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Cypen & Cypen
APRIL 23, 2009

Stephen H. Cypen, Esq., Editor


Ninety-two percent of S&P 500 companies’ pension plans were underfunded as of December 31, 2008, up from 62% a year earlier, according to a Wilshire Associates report reviewed in  Median funded ratio among the 323 companies in the S&P 500 with defined benefit plans was 73.3%, down from 96.6% twelve months earlier.  The plans’ aggregate funding ratio fell to 80.6% as of December 31, 2008, from 107.9% at the beginning of the year, while the combined $94.6 Billion surplus became a $237.5 Billion deficit in the same period.  The median expected return on plan assets fell to 8.2% from 8.25% in 2007 and 9.5% in 2000.  Median 2008 actual investment return was -27.4%, down from 8.2% in 2007, 11.2% in 2006, 8.5% in 2005, 10.8% in 2004 and 17.1% in 2003.  The companies’ aggregate pension liability rose only 1.8% to $1.221 Trillion at the end of 2008, while aggregate pension assets fell 24% to $984.1 Billion.  The companies contributed $30 Billion to their DB plans in 2008, up 19% from a year earlier. 


The Board of Commissioners of Fayette County, Georgia, has adopted a motion to approve its retirement study committee’s recommendation that a vendor be designated to provide a defined benefit retirement plan for Fayette County employees.  The issue of changing the current county employee retirement benefit from a defined contribution plan to a defined benefit plan had been in process for more than a year.  In mid-2007, the Board of County Commissioners authorized the County Administrator to establish a committee consisting of some staff members, outside experts and private citizens to evaluate the County’s current retirement benefit and to make recommendations regarding possible changes to that benefit. The current action hands the employees the security of a DB plan after five years of service with the County. 


The U.S. Treasury Department has announced an extension of its temporary Money Market Funds Guarantee Program through September 18, 2009, in order to support ongoing stability in financial markets (TG-76, March 31, 2009).  The program had been scheduled to end on April 30, 2009 (see C&C Newsletter for September 25, 2008, Item 7).  Thus, the temporary guarantee program will continue to provide coverage to shareholders up to the amount held in participating money market funds as of close of business on September 19, 2008.  All money market funds that currently participate in the program and meet the extension requirements under guarantee agreements are eligible to continue to participate in the program.  Funds not currently participating in the program are not eligible to participate.  There is a 32-page extension notice that provides procedures for participating funds to follow to ensure continued participation in the program, as well as instructions for making the program extension participation payments.  The amount of payment for the extension period will be based on a fund’s net asset value as of September 19, 2008.  For funds that had a market-based net asset value equal to or greater than 99.75% of their stable share price, the payment will be 0.015%, or 1.5 basis points, multiplied by the number of shares outstanding on September 19, 2008.  For funds that had a market-based net asset value less than 99.75% of their stable share price but equal to or greater than 99.50%, payment will be 0.023%, or 2.3 basis points, multiplied by the number of shares outstanding on September 19, 2008.  The program extension payment amounts, when combined with prior payment amounts, equate to an annualized 4 or 6 basis points of the fund’s asset base over the entire extended program term.  While the program protects accounts of investors, each money market fund must make the decision on whether to participate in the program; investors cannot sign-up for the program individually.  Currently, the program covers over $3 Trillion of combined fund assets. 


Sandoval, a Chicago police officer, filed suit under the Uniform Services Employment and Reemployment Rights Act.  He wanted to be a sergeant, which position required a competitive examination taken by all candidates simultaneously to curtail risks of cheating.  On the date Chicago scheduled an exam, Sandoval was on military duty.  He sat for the test in a country where he was stationed, passed and was placed on the eligibility list.  As soon as the first person was promoted form the list, he filed suit in federal court, contending that he would have done better and been promoted earlier had the test been offered closer to the place where he was stationed.  He says Chicago should have arranged for the military to administer the exam on base.  The district court granted summary judgment for Chicago, after concluding that Chicago did not discriminate against a person serving in the military.  On appeal, the first question involved jurisdiction:  suits against private employers under USERRA may be filed in federal court, but suits against states must be filed only in state court.  USERRA defines “private employer” to include a subdivision of a state.  Chicago is a “political subdivision” of Illinois, so subject matter jurisdiction was established.  USERRA provides that a person serving in the military may not be denied any benefit of employment on the basis of that service.  However, what Sandoval wanted was not the same treatment as everyone else (an anti-discrimination norm), but better treatment than those who are attending college or otherwise outside Chicago when a test is offered.  In other words, he sought an accommodation rather than equal treatment, but USERRA does not require an accommodation, which is fundamentally different from an equal-treatment norm.  Because Chicago extended to Sandoval the opportunity to take the required promotional examination on the same terms available to persons not in military service, it complied with its obligations under USERRA.  The judgment in favor of Chicago was affirmed by the United States Court of Appeals.  Sandoval vs. City of Chicago, Illinois, Case No. 08-2699 (U.S. 7th Cir., March 30, 2009). 


Appellant Poupore appealed from a federal trial court judgment denying his claim for disability benefits under the Social Security Act.  The judgment was affirmed because substantial evidence supported the Administrative Law Judge’s determination that Poupore was not entitled to  disability benefits because he retained the ability to perform light work (which includes sedentary work) and there was work in the national economy that he could do; there is substantial evidence that supported the ALJ’s finding that testimony of one of Poupore’s treating physicians was not entitled to significant weight; and substantial evidence supported the ALJ’s finding that Poupore’s subjective complaints of pain were insufficient to establish disability.  Poupore v. Commissioner of Social Security, Case No. 08-0659 (U.S. 2nd Cir., April 16, 2009).


Andrew appealed from a federal district court order granting defendants’ motion to dismiss his 42 U.S.C. § 1983 civil rights action.  Named as defendants were two former Baltimore Police Department police commissioners and a Baltimore Police Department deputy commissioner.  On appeal, Andrew contended that the district court erred in determining the allegations of his complaint did not demonstrate that defendants violated his First Amendment right to freedom of speech by retaliating against him for releasing an internal memorandum to a reporter from the Baltimore Sun.  (In his memorandum, Andrew requested that an investigation be conducted to determine whether use of deadly force by a tactical unit of the Baltimore Police Department against a barricaded suspect was justified and properly conducted.)  Although Andrew had argued that retaliation was improper because as a citizen he had a First Amendment right to speak about a matter of public concern, the trial court concluded that his memorandum was not protected by the First Amendment because it never lost its character as speech pursuant to his official duties simply by virtue of the wider dissemination he elected to give it after his recommendations were ignored by the police commissioner.  The appellate court vacated the district court’s order dismissing the action because Andrew had alleged facts that could entitle him to relief on his First Amendment claims.  The question whether Andrew’s memorandum was written as part of his official duties was a disputed issue of material fact that could not be decided on a motion to dismiss.  Andrew vs. Clark, Case Nos. 07-1184 and 07-1247 (U.S. 4th Cir., April 2, 2009). 


United States Government Accountability Office has released its report entitled “Defined Benefit Plans -- Proposed Plan Buyouts by Financial Firms Pose Potential Risks and Benefits.”  Some U.S. financial and pension consulting firms have recently proposed alternatives to terminating a defined benefit pension plan and contracting with insurance companies to pay promised benefits.  In their proposals, a plan sponsor would typically transfer assets and liabilities of a hard-frozen DB plan -- one in which all participant benefit accruals have ceased -- along with additional money, to a financial entity, which would become the sponsor.  Such buyouts would have implications for participants, plan sponsors and the Pension Benefit Guaranty Corporation, the federal agency that insures private DB plans.  The GAO report addresses the following questions:  (1) What is the basic model of proposed sales of frozen DB plans to third-party financial firms and how does it compare with a standard plan termination?  (2) What are the potential risks and benefits of plan buyouts for plan participants, PBGC, plan sponsors and other stakeholders?  As with a standard plan termination, the objective of a buyout would be to allow the original sponsor to shed its obligations to the plan, but potentially at lower cost and possibly with greater flexibility.  In buyout proposals, the new sponsor would assume all plan responsibilities and PBGC guarantees would continue to apply to plan benefits.  In comparison, a standard termination ends the plan, and an insurance company contracts to pay accrued benefits to participants (to the extent participants’ benefits are not paid out by the plan as part of the termination); PBGC guarantees no longer apply, but state guarantees do.  Insurance companies generally must comply with state-based risk-based capital requirements, which may provide safeguards against insurer insolvency and protections for pension benefits paid this way.  In some cases, plan buyouts could increase security of DB pensions by allowing weak sponsors to transfer plan sponsorship to firms with stronger financial backing and improved plan management.  However, buyouts would sever the employment relationship between sponsors and participants, possibly eroding incentives to manage the plan in the interest of participants.  Buyouts could increase the risk of a large claim against PBGC by increasing concentration of assets and liabilities held by a single sponsor or sector.  It could also lead to conflicts between agencies regulating financial companies and those regulating pensions.  In August 2008, Internal Revenue Service issued a ruling declaring that a DB plan that was bought out by a nonemploying entity would not qualify for tax preferences under current law.  After reviewing proposed models for plan buyouts and analyzing regulatory and statutory issues associated with terminations and buyouts, GAO made no specific recommendations.  GAO-09-207 (March 2009). 


The Obama administration has given South Carolina permission to use a portion of the state’s expected $2.8 Billion in federal stimulus money to help reduce liabilities of the $27 Billion South Carolina Retirement System, according to Workforce Management.  Apparently, the administration had rejected South Carolina’s original request to use stimulus money to pay down state debt, including debt related to retirees.  However, the administration did reconsider allowing the state to use a portion of the $2.8 Billion -- the first payment of which is expected to be almost $750 Million -- to reduce pension liabilities.  South Carolina will accept stimulus funds as long as the State Assembly uses equal amounts of the money received for programs and to pay down debt.  Sounds right to us. 


The financial industry brought the economy to its knees, but how did they get away with it?  With the nation wondering how to hold bankers accountable, Bill Moyers sat down with William K. Black, former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s.  Black offered his analysis of what went wrong and his critique of the bailout.  Catch the entire Bill Moyers Journal at  We can assure you its well worth the almost-half-hour you will need to invest. 


Office of Program Policy Analysis & Government Accountability, an office of the Florida Legislature, has issued its March 2009 report (No. 09-16).  Nationwide, pension plan investment returns have fallen, and Florida Retirement System investment returns are somewhat consistent with this trend.  Short-term losses will likely continue until the economy rebounds.  While both the pension (defined benefit) and investment (defined contribution) plans lost almost 5% of their value in fiscal year 2007-2008 (June 30), the most recent FRS actuarial valuation shows the pension plan was sufficiently funded to pay participant benefits.  Although the State Board of Administration (Governor, Chief Financial Officer and Attorney General) has several procedures in place to help ensure appropriate oversight of FRS funds, independent consultants report that these procedures need to be strengthened.  In particular, the board has lacked an independent compliance function and needs better internal controls that segregate its management and oversight functions.  The board is working to correct these deficiencies.  In addition, the board needs to improve its accountability to stakeholders to better communication of investment results, activities, costs and the pension plan’s future funding needs.  The report also contains more current data:  for the one-year period ending December 31, 2008, the DB plan returned -26.74%.  Ironically, for the same period, the DC component, which invests in a pool of twenty approved investments (compared to the DB fund’s 160 managers) lost only 23.22%. 


  In two civil cases, the Department of Veterans Affairs denied veterans’ claims for disability benefits.  In both cases the VA erroneously failed to provide the veteran with a statutorily-required notice of any information not previously provided to the Secretary of Veterans Affairs that is necessary to substantiate the claim.  The required notice must also indicate which portion of the required information and evidence is to be provided by the claimant and which portion the Secretary will attempt to obtain.  In both cases the VA argued that the error was harmless. And in both cases the Court of Appeals for the federal circuit, after setting forth a framework for determining whether a notice error is harmless, rejected the VA’s argument. In reversing, the United States Supreme Court held that the federal circuit’s “harmless-error” framework was too complex and rigid, its presumptions imposed unreasonable evidentiary burdens upon the VA and it was too likely too often to require the Court of Appeals for Veterans Claims to treat as harmful errors that in fact are harmless.  The court concluded that the framework conflicted with established law that the Court of Appeals for Veterans Claims must take due account of the Rule of Prejudicial Error.  Shinseki v. Sanders, Case No. 07-1209 (U.S., April 21, 2009). 


BusinessWeek says that public funds, including $175 Billion California Public Employees’ Retirement System, are contemplating riskier investments.  Over the past 18 months, investments of public pension plans -- the retirement security of 22 million police officers, firefighters, teachers and their survivors -- have lost a combined $1.3 Trillion.  But now some fund managers think they may have hit gold:  the Government’s programs to clean up toxic assets.  With a federal backstop on losses and expectations of double-digit returns on some investments, many think they are a good bet.  The Federal Deposit Insurance Corp., along with the U.S. Treasury, is trying to solicit buyers for troubled assets through a program called the Public-Private Investment Program.  Public funds may also potentially invest in the Term Asset-Backed Securities Loan Facility, created by the Federal Reserve Board in November to support investing in asset-backed securities tied to consumer and small business loans.  Offering a stake to public-sector players appeals to regulators.  Washington has been criticized for structuring deals so that taxpayers shoulder much of the risk, while private investors are offered handsome returns.  If taxpayer-funded public pension funds can benefit from the upside as well, the programs may be less controversial.  But should public pensions dabble in toxic assets?  Even with the government taking on most of the risk, a worsening economy could mean more of the assets go bad, leaving investors with losses.  Public pension plans are desperate to boost returns.  Many increased their exposure to equities in recent years.  While value of their assets has fallen sharply, obligations have risen.  Even so, some remain skeptical that pension money will pour into toxic assets, arguing that many state funds lack the staff to analyze complicated, illiquid investments. Others say the idea is irresponsible and that investing in anything so shaky it just brought down the country is a total breach of fiduciary duty. 


FINANCIAL PLANNER -- A guy whose phone has been disconnected. 

MARKET CORRECTION -- The day after you buy stocks. 


“Any idiot can face a crisis; it is this day-to-day living that wears you out.”  Chekhov (Anything we say here will get us into trouble.)

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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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