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Cypen & Cypen
March 19, 2015

Stephen H. Cypen, Esq., Editor

1.   ILLINOIS JUSTICES ALL OVER STATE'S LAWYER DURING ORAL ARGUMENT IN PENSION APPEAL: Associated Press reports that Illinois Supreme Court justices asked the state's lawyer to explain how the government can seek extraordinary power to reduce public pension benefits in face of a fiscal crisis when the government itself is culpable for the financial mess. Justices peppered the solicitor general during oral argument over constitutionality of a 2013 law that cuts retirement benefits in a 30-year plan to slay a $111 billion deficit (See C & C Newsletter for November 26, 2014, Item 2). State employees and retirees challenged it, arguing that the state constitution prohibits action to impair or diminish benefits of the contractual pension agreement. The state counters that it can resort to police powers to trump the constitution in moments of economic peril, which they say can be traced to the recession of 2008. Until questioned about it, the state’s lawyer did not mention that for decades, governors and legislators have given short shrift to annual contribution requirements, including as recently as 10 years ago, well after the crisis was widely recognized, by skipping $2.3 billion in payments. A Justice: if the court holds that the state can invoke its police powers to violate core constitutional guarantees to respond to an emergency that at least arguably the state itself created, then are we not giving the state the power to modify contractual obligations whenever it wants? Some people might call the state’s actions “chutzpah.” Look it up.

2. WHY MEMPHIS FIREFIGHTERS ARE HANGING IT UP: When Wal-Mart said it was giving its workers a raise last month, many observers pointed to improvements in the labor market as the reason. According to the Washington Post, when it is easier to find a job, people are more likely to quit the one they have, and no business can operate smoothly if it constantly has to recruit, hire and train new workers to replace dissatisfied ones who are quitting. That statement is true not just of businesses, but also of fire departments. The city council in Memphis, realizing there is not enough money to pay the city's pension debts, voted for a less generous plan in December. In response, at least 250 police officers and firefighters quit their jobs, and the city is having trouble finding replacements. A stable pension is an important reason that many people go into public service. But these pensions are in the red across the country, and if local governments want to continue to function, they will need to find more money, whether to close the gap or to raise pay instead. Of course, not only will we all be less safe, but local government will not be able adequately to fulfill its other crucial responsibilities either. The good news is that Memphis's public safety officers are evidently confident in their ability to find work elsewhere -- another sign that the economy is improving. A typical comment from a terminating firefighter: “I cannot justify me putting my life on the line, not knowing if my family will be taken care of.” Wake up, cities. (See also “Pension Fight Comes to a Head in Memphis,” in the Wall Street Journal,

3. MAJORITY OF STATES MEET COMMITMENTS TO PENSION FUNDS: A analysis of the experience of 112 state sponsored and statewide public pension plans in the U.S. for fiscal years 2001 through 2013 finds most states are meeting their commitments to fund their plans. National Association of State Retirement Administrators examined performance of state governments in meeting the annual required contribution -- as defined by Government Accounting Standards Board -- of their public employee retirement plans. The plans account for more than 80% of all public pension assets and participants. The weighted average ARC received was 84.4%; of $779 billion of combined ARC, plans received $657 billion. The average plan received 89% of its ARC. All but six states paid at least 75% of their ARC, and all but two states paid at least one-half. The report says New Jersey and Pennsylvania have weighted average ARC experiences that are notably lower than those of other states. New Jersey’s average is 38% and Pennsylvania’s is 41.2%. For both states, the chronic underfunding began when required contributions had dropped to very low levels by historical standards, as low as zero for some plans, chiefly as a result of strong investment gains from 1995 to 1999. When required contribution rates rose chiefly as a result of the 2000-2002 market decline, the states experienced great difficulty in restoring the stream of pension funding payments that had previously been in place. Other findings from the analysis showed:

  • Policies (i.e., statutes, constitutional provisions or retirement board requirements) that require payment of the ARC generally produce better pension funding outcomes than polices that do not require payment of the ARC. Some plan sponsors, however, consistently pay their ARC without the requirement. Some have challenged requirements to pay their ARC and underfunded their pension plans.
  • The few states that conspicuously failed to fund their pension plans have a disproportionate effect on the total ARC experience.
  • Failing to make even a good faith effort to fund the ARC increases future costs of funding the pension.
  • Policy constraints that prevent payment of the ARC can negatively affect the ability of employers to fund the pension plan.

4. THE CONTINUING RETIREMENT SAVINGS CRISIS: With the Baby Boom generation beginning to retire, more emphasis has recently focused on Americans’ financial security in retirement. Most recent studies show that many Americans are ill-prepared for retirement, and that they are highly anxious about their ability to retire. The financial crisis of 2007-2008 was a huge setback for households. Since then, the combined value of 401(k) accounts and IRAs increased to a record high of $11.3 trillion at the end of 2013. Does this translate to improved retirement security for average American households? Unfortunately, the answer is no: the typical American household was further behind in retirement readiness in 2013 than in 2010 and 2007. This report, an update of a previous National Institute on Retirement Security report published in 2013, examines the readiness of working-age households, based primarily on an analysis of the 2013 Survey of Consumer Finances from the U.S. Federal Reserve. The study analyzes workplace retirement plan coverage, retirement account ownership, and household retirement savings as a percentage of income, and estimates the share of working families that meet financial industry recommended benchmarks for retirement savings. The key findings of the report are as follows:

  • Account ownership rates are closely correlated with income and wealth. Nearly 40 million working-age households (45%) do not own any retirement account assets, whether in an employer-sponsored 401(k) type plan or an IRA. Households that do own retirement accounts have more than 2.4 times the annual income of households that do not own a retirement account.  
  • The average working household has virtually no retirement savings. When all households are included -- not just households with retirement accounts -- the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households. Furthermore, 62% of working households age 55-64 have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement.  
  • Even after counting households’ entire net worth -- a generous measure of retirement savings -- two-thirds (66%) of working families fall short of conservative retirement savings targets for their age and income based on working until age 67. Due to a long term trend toward income and wealth inequality that only worsened during the recent economic recovery, a large majority of the bottom half of working households cannot meet even a substantially reduced savings target.  
  • Public policy can play a critical role in putting all Americans on a path toward a secure retirement by strengthening Social Security, expanding access to low-cost, high quality retirement plans, and helping low-income workers and families save. Social Security, the primary edifice of retirement income security, could be strengthened to stabilize system financing and enhance benefits for vulnerable populations. Access to workplace retirement plans could be expanded by making it easier for private employers to sponsor DB pensions, while national and state level proposals aim to ensure universal retirement plan coverage. Finally, expanding the Saver’s Credit and making it refundable could help boost the retirement savings of lower-income families.

5. WISDOM FROM ABOUT.COM: has provided some wisdom concerning financial planning:

  • When should you claim Social Security benefits? Deciding when you will start to collect social security benefits is arguably one of the most important retirement planning choices you will ever make. But despite the crucial role that Social Security plays in creating a retirement income plan that will sustain you throughout retirement, few people give as much thought to this decision as they should. Instead, even though recent figures from the Society of Actuaries show that life spans are increasing, 62, the earliest age at which one can generally claim for benefits, remains the most popular age for claiming Social Security. Of course, if you have been forced to retire and do not have sufficient savings to sustain you in retirement, you may have no choice but to start collecting Social Security payments as soon as you can. But if you do have some maneuvering room, claiming later rather than earlier is often the smarter choice. More details at:  
  • What is the Rule of 72? If you are an investor, you have likely asked yourself how long it will take your money to double. Believe it or not, there is a simplified way to figure this out, and it is called Rule of 72.  The Rule of 72 will help determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for their initial investment to increase 100%.  
  • Cashback Credit Card Rewards Ranked First By Wealthy Americans. Cash back is ranked the most popular credit reward among the majority of people. Basically, you earn money while you spend money. If you are wondering exactly how this works, here is the way it happens. When you spend money on a credit card, the retailer typically owes the credit card company about 2% of your purchase. Cashback credit cards allow you to get a rebate from your credit card company for some or all of the money you are making them by shopping. Your goal should be to get that full 2% back from the bank.  
  • 10 Secrets of Millionaires That Might Surprise You. According to new market research, a record 9.63 million households had a net worth of $1 million or more in 2013, a 58% increase from 2008. The number of affluent households worth between $100,000 and $1 million also went up in 2013. But, would you really know if a millionaire was standing next to you? While your mind may conjure up the jet-setting group that are the subjects of many over the top reality shows, the truth is that there are a lot of people out there with a net worth of over seven figures, and you might not know it. You can see these people every day of the week; they drive Toyotas, Hondas, Kia’s -- and the occasional Jeep Cherokee. They have saved for a long time, and finally find themselves in a position to quit their job and live life on their own terms. Here are ten secrets that these “rich” people have in common: job stability, steady savers, save the raise, investors, not afraid to ask for advice, pay off the mortgage, do not indulge in fancy toys, good credit, goal setting and real estate. Details at

6. SECURITIES CLASS ACTION REPORT: Previously in the ISS Securities Class Action Services Top 100 for the first half of 2014, two new settlements were identified as making Top 100 list, Massey Energy Company and the Ernst & Young LLP settlement in the Lehman Brothers Holdings, Inc. (Equity/Debt Securities) action. These two settlements were filed in federal court and alleged as violating Rule 10b-5 of the Securities and Exchange Act of 1934 (Manipulative and Deceptive Practices). The two settlements amount to $359 million in settlement funds. In the second half of 2014, two out of 61 new settlements were placed in the ISS Securities Class Action Services top 100 for second half of 2014, J.P. Morgan Acceptance Corp and HarborView Mortgage Loan Trust. Filed in federal court in the midst of the financial credit crisis, both settlements relate to mortgage offerings and were alleged violations of the Securities Act of 1933 (Civil Liabilities on Account of False Registration Statement). The volume of settlements added in the report is 78% lower compared with the same period in 2013, when ISS Securities Class Action Services tracked 61 agreements. The two settlements involve approximately 1700 security identifiers. Securities class action settlements volume for 2014 declined to four from 13 over the previous year, with an aggregate settlement fund amounting to $914 million. Of 110 agreements followed by ISS Securities Class Action Services in 2014, only four ranked in the  Securities Class Action Top 100 list. From the top 100, 87 were alleged violating Rule 10b-5, while 45 were alleged violating Securities Act of 1933. In addition, eight resulted from alleged breaches of fiduciary duty in the wake of a merger or acquisition, 74 of 100 were alleged violations of Generally Accepted Accounting Principles (GAAP), and 19 were identified as resulting from insider trading. The Securities Class Action Services Tentative Settlement Pipeline stands at $17.5 billion as of December 2014.

7.  IRS WEBINAR ON RETIREMENT PLAN LOANS TO PARTICIPANTS: Internal Revenue Service puts on free phone forums and webinars featuring IRS employees discussing retirement plan topics. On March 26, 2015, at 2:00 p.m. Eastern Time, IRS will present “Retirement Plan Loans to Participants.” Learn about

  • What type of plans can make loans to participants
  • What are the conditions a plan must follow to make loans
  • What are the required terms of a plan loan
  • How plan loans may be taxable under IRC Section 72(p)
  • When plan loans violate the prohibited transaction rules of IRC Section 4975
  • How to fix plan errors involving loansEstimated duration is sixty minutes. Register and you will receive a confirmation email:

8. DILLERISMS: The reason the golf pro tells you to keep your head so you cannot see him laughing. Phyllis Diller

9. STUFF YOU DID NOT KNOW: Only two people signed the Declaration of Independence on July 4; John Hancock and Charles Thomson. Most of the rest signed on August 2, but the last signature was not added until 5 years later. 

10. TODAY IN HISTORY: In 1973, Dean tells Nixon, “there is a cancer growing on the presidency.”

11. 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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