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Cypen & Cypen
APRIL 8, 2010

Stephen H. Cypen, Esq., Editor

1.            PENSION FUNDS AWAIT BIG PAYOFF FROM PRIVATE EQUITY:  Private equity deal-makers, those kings of corporate buyouts, made billions for themselves when times were good.  But some of their biggest investors, public pension funds, are still waiting for the hefty rewards that were promised.  The nation’s 10 largest public pension funds have paid private equity firms more than $17 Billion in fees since 2000, according to The New York Times, as funds flocked to these so-called alternative investments in hopes of reaping market-beating returns.  But few big public funds ended up collecting the 20-30 percent returns that private equity managers often held out to attract pension money.  Many public pension funds are struggling to recover from a collapse in the value of their portfolios, despite large private equity investments that were supposed to help cushion their losses.  Fees are at the center of the debate over the divergent fortunes of private equity managers and their investors, because fees often make a big dent in any investment gains.  State and local pension assets declined by 27.6 percent from the end of 2007 to the end of 2008, wiping out $900 Billion.  Those poor returns have rankled some longtime private investors like the California Public Employees’ Retirement System.  Last year CalPERS strongly endorsed principles proposed by the Institutional Limited Partners Association, which represents private equity investors, to keep management fees in check and improve disclosure about fund performance.  The funds vary in how they report their performance and calculate their returns, allowing a significant number to classify themselves as “top quartile.”  (More than 25 percent?)  Private equity funds generally charge fees totaling 2 percent of the money they manage and then take 20 percent of the profits they generate.  Private equity owes its explosive growth largely to America’s pension funds.  Buyout funds raised $200 Million in 1980 and $200 Billion in 2007.  Public pension funds were the biggest contributors over that period, and now have $116 Billion invested in private equity.  But these investments have not worked out as well as many had hoped.  Median returns for public pension funds with assets greater than $5 Billion were negative 18.8 percent over one year, negative 2.8 percent over three years and 2.4 percent over five years.  Indeed, several university professors challenge the private equity firms’ premise that returns beat the stock market over long periods of time.  

 2.            CORPORATE FUNDING STATUS HIGHEST IN TWO YEARS:  The funding ratio for the typical U.S. corporate pension plan rose 2.8 percentage points to 88.1% in March, according to BNY Mellon Asset Management. says that funding ratio is the highest since March 2008.  A strong March 2010 rally in U.S. and international stocks drove pension plan assets up 3.7%, outpacing a 0.5% gain in liabilities for the month.  The small increase in liabilities was due to interest accrual.  The Aa corporate discount rate remained unchanged at 5.96%.  While interest rates affecting liabilities were unchanged in March 2010, there was a narrowing of spreads for the Aa corporate bonds, as long U.S. Treasury yields increased to their highest level since October 2008. 

 3.            REPORTS SHOW FUNDING RATIO UP:  Apropos of the above item, two separate reports by Mercer and UBS Global Asset Management each showed slight increases in corporate pension funding.  Mercer found the average funded ratio of S&P 1500 companies' defined benefit plans was 84% as of March 31, up one percentage point from a month earlier.  The aggregate assets and liabilities of the S&P 1500 plans were $1.3 Trillion and $1.55 Trillion, respectively.  The UBS report determined the funded ratio of the typical corporate defined benefit plan increased by one percentage point to 85% for the quarter ended March 31.  First-quarter performance was driven by stronger equity markets, increasing assets by 2.5% and a 1.5% increase in liabilities.  Both reports were reviewed in 

 4.            SIXTY-DAY ROLLOVER REQUIREMENT NOT APPLICABLE TO DISTRIBUTION CHECK PAYABLE TO SECOND PLAN:  A taxpayer's receipt of a check from her former employer's plan that she intended to deposit in her new employer's plan and that was made payable to her new employer for the benefit of the taxpayer was a direct rollover distribution that was not subject to the 60-day rollover requirement of Code Section 402(c)(3)(A), according to IRS Letter Ruling 201005057.  After the taxpayer left her first employer and began working for a second employer, she decided to roll over her benefits from the first employer's plan into the second employer's plan.  She was given a check made payable to the second company, for the benefit of the taxpayer.  She kept the check for a period of time that exceeded 60 days, and then deposited it into the second employer's plan.  A ruling was requested that IRS waive the 60-day rollover requirement with respect to the distribution.  IRS explained that the taxpayer received a distribution that was a direct rollover, as that term is defined in Code Section 401(a)(31).  Although the distribution check was given to her, it was made payable to the second company, for her benefit.  Since the check was not payable to the taxpayer, she lacked control over the check and could not have cashed it.  IRS noted that a Form 1099-R that she received concerning the distribution supported this conclusion, by showing in Box 7 Distribution Code "G," indicating a "Direct Rollover" to a qualified plan, with no withholding for federal income tax.  IRS ruled that the taxpayer received a distribution that was a direct rollover, and, thus, was not subject to the 60-day rollover requirement.  The taxpayer could deposit the check into the second employer's plan. 

 5.            CEOS’ PAY FALLS AGAIN:  The boss took another haircut as chief executive officer compensation edged lower in 2009, the first time in two decades that pay declined for two consecutive years.  The Wall Street Journal reports that the median value of salaries, bonuses, long-term incentives and grants of stock and stock options for CEOs of 200 major U.S. companies declined 0.9% to $6.95 Million.  The drop in total direct compensation was only the third since 1989, when the Journal began tracking CEO pay. In 2008, pay fell 3.4%.  The analysis also showed that highly paid CEOs generally run companies that deliver better-than-average shareholder returns.  Charles Ergen, CEO and founder of Dish Network Corp., earned the distinction of having the harshest drop in pay. He drew a $623,100 salary which was 92.5% lower than his 2008 total compensation, even though the company's stock doubled.  In contrast, Ray R. Irani, CEO of Occidental Petroleum Corp., collected $52.2 Million, making him the highest paid executive surveyed. Irani has been among the Journal's best paid every year since 2004.

 6.            GOVERNMENT OFFICIALS CAUSE FUNDING PROBLEM FOR PENSION PLANS, ACCORDING TO TRUSTEE:  Writing in Public Pensions Online, Charles Jeroloman, long-time Chairman of the Board of Trustees of City of Delray Beach Police and Firefighters Retirement System, says government officials cause funding problems for pension plans.  Over the last 15-plus years, city, county and state government officials creatively looked for ways to save money on budgets and salaries.  One commonly-used strategy encourages higher-salaried employees to accept a “window,” by which these employees are credited extra years of service toward retirement.  (This device is also known as an Early Retirement Incentive Program, or, E.R.I.P.)  Additional years are immediately added to the employee's credited service, even though such service was never funded by regularly-scheduled employer contributions and employee contributions (as well as investment returns thereon).  Nevertheless, the employer immediately experiences large reduction in salary and related costs due to the difference in salaries paid to new employees (if they are hired, at all) and longer-term employees.  Ironically, if that same employee were to purchase previous years credited service (that is, for law enforcement, fire fighting or military), the employee would first have to pay the full costs of such benefit before it could be received.  In addition, an E.R.I.P. can deteriorate a pension fund’s unfunded liability.  Another problem is that not all governments have deposited the required annual contributions to their pension plans.  Even when government budgets could sustain funding of required pension contributions, government officials often elected to fund other projects.  This behavior could lead to more plans experiencing funding problems.  Although many plans have been around for decades, the only thing that has changed is government officials electing to add unfunded benefits and not pay required contributions.   These problems must be brought to attention of public, media, unions, employees, employers, regulators and government officials.  Jeroloman believes that all benefits should be funded by employers, employees and investment returns (the last of which accounts for 70%-75% of funding).  Pension plans are in for the long haul, and over time will right themselves, if required contributions are made.  If the public and media looked at historic investment returns and long term costs of these pension plans, instead of a one or two year period of recession and recovery, they will see a different picture. 

 7.            DOCTOR TELLS OBAMA SUPPORTERS TO SCRAM:  A doctor who considers the national health care overhaul (see C&C Special Supplement for March 30, 2010) to be bad medicine for the country posted a sign on his office door telling patients who voted for President Obama to seek care elsewhere.  Jack Cassell, a Mount Dora, Florida, urologist and a registered Republican opposed to the health plan, told the Orlando Sentinel that it would be unethical for him to turn people away, but if they read the sign and turn the other way, so be it.  The sign reads: “If you voted for Obama … seek urologic care elsewhere.  Changes to your healthcare begin right now, not in four years.”  A professor of bioethics, law and medical professionalism said doctors cannot refuse patients on the basis of race, gender, religion, sexual orientation or disability, but political preference is not one of the legally-protected categories specified in civil rights law.  The doctor does not quiz his patients about their politics, and has not turned away patients based on their vote.  Nevertheless, the sign could cause some patients to question his judgment or fret about the care they might receive if they do not share his political views.  We wonder who leaked this story. 

 8.         KRAFT TRIPS ON CADBURY PENSION PLAN:  Kraft Foods has asked about 3,600 people at Cadbury, the British confectioner it recently acquired, to choose between their present pension plan or possible pay raises, the New York Times reports.  Unable to close the pension plan without paying hundreds of millions of dollars, because of a clause it was previously unaware of (does the word “malpractice” sound familiar?), the United States company has given Cadbury employees with the plan a choice between keeping it and freezing their wages, or dropping it in return for possibility of their wages raising.  A Kraft spokesperson said the scheme was unaffordable going forward.  Meanwhile, Kraft released its executive compensation figures for last year, revealing that CEO Irene Rosenfeld had been awarded $26 Million pay and bonus for her “exceptional“ role in acquisition of Cadbury.  We could not make this stuff up if we tried. 

 9.            HHS SECRETARY SENDS LETTERS TO GOVERNORS/INSURANCE COMMISSIONERS:  U.S. Department of Health and Human Services Secretary Kathleen Sebelius has issued a letter to governors and independent insurance commissioners asking each state to express its interest in participating in the temporary high risk pool program established by the new health insurance reform law (see C&C Special Supplement for March 30, 2010).  The temporary high risk pool program was created to help provide coverage to people who are uninsured because of pre-existing conditions.  States may choose whether and how they participate in the program.  HHS is committed to working closely with states as the program is implemented.  Establishment of a temporary new high risk pool program is one of the first tasks in implementing the new health reform law, and will help provide affordable insurance for Americans who have been locked out of the insurance market.  In her letter, Sebelius writes that HHS is interested in building upon existing state programs in this important initiative to provide expanded access to health coverage for individuals who cannot otherwise obtain health insurance.  To that end, Sebelius writes to request an expression of each state’s interest in participating in this temporary high risk pool program.  The new health insurance reform law provides $5 Billion in federal funds to support the new program.  States have a number of options for how they may participate, including: 

  • Operate a new high risk pool alongside a current state high risk pool;
  • Establish a new high risk pool (in a state that does not currently have a high risk pool);
  • Build upon other existing coverage programs designed to cover high risk individuals;
  • Contract with a current HIPAA carrier of last resort or other carrier, to provide subsidized coverage for the eligible population; or
  • Do nothing, in which case HHS would carry out a coverage program in the state.

Sebelius has set a rather short deadline for states to indicate their intent to participate:  April 30, 2010. 

10. FLA. LAWYER FINDS GRENADE ON HIS OFFICE DOORKNOB:  Florida lawyer Gary Dorst went to his office in Maitland, Florida, and found a grenade hanging from his doorknob.  At press time, authorities were not sure if the grenade was real.  The county bomb squad planned to detonate the device and check it out.  Investigators believe the grenade was intended as a threat rather that an attempt to harm, since it was hanging on the doorknob in plain view.  Dorst practices family and criminal law.  He was a police officer before attending law school and a prosecutor after graduation.  As one blogger on said, a potentially explosive story. 

11. STEWARDESSES FIGHT BARE, BUT NOT WITH KNUCKLES:  A dozen stewardesses from bankrupt air line Air Comet have posed in the nude for a special calendar.  Twelve hundred copies of the saucy calendar are being sold over the internet for 15 euros (about $21).  The calendar is the last resort of the 672 Air Comet staff who have been left unemployed after the air line went bust (not our word) last December and many without pay for the past six months.  Air Comet had tried and failed to create a niche in the market by offering cheap flights to South America, but falling demand due to the recession caused the airline to collapse, leaving hundreds of passengers stranded at various airports.  Air Comet owes creditors an estimated 160 million euros (about $240 Million).  One calendar girl said the stewardesses produced the calendar because they did not want society to turn the page and forget what had happened to them.  Frankly, based on the calendar, we do not think anyone will forget.  Check out Miss November, for free, sitting in a cockpit (our word), at

12. PLACEMENT AGENT GROUP OPPOSES CALIFORNIA BILL:  Third Party Marketers Association, the trade group representing placement agents, announced its opposition to a bill pending in the California Assembly that would require agents to register as lobbyists.  The group insists placement agents are not lobbyists and are involved in a host of services for their money manager clients.  The association specifically objects to a proposed ban on acceptance of contingency fees, a ban tied to the lobbyist designation.  One representative of a placement agent said the new law  would shut down the industry, because small money managers, who make up the bulk of business for many placement agents, do not have resources to enter into retainer agreements.  Under the current system, placement agents do not get paid unless they are able to obtain work for their client, according to 

13. CALIFORNIA GETS BAD RAP ON PENSIONS:  California has done some really stupid things (like a tax credit for first time homebuyers), but the New York Times did the state and its readers a disservice in going after California's pension fund liabilities.  Commentator Dean Baker says the basic story is that if you assume a 4.14 percent nominal rate of return on pension fund assets, then the state's pension liabilities look really bad.  The big question readers should ask is, so what?  The market has plummeted from prior levels, which is good news for future returns.  Lower price to earnings ratios open the door for higher future returns.  The logic is simple:  you are paying much less for each dollar of profits.  For this reason, the assumption of 4.14 percent average nominal returns (just over 2.0 percent real, assuming a 2.0 percent inflation rate) is ridiculously low.  Suppose we assume that pension liabilities grow at the nominal rate of 5 percent a year.  If we sum the liabilities over 40 years, using a 4.14 percent discount rate gives a 70 percent higher cost than using a 7.0 percent discount rate.  Stocks have historically provided a real return of 7 percentage points above the inflation rate, so assuming a nominal return of 7.0 percent for the mixed portfolio is hardly unreasonable.  In short, the story of outsized pension liabilities in the Times article is driven largely by a ridiculous assumption about pension returns.  There is no reason whatsoever that the state of California should use a 4.14 percent discount rate in assessing its pension liabilities.  This calculation would lead to exaggeration of its pension liabilities and therefore unnecessarily raise taxes or cut pensions and other spending.  Baker, who is an author and co-director of the Center for Economic and Policy Research in Washington, D.C., wrote for The American Prospect

14. OXYMORON:  Why do we sing "Take me out to the ball game" when we are already there? 

15. FABULOUS RANDOM THOUGHTS:  “Lol” has gone from meaning, "laugh out loud" to "I have nothing else to say." 

16. SIMPLE BUT BRILLIANT...QUOTES FROM WILL ROGERS, PROBABLY THE GREATEST POLITICAL SAGE THIS COUNTRY HAS EVER KNOWN:  If you're riding ahead of the herd, take a look back every now and then to make sure it's still there. 

17. QUOTE OF THE WEEK:  “Whenever you do a thing, act as if all the world were watching.”  Thomas Jefferson.  This quote may be the best one of all.  Some related quotes, of our own making:  “Whenever you do a thing, pretend as if your mother were watching”  and “Before you do something, think how it will look on the front page of The Miami Herald.”   

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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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