who was riding in the passenger seat, take the wheel while she attended to her pu.bic hair. The results were not pretty: going 45 mph, the two rear-ended a car that had slowed to make a left turn. A day earlier, the woman had been convicted of numerous driving infractions, including DUI with a prior arrest and driving with a suspended license. She had been ordered to impound her car, her license was revoked for five years and she had been placed on probation for nine months. (But, was she prohibited from shaving while on probation?) The couple drove away before switching seats in an attempt to make it seem to police as though the woman had not been driving. If found guilty of violating terms of her probation, the woman could face a year behind bars -- perhaps appropriate for pu.bic enemy number one.
13. OXYMORON: If Webster wrote the first dictionary, where did he find the words?
14. FABULOUS RANDOM THOUGHTS: I can't remember the last time I wasn't at least kind of tired.
15. SIMPLE BUT BRILLIANT...QUOTES FROM WILL ROGERS, PROBABLY THE GREATEST POLITICAL SAGE THIS COUNTRY HAS EVER KNOWN: Lettin' the cat outta the bag is a whole lot easier'n puttin' it back.
16. QUOTE OF THE WEEK: “If you haven’t got something nice to say about a person, it’s time to change the subject.” Pappy Maverick
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