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Cypen & Cypen
NEWSLETTER
for
March 7, 2013

Stephen H. Cypen, Esq., Editor

1.    HOW DOES SMOOTHING AFFECT FUNDING OF DEFINED BENEFIT PLANS?:  The Society of Actuaries has released a white paper presenting its observations on input and output smoothing methods.  Volatility of required pension contributions has been a consistent concern for sponsors in defined benefit plans. As recently as July 2012, legislators modified the law that governs contribution requirements for private single-employer DB plans to reduce effects of low interest rates on plan sponsors. Deliberations over this legislation raised questions about the merits of stabilizing contribution requirements through input methods (which smooth volatile elements of pension calculations, such as interest rates or asset values) or output smoothing methods (which smooth the resulting contribution requirements).  The report begins an examination of ways to address volatility in funding rules by making a few general observations regarding similarities and differences between input and output smoothing mechanisms. The report notes that:

  • In general, the choice between input and output smoothing methodologies does not directly affect the solvency of DB plans or the predictability of statutory requirements. 
  • An input method smoothes a single source of volatility, and may affect multiple statutory requirements, but smoothing the effects of other sources of volatility necessitates additional smoothing methods. For example, an asset smoothing method stabilizes the asset value used to calculate contribution and benefit restriction requirements, but an additional smoothing method would be needed to stabilize the effects of interest rate volatility on the liabilities used to calculate these requirements. 
  • In contrast, an output method smoothes the effects of multiple sources of volatility for a single statutory requirement, but stabilizing other statutory requirements necessitates additional smoothing methods. So, for example, an output method that stabilizes contribution requirements smoothes the effects of asset and interest rate volatility, but an additional smoothing method would be needed to stabilize benefit restriction requirements.  
  • Input smoothing methodologies change the relationship between market-based and reported values of pension assets and liabilities. Users of the reported values need to understand their relationship to market-based values to ensure appropriate use of information. 

These observations have implications beyond selection of input or output smoothing methodologies. They call attention to how smoothing may influence attitudes toward risk in management and design of retirement programs. They also point out that smoothing complicates understanding of DB plan financial positions, with the potential to mistake smoothed results for a reduction in plan risk when, in fact, smoothing methods merely spread the recognition of volatile experience into a more (perhaps) manageable pattern.  The report is not intended to advocate a position for or against the use of smoothing methodologies, or for or against the use of any particular smoothing methodology. Rather, the purpose of this research is simply to provide objective, actuarial illustrations of the differences between alternative methodologies. Further, the illustrations in this report were designed to highlight observations on the operation of input and output smoothing methodologies, and should not be construed as a full analysis of particular smoothing methods. The illustrations control numerous factors, including correlations between changes in asset and liability values and the effects of MAP-21 interest rate stabilization, which deserve consideration in the analysis of a specific smoothing method.   Translation: punt to the actuary.

2.      UNION DID NOT HAVE STANDING TO CHALLENGE TERMINATION OF MEMBER WHO SETTLED AND RELEASED CITY: In June 2009, Ramskugler had satisfied the State of Wisconsin's requirements to become a police officer, but had not yet completed the additional probationary period mandated by Milwaukee's Board of Fire & Police Commissioners. As a result, when the Board fired Ramskugler, it claimed it did not need to follow Wisconsin's statutorily prescribed procedures for terminating police officers. Ramskugler sued, joined by the Milwaukee Police Association, the union.  Together, they claimed that Ramskugler was wrongfully deprived of property without due process. After the district court granted summary judgment in favor of defendant, the plaintiffs appealed. Prior to oral argument, however, Ramskugler signed a complete settlement and release. The union never had standing to bring suit on its own behalf, and any claims previously derived from its membership were then moot. Accordingly, the court dismissed the appeal.  The union had not pled any injury to itself. The entire discussion of its interest was to claim that, as a result of having a duty to represent and advise its members on matters related to the litigation, it possessed a tangible interest in knowing the law as it may impact its members, as well as ensuring that its members were afforded due process.  The position left little doubt that the union's claim to standing derived entirely from its members.  Addressing the union’s own claims would produce an advisory opinion -- a task the court cannot undertake.  Milwaukee Police Association v. Board of Fire & Police Commissioners of the City of Milwaukee, Case No. 11-2314 (U.S. 7th Cir. February 26, 2013).
 
3.      AGREEMENT BY COUNTY TO PROVIDE PERPETUAL HEALTHCARE BENEFITS TO EMPLOYEES MAY BE IMPLIED: Sonoma County Association of Retired Employees alleged that although the County of Sonoma had not expressly promised to provide certain vested health care benefits in perpetuity, it had implicitly done so. A United States district court judge dismissed the association's complaint.  On appeal to the United States Court of Appeals for the Ninth Circuit, the panel vacated the district court’s dismissal of the complaint.  The panel held that in light of a recent California Supreme Court decision, which recognized that a county may form a contract with implied terms under specified circumstances, the district court erred in dismissing the association's complaint with prejudice.  The panel held that although the association’s amended complaint did fail plausibly to allege the county created an implied contracts by ordinance resolution, the district court erred by denying the association’s leave to amend on the ground that such amendment would be futile.  The case was remanded to the district court for proceedings consistent with the recent Supreme Court of California case.  A county may be bound by an implied contract (or by implied terms of a written contract), as long as there is no statutory prohibition against such agreement.  As with any contractual obligation that would bind one party for a period extending far beyond that term of the contract of employment, implied rights to vested benefits should not be inferred without a clear basis in the contract or convincing extrinsic evidence.  There were no other statutes that prohibited public entities from including implied terms relating to healthcare benefits in employment contracts. Sonoma County Association of Retired Employees v. Sonoma County, Case No. 10-17873 (U.S. 9th Cir. February 25, 2013).

4.      DISABILITY RATE AMONG GOVERNMENT BENEFIT RECIPIENTS VARIES:  Disability status is a key component in determining eligibility for many government assistance programs, says governing.com.  Nearly one-third -- about 14 million -- of all beneficiaries of income-based assistance from the federal government or states reported a disability in 2011. The rate can vary from state to state, however, to qualify for many assistance programs, individuals must suffer from a disability or meet age and income requirements. In addition, a disabled person’s income is typically far below the national average, with only one of every three disabled adults employed in 2011.  West Virginia recorded the highest rate (41.7 percent), followed by Wyoming (40 percent) and Kentucky (39.4 percent). Arizona and Hawaii had the lowest share of disability rate, each about a quarter of total recipients. Florida came in at 28.2 percent.  The data measured participation in the Supplemental Nutrition Assistance program (food stamps), Supplemental Security Income program, Temporary Assistance for Needy Families, Medicaid and other public assistance. Individuals considered to be disabled reported having ambulatory, independent, cognitive, self-care, hearing or vision impairments.  In all, about 46 million Americans received some form of cash or in-kind assistance in 2011. That figure is about 20 percent of the civilian non-institutionalized population.  Is this a great country, or what?
 
5.      FEDERAL TORT CLAIMS ACT INTENTIONAL TORT EXCEPTION ABROGATED:  The Federal Tort Claims Act waives the government’s sovereign immunity from tort suits, but excepts from the waiver for certain intentional torts, including battery.  FTCA, as originally enacted, afforded tort victims a remedy against the United States, but did not preclude suit against the alleged tort-feasor as sole or joint defendant. Several agency-specific statutes postdating the FTCA, however, immunized certain federal employees from personal liability for torts committed in course of their official duties.  One such statute, the Gonzalez Act, makes remedy against the United States under FTCA preclusive of any suit against armed forces medical personnel.  The Act also provides that for purposes of this section, the intentional exception of the FTCA shall not apply to any cause of action arising out of a negligent or wrongful act or omission in the performance of medical functions. Congress subsequently enacted comprehensive legislation, the Federal Employees Liability Reform and Tort Compensation Act, which makes FTCA’s remedy against the United States exclusive for torts committed by federal employees acting within the scope of their employment.  Under the Federal Employees Liability Reform and Tort Compensation Act, federal employees are shielded without regard to agency affiliation or line of work. Levin suffered injuries as a result of cataract surgery performed at a U. S. Naval Hospital.  He filed suit, naming the United States and the surgeon as defendants, and asserting, among other things, a claim of battery based on his alleged withdrawal of consent to operate shortly before the surgery took place. Finding that the surgeon had acted within the scope of his employment, the federal district court released him and submitted the United States as sole defendant.  The government moved to dismiss the battery claim, relying on FTCA’s intentional tort exception. Levin countered that the Gonzalez Act rendered that exception inapplicable when a plaintiff alleges medical battery by a military physician.  The district court granted the government’s motion to dismiss.  Affirming, the ninth circuit concluded that the Gonzalez Act served only to buttress the immunity from personal liability granted military medical per­sonnel, and did not negate the FTCA's intentional tort ex­ception.  On review by certiorari, the United States Supreme Court held that the Gonzalez Act direction abrogates the FTCA's in­tentional tort exception and therefore permits Levin's suit against the United States, alleging medical battery by a Navy doctor acting within the scope of his employment.  The Gonzalez Act’s operative clause states, that no uncertain terms, that FTCA's intentional tort exception shall not apply. Levin v. United States, Case No. 11-1351 (U.S. March 4, 2013).  
 
  6.      INCOME COMPOSITION, INCOME TRENDS AND INCOME SHORTFALLS OF OLDER HOUSEHOLDS:  A new Issue Brief from Employee Benefit Research Institute says a steady, reliable source of retirement income is essential to financial security in retirement. Policymakers, employers and financial-service providers have long tried to design policies and products that can help retirees acquire steady retirement income, but such policies and products must also respond to the constantly changing financial environment. Furthermore, in order to adapt these policies and products for future retirees, it is important to understand the current state of income in retirement.  The Issue Brief examines the income patterns of older U.S. households. The study combines both income and expenditure data to gain a more complete picture of the retirement income adequacy of current retirees. It focuses on three different aspects of retirement income:  

  • The sizes of the different components of income and their shares of total household income. 
  • How the importance of each component of retirement income changes with age for different cohorts.  
  • Finally, it estimates the percentage of older households with retirement incomes that are not sufficient to finance their spending needs. 

The study also identifies the expenditure components that drive households to income deficits, and identifies the key demographic characteristics of these households.  Here are some data at a glance:

  • For all age groups above 65, Social Security remains the primary source of income. In 2009, households ages 65-74 and households with members age 85 or above received 54 percent and 66 percent of their total household incomes, respectively, from Social Security benefits. 
  • The importance of Social Security income increases with age. For households that had members ages 65-69 in 2001, the share of household income derived from Social Security rose from 47 percent in 2001 to almost 60 percent in 2009.  
  • Income from pensions and annuities is the second-largest source of income for older households. In 2009, households ages 65-74 received 17.1 percent and households above age 85 received 15.3 percent of their incomes from pensions and annuities.  
  • In 2009, two-fifths of households with members age 65 and above had incomes less than their expenditures—meaning they had eficits.  
  • In 2009, 14.3 percent of households with members age 65 and above had spending that exceeded 175 percent of their household incomes.  
  • Households that face income shortfalls not only have much lower levels of assets, they spend down their liquid assets at a faster rate than households with no income shortfalls.  
  • The probability of running into an income shortfall is much higher for those with lower incomes. In 2009, 66.4 percent of households age 65 or older in the bottom-income quartile faced income deficits, while only 6.8 percent in the top-income quartile faced such shortfalls.  
  • Median home- and health-related expenses, as well as median total expenses, are much higher for households that face income shortfalls, even if they have lower levels of income.  
  • Singles, households with no pensions, African-Americans and Hispanics have larger shares of households with income deficits. 

Issue Brief No. 382 (February 2103).
 
7.      REVISED 60’s HITS FOR BABY BOOMERS:  Ringo Starr  --- I Get By With a Little Help From Depends
 
8.      PROFUNDITIES: Talk is cheap, except when Congress does it. -- Anonymous
 
9.      ON THIS DAY IN HISTORY: In 1933Game of “Monopoly” invented.
 
10.    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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