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Cypen & Cypen
APRIL 15, 2010

Stephen H. Cypen, Esq., Editor

1.            SAN DIEGO PENSION CHARGES DISMISSED:  United States District Judge Roger Benitez has dismissed fraud charges against five former members of the San Diego pension system, concluding that the law under which the former officials were being prosecuted was too vague and not clear enough to support a prosecution.  The defendants were indicted in 2006 for alleged violation of the honest services fraud law, which essentially prohibits public officials from scheming to deprive citizens of their rights to “honest services.”  The ruling makes reference to a California Supreme Court ruling that previously cleared all but one of the defendants of conflict of interest charges.  The ruling also notes that the United States Supreme Court has recently granted review in three honest services cases to address application of the statute, including one involving Jeffrey Skilling of Enron infamy.  Here are a few excerpts from the Judge’s order, the entirety of which is at  

...The crime which is alleged in the indictment is not the typical dishonest services scenario, such as the bribing of a public official or extortion by a public officeholder.  Neither is this case the typical undisclosed conflict of interest scenario, such as when a public official directs a government contract to a private business in which the official has a significant financial interest. 

Far from these typical cases, which make up the heartland of honest services fraud cases, is the case against these five municipal defendants. The defendants in this case were placed in positions on a public pension fund board, with built-in lawful conflicts of interest, and forced by their city employer to deal with city problems not of their own making.  The city designed a short-sighted political solution and forced the pension fund board to vote.  Had the board voted down the [city’s proposal] solution, it might have bankrupted the city.  It might have meant that the city would have had to stop making any amount of payments into the pension fund.  It certainly would have meant being held up to public scrutiny and criticism.  On the other hand, voting to approve the [city’s proposal] may have been the only way to fulfil their fiduciary duties.  Faced with the unavoidable position in which they had been placed by the city, (i.e., having to consider the city's proposal), one could reasonably argue that approving the [city’s proposal] was the best way to carry out their twin constitutional duties as board trustees:  the defendants maximized benefits for current and future members of the pension fund and minimized contributions from the city contributor.  The legal question now before this Court is, "how could a person of average intelligence reasonably understand that in so acting, he or she was committing the federal crimes of 'honest services' mail and wire fraud?"  ...

Fortunately, due process forbids turning citizens into criminals through the application of novel, untested applications of a criminal statute.  ...  In this case, the defendants have been charged under a novel, untested, application of the vague mail and wire fraud honest services statutes for carrying out pension fund business.  A reasonable person of ordinary intelligence would not have known that what the defendants were doing violated the federal mail and wire fraud statutes.  Under our Constitution, people are not to be punished for "violating an unknowable something." ...

United States of America v. Saathoff, Case No. 06cr43-BEN (U.S. SD Cal., April 6, 2010).

 2.            FINANCIAL HEALTH OF CORPORATE PLANS IMPROVES:  Like prior reports (see C&C Newsletter for April 8, 2010, Item 2 and C&C Newsletter for April 8, 2010, Item 3), Towers Watson found that financial health of the nation’s 100 largest corporate pension plans improved modestly in 2009, largely due to strong stock market returns.  (Higher liabilities caused by lower discount rates tempered the overall improvement, however.)  The analysis of year-end corporate disclosures found that aggregate funding for U.S. pensions increased by $26.1 Billion last year, shrinking a $209.6 Billion deficit at year-end 2008 to a $183.5 Billion deficit at year-end 2009.  The overall aggregate funding ratio increased by four percentage points, from 78% funded to 82% funded.  Although pension contributions increased from 2008 to 2009, companies expect contributions in 2010 to be roughly one-third less than 2009 contributions. The analysis showed that pension plan assets increased by 12% in 2009, from $768 Billion to $863 Billion.  The increase was largely due to significant gains in the equities market, as well as cash contributions into the plans.  In 2009, the average rate of return on plan investments was 18%, compared with an average return of minus 24% in 2008.  Over the last year, most plan sponsors did not change their investment policy, although some shifted to a liability-driven investment strategy to manage their funded status better, resulting in a slight shift away from equities.  For the companies that provided data, the average target equity allocation was 52.8% for 2010, compared with 55.1% for 2009.  The percentage of companies with funding ratios lower than 70% fell significantly, from 41% in 2008 to 17% in 2009.  The percentage with funding ratios between 70% and 90% jumped from 45% to 69%.  (We are going to go out on a limb here, and calculate that the percentage with funding ratios above 90% remained at 14%.) 

 3.            A TALE OF TWO RETIREMENTS:  New research conducted by the non-profit Transamerica Center for Retirement Studies highlights how availability of 401 (k) and similar employee-funded retirement plans, or lack thereof, may lead workers down divergent paths in saving and planning for retirement, which, in turn, may result in dramatically different outcomes when they reach retirement age.  The 11th Annual Transamerica Retirement Survey found that workers who are offered 401(k) plans, or similar employee-funded arrangements, exhibit more proactive retirement savings behaviors, demonstrate higher levels of knowledge about retirement investing and are more confident in their ability to retire comfortably.  Availability of a plan is highly correlated to proactive saving behaviors beyond simply providing a vehicle to save.  For example, workers who are offered a plan started saving at a median age of 28 (two years before those without plans), allowing more time to contribute and potentially grow their savings.  Of those who are offered a plan, more than three out of four participate in the plan and two-thirds are saving for retirement outside of the plan provided by their employer.  By comparison, only 57 percent of those not offered a plan are saving outside of work.  Workers offered an employee-funded savings plan also appear to be at a distinct advantage because they are more likely to have a retirement savings strategy; 61 percent have developed some form of a retirement savings strategy, compared to only 40 percent of workers without an employee-funded plan.  The former also demonstrate a better understanding of the fundamentals of retirement investing.  [Editor’s note:  although workers who are offered retirement plans are certainly better off than those who are not, even those with 401(k)-type plans have only a fraction of the amount needed for a reasonably-comfortable retirement.] 

 4.            DOL’S EBSA POSTS 2009 ADVISORY COUNCIL REPORTS:  The Department of Labor’s Employee Benefits Security Administration has posted reports of the 2009 Advisory Council on Employee Welfare and Pension Benefit Plans: 

            A.            Report on Approaches to Retirement Security in the United States,

The 2009 ERISA Advisory Council reached a consensus focusing on adequacy of and structure of U.S. retirement plans to assess whether structural aspects of these plans contribute to retirement security.  The Council concluded that most contemplated changes to improve retirement security, particularly for defined benefit plans, require legislation.  Many witnesses called for short-term funding relief, which the Council supports in concept.  Others called for major long-term reform and development of new or greatly modified retirement plans.  The report lists some of the longer-term reform recommendations made by witnesses and others.  The Council specifically recommended immediate formation of a Presidential Commission.  The Council has not endorsed any other long-term proposal, but believes most, if not all, are worthy of serious consideration.  These proposals may need consideration in a forum beyond Capitol Hill. 

            B.            Report on Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries,

The Council reached a consensus to focus on the issue of promoting retirement literacy and security by streamlining disclosures to participants and beneficiaries. The Council studied efficacy of ERISA's reporting and disclosure schemes, as well as problems and costs related to such disclosures.  After much discussion and debate concerning issues presented and the extent the Council believed the Department of Labor needs to address ERISA's disclosure requirements, the Council submitted four recommendations to the Secretary of Labor for consideration.

            C.            Report on Stable Value Funds and Retirement Security in the Current Economic Conditions,

The Council studied stable value funds and retirement security in current economic conditions.  The Council's purpose in studying stable value funds and other stable value investment products was to determine whether the Department should provide (i) requirements or guidelines to retirement plan service providers related to design or marketing of stable value fund investments; (ii) requirements or guidelines to plan sponsors and fiduciaries for selecting and monitoring stable value funds; and (iii) information to plan participants to assist them in making informed investment decisions regarding stable value fund investments in participant-directed plans.  Witnesses represented a wide variety of interested parties and viewpoints, including members of the stable value industry, independent investment advisors, retirement plan consultants, employee benefits providers, employee benefits attorneys and non-profit associations.  The Council submitted two recommendations to the Secretary of Labor. 

 5.            BIG BANKS MASK RISK LEVELS:  Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to the Wall Street Journal.  A group of banks -- which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. -- understated debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods.  The banks, which publicly released debt data each quarter, then boosted the debt levels in the middle of successive quarters.  Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers.  Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.  The practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.  Nice... real nice.  

 6.            SERVICE DOG BITES THE DUST:  A Pennsylvania court has ruled that a service dog does not qualify for food stamps  because he is not human.  However, according to, the animal's disabled owner may not have to argue the legal issue on his own much longer.  Although he lost his self-handled case arguing that the dog's nutritional requirements should be taken into account, as a household member, in determining his owner's food stamp allotment, the man says his phone has been ringing off the hook with calls from lawyers who want to help him with an appeal.  Even the judge who ruled against the man, upholding an earlier determination by the Department of Public Welfare, apparently would have liked to see a different result:  “This court is sympathetic to the argument that his service dog is a necessity for him due to his disability, and that he lacks the funds to properly feed his service dog.  We hope that there is some other state or federal program that might provide for the maintenance and upkeep of the dog.”  Wow.  Bow. 

 7.            MARLINS VALUE UP; STILL NEAR BOTTOM:  Based on value  of Major League Baseball’s 30 teams, the Florida Marlins, at $317 Million, ranked Number 27, according to Forbes.  The ranking is an improvement over last year’s 30th place.  The 15 percent increase in value was the highest, and only one of three teams to experience double-digit increases in value (Minnesota Twins - 14 percent, Texas Rangers - 11 percent).  Nationwide, team values increased an average of only 1 percent, to $482 Million (so sad).  Note:  Florida Marlins owner Jeffrey Loria bought the team in 2002 for $158 Million. 

 8.         CITY FIRE INSPECTORS PREVAIL IN FLSA CLAIM THEY ARE LAW ENFORCEMENT OFFICERS:  Cremeens and seven others, fire investigators for the City of Montgomery, Alabama's fire department, appealed dismissal via summary judgment of their collective action seeking overtime pay from the city.  They claimed that, although they are required to spend some time fighting fires, they are entitled to Fair Labor Standards Act overtime pay as law enforcement officers, who are entitled to it for working more than 86 hours per two-week period rather than as firefighters for whom the threshold is 106 hours.  The City argued that FLSA mandates, without exception, firefighter overtime for anyone who fits the FLSA's definition of firefighter.  But the Department of Labor’s dual assignment regulation, which addresses overtime for firefighters who perform law enforcement duties, remains valid.  Therefore, the appellate court reversed the judgment of the district court.  Cremeens vs. The City of Montgomery, Case No. 09-1563 (U.S. 11th Cir., April 5, 2010). 

 9.            FIRE CAPTAIN PROPERLY DEMOTED FOR AFFAIR WITH SUBORDINATE:  Starling was a firefighter in the Palm Beach County, Florida, Fire Rescue Department.  While he was a rescue captain, he arranged to have Smith, another firefighter, transferred to his station as his subordinate.  Sometime during the next few months, Smith and Starling -- then married but separated from his wife -- began an intimate relationship.  The County's Fire Rescue Administrator demoted Starling from captain to firefighter/paramedic.  Starling sued the County under 42 U.S.C. § 1983 for violating his First Amendment right to intimate association.  The district court granted the County’s motion for summary judgment.  On Starling's appeal, the primary question was whether the County had violated Starling's First Amendment right to intimate association when he was demoted for an extramarital affair with one of his subordinates.  The appellate court concluded that the County's did not violate the Constitution, because the County’s interest in discouraging extramarital association between supervisors and subordinates is so critical to the effective functioning of the Fire Department that it outweighs a firefighter’s interest in an extramarital association with a subordinate, even if the court assumed arguendo that the First Amendment protects extramarital association as a fundamental right.  In the quasi-military context, which includes both fire departments and police stations, courts have afforded public employers greater latitude to burden an employee's rights, particularly when the exercise thereof impacts discipline, morale, harmony, uniformity and trust in the ranks.  Starling v. Board of County Commissioners, Palm Beach County, Case No. 09-11168 (U.S. 11th Cir., April 6, 2010). 

10.            FUNDING OF STATE AND LOCAL PENSIONS, 2009-2013:  The Center for Retirement Research at Boston College has released a new Issue in Brief, starting with the obvious premise that the financial crisis has reduced the value of equities in state and local defined benefit pensions and hurt the funding status of these plans.  The impact will become evident only over time, however, because actuaries in the public sector tend to smooth both gains and losses, typically over a five-year period.  The first year for which the crisis will have a meaningful impact on reported funding status is fiscal 2009, since in most cases the fiscal 2008 books were closed before the market collapsed.  After 2009, the funding picture will continue to deteriorate to the extent that years of low equity values replace earlier years of high values.  (Did somebody at the Center miss the record Bull Market, which has taken equities back to October, 2008 levels?)  The current and future funding status of state and local pensions is crucially important, as state and local governments are facing a perfect storm:  decline in funding has occurred just as the recession has cut into state and local tax revenues and increased demand for government services.  Finding additional funds to make up for market losses will be extremely difficult.  The brief reports state and local pension funding levels for fiscal 2009, a year for which stock market performance is known and for which actuarial valuations are available for roughly half of the 126 plans in the sample.  It also reports projections for 2010-2013 under alternative assumptions about performance of the stock market.  The first section briefly describes evolution of funding in the public sector, concluding that since the early 1980s, public plans made significant progress in terms of funding.  The financial crisis, however, has thrown public plans seriously off course.  As discussed in the second section, aggregate funding  declined from 84 percent in 2008 to 78.5 percent in 2009.  (We would like to add a little historical perspective here:  average funded status for 2001 was 91.4 percent, and has never even hit 90 percent since then.)  The third section describes three alternative scenarios for the stock market for the period 2010-2013, and reports that, under the most likely scenario, funding levels will decline to 72 percent by 2013.  The final section notes limited policy options available to states and localities.  The key question is what should be done.  A major increase in contributions is not realistic at this time.  States and localities may have only limited ability to increase employee contributions, because some state courts have ruled that public employers are prohibited from modifying plans for existing employees.  Higher contributions from new employees will take a long time to have any substantial effect.  Thus, if funding levels are to be restored quickly, the money must come primarily from tax revenues.  But the recession has decimated tax revenues and increased the demand for state and local services.  Thus, finding additional taxes to make up for market losses will be extremely difficult.  One small step that would be viewed as a commitment to responsible funding would be for states and localities at least to pay their full Annual Required Contribution (Is there a choice?).  Otherwise, the only option is to wait for the market and economy to recover.  In other words:  R-E-L-A-X..  Number 10, April 2010. 

11.         EMPLOYERS PLAN TO MAINTAIN RETIREMENT CHANGES MADE DURING ECONOMIC DOWNTURN:  A majority of employers that made changes to their retirement plans in response to the economic downturn expects to keep those changes in place throughout 2010.  The foregoing finding is among those in a survey released by Buck Consultants and reported in  The survey, "Retirement Plan Changes in a Period of Economic Uncertainty," measures actions taken by employers during 2009, and gauges their plans as conditions improve.  Results show 77 percent of employers with traditional pension plans, also called defined benefit plans, and 52 percent of employers with defined contribution plans, such as 401(k) plans, will not reverse changes or are uncertain if they will reverse previous changes.  Aye, there’s the rub.

12.            HOW PUBLIC EMPLOYERS CAN LEVERAGE VOLUNTARY BENEFITS:  Public-sector employers that devote enough resources to design, underwriting, administration and pricing of voluntary benefits will reap the rewards of offering a valuable service that can help their employees survive a difficult economic climate and ease the sting of benefit reductions.  Employee Benefit News reports this conclusion of The Segal Company’s detailed analysis entitled “Managing Through Fiscal Stress:  Voluntary Benefits Expand Coverage Options.”  The findings suggest that voluntary benefits are not being used as strategically as they could be; and in many cases, individual programs were set up without an overarching strategy of what can be significant, meaningful and important to the workforce.  In a sign of the times, Segal researchers noted that employee stress is expected to continue into the economic recovery, especially in the public sector where scores of workers have been laid off or furloughed amid dwindling revenues and soaring benefit obligations.  One report indicates that 48 states face shortfalls totaling $196 Billion in their budgets for fiscal year 2010.  Public employers have long been known for offering heavily-subsidized benefit packages as part of collectively bargained agreements to compete better with private enterprise.  Given this fact, the deep prevalence of voluntary benefit plan sponsorship in this sector might come as somewhat of a surprise.  Nearly 90% of the 569 U.S. municipalities, states, educational institutions and other public entities responding to a recent survey offer or are planning to offer voluntary benefits.  Voluntary products seem positioned for rapid growth because payroll deduction and workplace benefit shopping are powerful motivational tools, and because workers are taking more accountability for their futures, preferring to pick and choose the benefits they want and can afford.  Public employers are turning to voluntary benefits just as much as corporations in order to round out the benefits package.  Finding the right mix of voluntary options requires an inclusive strategy wherein all of the multiple stakeholders in the public sector identify those benefits they believe will maintain meaningful health coverage and financial security. 

13.            PARTING ON REALLY GOOD TERMS:  Here’s a story from Employee Benefit News guaranteed to warm your heart and perhaps make you think twice about how your company has treated laid-off employees.  When forced to slash millions from its budget and reduce its workforce by more than 100 employees, Palm Beach County, Florida’s, Clerk & Comptroller created the “We're All in This Together” transition program.  The program sought to minimize impact of such dramatic changes by maintaining transparent, ongoing communications with such employees; upholding employees' sense of empowerment and inclusion; and treating separating and remaining workers fairly and respectfully.  For separating employees, the organization provided an onsite job fair and transition workshops covering job-hunting, professional development, financial assistance and educational opportunities.  For remaining employees, there was a rebuilding/stabilization initiative that included a post-layoff period to adjust to the new environment, cross-training for new responsibilities, a “Clerk Kudos” recognition program and implementation of the first “Employee Appreciation Dress Down Day.”  For its efforts, the agency recently received a 2010 Work-Life Innovative Excellence Award, the highest honor from the Alliance for Work-Life Progress, which recognizes organizations that have successfully aligned work-life initiatives with business objectives.  Even better though, were the high marks employees gave the organization in its first post-layoff employee survey.  Although no company wants to lay off workers, when such action is necessary, there is clearly a right way and a wrong way to do it.  Bravo to Palm Beach County. 

14.            U.S. ASSETS RISE 18 PERCENT:  Americans' retirement nest eggs are climbing back from their recession lows, according to Spectrem Group.  Total U.S. retirement assets, which include both defined benefit and defined contribution plans, rose 18% to $9.3 Trillion in 2009, up from $7.9 Trillion in 2008.  Assets held in defined contribution plans, which include 401(k) plans, rose 19% to $4.5 Trillion, from $3.8 Trillion the year before.  As a percentage of all retirement assets, these plans held steady at 49%.  By themselves, 401(k)s, which account for 71% of all defined contribution assets, rose 20%, to $2.3 Trillion in 2009, up from $1.9 Trillion in 2008.  The retirement market bounced back in 2009, recovering nearly all of the recession-driven losses of the previous year.  The number of plan participants seeking advice on how to invest their retirement funds has more than doubled since 2008, suggesting some lingering uncertainty.  Indeed, the number of participants saying they would like more advice and assistance with investment decisions rose to 58% in 2009, from 26% the prior year.  Teach me tonight. 

15.            OXYMORON:  Doesn't "expecting the unexpected" make the unexpected expected?
16.            FABULOUS RANDOM THOUGHTS:  Whenever someone says "I'm not book smart, but I'm street smart", all I hear is "I'm not real smart, but I'm imaginary smart". 

17.            SIMPLE BUT BRILLIANT...QUOTES FROM WILL ROGERS, PROBABLY THE GREATEST POLITICAL SAGE THIS COUNTRY HAS EVER KNOWN:  After eating an entire bull, a mountain lion felt so good he started roaring. He kept it up until a hunter came along and shot him. The moral: When you're full of bull, keep your mouth shut. 

18.            QUOTE OF THE WEEK:  “In politics, a lie unanswered becomes truth within 24 hours.” 

19.            PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you. 

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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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