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Cypen & Cypen
March 15, 2012

Stephen H. Cypen, Esq., Editor

1.     ECONOMIC DOWNTURN SPURS EFFORTS TO ADDRESS STATE AND LOCAL GOVERNMENT PENSION PLAN COSTS AND SUSTAINABILITY:   United States Government Accountability Office has issued a new report dealing with state and local government pension plans.  During the recent economic downturn, most large state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more.  However, pension plans still face challenges over the long term due to the gap between assets and liabilities.  In the past, some plan sponsors have not made adequate plan contributions or have granted unfunded benefit increases, and many suffered from investment losses during the economic downturn.  The resulting gap between asset values and projected liabilities has led to steady increases in the actuarially-required contribution levels needed to help sustain pension plans at the same time state and local governments face other fiscal pressures.  Since 2008, the combination of fiscal pressures and increasing contribution requirements has spurred many states and localities to take action to strengthen the financial condition of their plans for the long term, often packaging multiple changes together. GAO’s tabulation of recent state legislative changes reported and review of reforms in selected sites revealed the following: 

  • Reducing benefits:  35 states have reduced pension benefits, mostly for future employees due to legal provisions protecting benefits for current employees and retirees.  
  • Increasing member contributions: Half of the states have increased member contributions, thereby shifting a larger share of pension costs to employees. 
  • Switching to a hybrid approach: Georgia, Michigan and Utah recently implemented hybrid approaches, which incorporate a defined contribution plan component, shifting some investment risk to employees. 

At the same time, some states and localities have also adjusted their funding practices to help manage pension contribution requirements in the short term by changing actuarial methods, deferring contributions or issuing bonds, actions that may increase future pension costs.  Going forward, growing budget pressures will continue to challenge state and local governments’ abilities to provide adequate contributions to help sustain their pension plans.  GAO-12-322 (March 2012). 
The National Conference on Public Employee Retirement Systems has released a statement dealing with the GAO report reviewed immediately above.  NCPERS is gratified, but hardly surprised, that the most comprehensive government study of public pension plans to date finds the vast majority of plans are adequately funded to meet their current obligations and have adopted systemic and operational reforms to ensure their long-term sustainability.  The findings of the just-released report by GAO closely mirror the findings of the 2011 NCPERS Public Fund Study (see C&C Special Supplement for June 10, 2011).  As evidenced by both studies, the fact is that contrary to much of the harsh and impassioned political rhetoric of the past two years, public pension plans are alive, well and building for a solid future.  And as both GAO and NCPERS have noted, the few plans that are in well-publicized trouble typically have not been adequately funded by their government sponsors.  America’s real concern should be the unprecedented and escalating retirement crisis in the private sector.  That crisis warrants study by GAO, and must become the immediate focus of public policy debate. The private sector’s $8.5 Trillion retirement savings deficit seriously endangers our ability as a nation to sustain our economy -- especially over the next decade, when a record number of workers will reach retirement age, many of them financially unprepared.  Retirement security for all Americans, whether they work in the public sector or the private sector, must become a top national priority.   
3.      STATE AND LOCAL GOVERNMENT SPENDING ON PUBLIC EMPLOYEE RETIREMENT SYSTEMS:  As states and cities continue to address effects of the Great Recession, the cost of pension benefits for employees of state and local government remains a key point of discussion.  On a nationwide basis, pension costs for state and local governments are roughly three percent of total spending.  Current pension spending levels, however, vary widely, and are sufficient for some entities and insufficient for others.  In wake of the 2008-09 market decline, over 40 states and many cities have taken steps to improve the financial condition of their retirement plans, and to reduce costs.  Although some lawmakers have considered closing existing plans to new hires, most determined that such would increase, rather than reduce, costs, particularly in the near-term.  Instead, states and cities have adjusted employee and employer contribution levels, restructured benefits, or both. Ultimately, the degree of needed change in pension plan costs will depend largely on funding history of the plan and the type and magnitude of recent reforms.  The conclusion from a recent Issue Brief issued by National Association of State Retirement Administrators is that state and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working.  Over $200 Billion is distributed annually from these trusts to retirees and their beneficiaries, who reside in virtually every city and town in the nation.  These benefits serve as a source of economic stimulus to every state and local economy.  On average, public pension programs remain a small part of state and local government spending, although the costs, benefit levels and funding levels vary widely.  Changes to benefit levels and required employee contributions adopted by states and cities have also been diverse, dependent in part on such factors as the legal authority to make changes to benefits or required employee contribution rates; and the plan’s financial condition prior to the 2008-09 market decline. Generally, states and cities with a history of paying their required pension contributions are in better condition and need adjustments to benefits or financing arrangements that are less far-reaching compared to those with a history of not adequately making their contributions.  In Florida, state and local government contributions to pensions as a percentage of all state and local government spending for 2009 was 2.65 percent. 
4.      DEVELOPING A PENSION FUNDING POLICY FOR STATE AND LOCAL GOVERNMENTS:   Gabriel Roeder Smith & Company has released a research report dealing with Development of a Pension Funding Policy for State and Local Governments.  Over the past decade, the Annual Required Contribution as described in the Governmental Accounting Standards Board’s Statements No. 25 and No. 27 has become a de facto funding policy for many public-sector retirement systems.  GASB is currently revising public pension accounting standards and has communicated an important message in the process:  accounting standards are not funding standards.  In the Exposure Drafts of the new Statements No. 25 and No. 27, GASB has removed all references to the ARC.  At the same time, the EDs require disclosure of elements of a plan’s funding policy and the actual funding pattern must be taken into account to determine the plan’s financial disclosures.  Now more than ever, public retirement systems need to have a sound, written funding policy to secure member benefits -- and a strong funding policy may improve a plan’s financial disclosures as well.  The idea of having a written funding policy is not new.  Government Finance Officers Association states that the main financial objective of public employee defined benefit plans is to fund the long-term costs of promised benefits to plan participants.  Moreover, GFOA recommends that this goal be accomplished through a systematic and disciplined accumulation of resources (that is, contributions and related investment earnings), which are sufficient to pay promised benefits to plan members over their lifetimes.  In addition to this objective, GFOA cites other goals as well.  To be consistent with the governmental budgeting process, efforts should be made to keep the employer’s pension contributions relatively stable from year to year. Moreover, to satisfy the principle of intergenerational equity, pension costs should be allocated to taxpayers on an equitable basis over time, not pushed into the future or immediately imposed on current taxpayers.  In addition, to help offset related risks, efforts may be made to provide a reasonable margin for adverse experience. Developing a written funding policy can help decision-makers understand the tradeoffs related to reaching these goals and document the reasoning that underlies their decisions.  By clarifying the funding policy, decision-makers can come to a better understanding of the principles and practices that help sustain benefits over the long-term. 
5.      ACTUARIES COMMENT ON IRS POSITION ON SECTION 415(b):  The American Academy of Actuaries Pension Committee has addressed a letter to the Government Actuary at the Department of the Treasury and to the Manager of the Employee Plans Actuarial Group with Internal Revenue Service.  AAA, a professional association whose mission is to serve the public and the U.S. actuarial profession, has become aware of an Internal Revenue Service position with respect to Internal Revenue Code Section 415(b) that differs substantially from the widely held understanding of the practitioner community.  In short, AAA understands the IRS’s position to be that a plan cannot pay the full single life annuity limit ($200,000 annually in 2012) at a commencement age between 62 and 65 unless the plan provides unreduced benefits at that age.  AAA further understands that a plan cannot without reducing the single life annuity limit pay a Qualified Joint and Survivor Annuity (as defined in IRC Section 417) unless the plan provides the QJSA form of benefit free (that is, without reduction for the form of benefit).  The actuaries express their concern regarding this interpretation, and respectfully request clarification or additional guidance.  In addition, AAA requests that, if this is indeed the IRS’s position, it be promulgated in a proposed regulation exposed for public comment, and applied only prospectively (with Section 411(d)(6) protection of accrued benefits) once such regulation is finalized.  
6.      JUDGE PULLS GUN IN COURT, TELLS VICTIM “SHOOT YOUR LAWYER”:  FindLaw says it is not normal for a judge to pull a gun in court, but leave it to Georgia to produce one who does.  Judge David Barrett brandished a pistol mid-hearing while a witness was being questioned on the stand.  This act was not one of self-defense, but instead an attempt to make a poor rhetorical point.  When a se.xual assault victim stopped cooperating with her attorney, he told her she was “killing her case.”  He then offered her his gun, adding, “You might as well shoot your lawyer.”  Although the judge pulled a gun in court for non-violent purposes, his actions still violated the law. Georgia judges may carry a concealed weapon on the bench, but they may not brandish it without justification.  Sarcasm, apparently, does not count.  The judge is likely aware of this fact, which might be why he decided to retire from the bench.  While this move may prevent further action from the judicial commission, it probably will not stop the state bar.  Barrett is a licensed attorney, and if the State Bar of Georgia really wants to, it can punish the judge for pulling a gun in court.  Go get ‘em. 
7.      HEY, BUDDY, THAT IS NOT A TRAMPOLINE!: reports on an Ohio man who stomped on his girlfriend’s chest so hard that her breast implant burst.  The woman said her 60-year-old boyfriend punched, choked and tried to suffocate her during a physical confrontation.  He eventually took the woman to a hospital, but told her not to tell anybody at the hospital about the attack.  Hospital employees contacted police, who later arrested the man for felonious assault.  He has an expansive criminal history, including previous arrests for assault and domestic violence, although those charges were later dismissed.  This guy must have been hopping mad. 
8.      GOLF WISDOMS:    The less skilled the player, the more likely he is to share his ideas about the golf swing.   
9.      PARAPROSDOKIAN:  (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part.  It is frequently used for humorous or dramatic effect.):  “I've had a perfectly wonderful evening, but this wasn't it.” -- Groucho Marx    
10.    QUOTE OF THE WEEK:   “Life is full of obstacle illusions.”  Grant Frazier 
11.    ON THIS DAY IN HISTORY:  In 1913, First presidential press conference (Woodrow Wilson). 
12.    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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