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Cypen & Cypen
APRIL 7, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


A recent New York Times piece deals with the small but growing part of the $2 Trillion State and Local Pension Funds that is being steered into high-risk investments by pension consultants and others who often have business dealings with the very money managers they recommend. After making such investments, a few of these pension funds have come up short, forcing governments to draw on tax dollars. The Securities and Exchange Commission is so concerned that it has begun an inquiry into the practices of pension consultants, who serve as gatekeepers for thousands of money managers. Regulators will find not just financial consultants but a web of intermediaries -- marketing agents, lobbyists, brokers and world leaders -- between pension funds and the investments they choose. Some pension consultants play host to gatherings that showcase famous people to pension officials. Money managers may pay tens of thousands of dollars to participate and often supply the talent. Consultants, meanwhile, are being paid by the pension funds to track and rate the money managers but may take money from the managers for other services. Under the consultants’ watch, more money is flowing into private or alternative investments, which are not publicly traded like stocks and bonds and whose performance cannot be tracked in any agreed-upon way. Private investment pools attracted virtually no state pension money a decade ago, but the typical state pension fund now has nearly 5% of its assets in them, and some states have far more. A 2002 audit of one state pension fund found that its nationally-known consultant had recommended 16 money managers, 14 of which were paying the consultant for marketing advice and other services. Of course, the consultant said that it kept its various business lines separate, and that it told all money managers that they would not win preferential treatment from the pension consultant by buying its other services. The SEC inquiry began in December, with 12-page letters to about two dozen pension consultants, requesting extensive information about what they do for pension funds, how they are paid and how their pension work may conflict with other business operations. The agency appears to be trying to learn how often pension consultants work for both sides of the table, receiving compensation from their pension clients and money managers. We will see what eventually comes out of the SEC’s look-see.

The Association for Financial Professionals is a membership organization of global corporate financial professionals, comprising more than 14,000 individual members from a wide range of industries. The Committee on Investment of Employee Benefit Assets is a committee of the AFP, formed to provide a nationally recognized forum and voice in public policy for ERISA-governed corporate plan sponsors on fiduciary and investment issues. Members are senior corporate financial officers who individually manage and administer corporate retirement plan assets. In March 2004, CIEBA released a report entitled “The U.S. Pension Crisis - Evaluation and Analysis of Emerging Defined Benefit Pension Issues.” Although the report is a summary and evaluation of CIEBA member survey data, it should still be of interest to participants in public plans, the vast majority of which are defined benefit. The following are some of the key findings in the report:

  • Seventy-five percent of large U.S. corporations continue to offer a defined benefit pension to their employees.
  • DB Plans currently cover approximately 35 million Americans and their families, an all-time high.
  • Corporations have been stable and effective long-term investors, primarily through disciplined, long-term commitments to the world’s equity markets. As a result, the median ten-year return for corporate pension plans has been approximately 9.4% per year, while the corporate return on asset assumption over the period has been approximately 8.8%.
  • Approximately 75% of aggregated pension liabilities continue to relate to traditional, final average pay plans (although new and more flexible plans have been implemented over the past several years).
  • The fall in stock prices, combined with a decline in interest rates, would have the unintended consequences of reducing the funded status of most pension plans by perhaps 10% or more.
  • If the corporate DB system is undermined, lower income Americans are likely to be affected most, increasing pressure on government programs to make up the potential shortfall, at a time when those programs are under stress already.

CIEBA perceives threats coming from an unprecedented, and largely uncoordinated, series of emerging accounting, legislative and regulatory initiatives. Specifically, these initiatives include new accounting methods under consideration by the Financial Accounting Standards Board, funding rules crafted by the Treasury Department, proposed changes to the Pension Benefit Guaranty Corporation’s Risk Premium System and the means by which various rating agencies treat pension obligations. Fortunately, public plans would not thereby be adversely affected, if at all. View the entire 26 page report at

For the first time in over four years, Dow Jones & Co. will make changes in stocks that compose the Dow Jones Industrial Average. As of April 8, 2004, American International Group Inc., Pfizer Inc. and Verizon Communications Inc. will replace AT&T Corp., Eastman Kodak Co. and International Paper Co. Although the last rebalancing was as a result of mergers, this time it is a recognition that the domestic stock market has shifted from basic materials stocks to financial and health care. As in the past, there will be no distortion in the industrial average, as the formula is adjusted to assure comparability.

According to the New York Law Journal, a Manhattan Judge has rebuked New York City for its challenge to the disability benefits of a former police officer who helped uncover corruption and became an outcast within the department. The ex-officer, Jeffrey Baird, diagnosed with post-traumatic stress disorder, applied for accident disability retirement. He claimed that his PTSD arose from an intense campaign of harassment against him. Baird played an instrumental role in the work of a commission that investigated police corruption in the early 1990s. As a member of the Internal Affairs Unit, Baird told investigators that officers routinely sabotaged inquiries into police corruption and hid evidence of corruption from prosecutors. Shortly thereafter, Baird’s troubles began: other officers referred to him as “rat”, harassed him at work and he began receiving anonymous, obscene letters at home. Having been diagnosed with PTSD, Baird applied for accidental disability retirement. Although the medical board found that Baird suffered from a disability that prevented him from performing his duties, it recommended ordinary disability retirement. On review, Supreme Court Judge Louis York described the City’s arguments as “pitiful.” (In New York, the Supreme Court is similar to the Circuit Court in Florida.) The Court found that the “accidental” events were not the usual falls or other anticipated physical injuries, but legally did not have to be. “If each act of harassment and retribution that the petitioner was subjected to can be deemed by respondents to be ‘expected’ or ‘ordinary,’ then our police force -- and our society -- are truly in dire straits.” The Judge ordered the police department to reconsider its ruling on Baird’s benefits, suggesting that there is little reason why he should not be eligible for the greater benefits. Vowing an appeal, a city attorney said that the board of trustees’ determination denying accidental disability retirement was entirely in accord with applicable case law. “A pattern of alleged harassment does not constitute a line-of-duty accident as that term has been defined by the Court of Appeals.” We have mixed emotions about the results in this case. If, on the one hand, the board is an arm of the city, then the city should not be able benefit from its own misconduct. On the other hand, if the board is independent, a decision expanding the term “accident” to include misconduct by the city would be inappropriate.

Lynn Catterton, a City of Orlando police officer, applied for a service-incurred disability pension based on her Paroxysmal Supraventricular Tachycardia. There was no dispute that Catterton was totally and permanently disabled. There was also no dispute that her condition was congenital in nature. In denying Catterton’s application, the board relied upon a plan exclusion providing that no member is entitled to a disability pension “because of or due to the aggravation of a ... medical condition pre-existing at the time of employment ... provided that such pre-existing condition and its relationship to a later ... medical condition be established by competent substantial evidence.” On review to the circuit court sitting in its appellate capacity, the board’s decision was quashed. Sections 185.34 and 112.18(1), Florida Statutes, create presumptions for, among other things, heart disease -- which PSVT clearly is. If the pre-existing exclusion is construed, enforced and administered without yielding to the statutory presumptions, an applicant who suffers from one of the enumerated diseases under the statutes is denied entitlement to the presumptions where his or her condition is determined to be pre-existing. The congenital nature of a disease should merely be a part of evidence available to the opposing party to overcome the presumption of service-connection. The pre-existing exclusion under the plan also undermines the Legislature’s purpose and goal of dispensing with an applicant’s need to introduce proof that the diseases enumerated under the statutory presumptions are occupationally-related, by assuming such conditions are the result of the inherent hazards faced by all those who occupy the profession. Moreover, it undermines the Legislature’s purpose and goal to provide a uniform system and establish minimum standards that are not to be diminished by the plan. Thus, to the extent that the pre-existing exclusion under the plan precludes an officer suffering from a condition caused by one of the enumerated diseases from utilizing the presumptions when applying for service-connected pension benefits, the provision is inconsistent with the statutes. The court also held that if there is evidence presented that supports the presumptions, then the opposing party must overcome them by clear and convincing evidence. Finally, following established precedent, the court declined to direct the board to grant the pension, but remanded thereto for further proceedings. Catterton v. City of Orlando, Police Pension Board, 11 Fla. L. Weekly Supp. 281 (Fla. 9th Cir., January 26, 2004).

Johnson was a deputy Sheriff with the Orange County, Florida, Sheriff’s Office, who enjoyed career service status. Following an investigation, Johnson was charged with unsatisfactory performance of his duties and conduct unbecoming an officer. After administrative review was unsuccessful, Johnson appealed to the appeals board, which upheld the findings. The matter was then presented to the Sheriff, who sustained the appeals board ruling and terminated Johnson. On review in the circuit court, the court concluded that the Sheriff had ignored his own rules and violated Johnson’s due process rights. (According to a general order, during the appeals board hearing a Level 2 Administrator in the appealing deputy’s chain of command must present management’s case. The parties agree that a Level 2 Administrator outside of Johnson’s chain of command attended the hearing.) On further review to the district court of appeal, the Sheriff’s ruling was reinstated. Generally, violation of an internal administrative rule does not constitute a violation of due process. Although the right to due process is conferred not by legislative grace but by constitutional guarantee, not every violation of right granted by state law is constitutionalized, but only those that deprive a person of some right secured by the constitution or laws of the United States. Thus, the Sheriff’s failure to follow his own procedural regulations does not establish violation of due process where constitutional requirements are nonetheless met. Unless the conduct complained of infringes on federal or state constitutional safeguards, there is no constitutional deprivation. Beary v. Johnson, 29 Fla. L. Weekly D758 (Fla. 5th DCA, March 26, 2004).

In 2004, the average American will work 65 days to pay his federal taxes and 36 more days to pay his state and local taxes. That means April 11, 2004 will be celebrated as “Tax Freedom Day.” Americans have not been able to celebrate Tax Freedom Day this early in more than 35 years. Incidentally, Connecticut residents must wait until April 28 to celebrate, while Alaskans already celebrated on March 26.

Copyright, 1996-2004, all rights reserved.

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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