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Cypen & Cypen
APRIL 29, 2010

Stephen H. Cypen, Esq., Editor

1.            PUBLIC-SECTOR EMPLOYEES EARN LESS THAN PRIVATE-SECTOR COUNTERPARTS:  A new report entitled Out of Balance?, from Center for State & Local Government Excellence and National Institute on Retirement Security, compares public-sector and private-sector compensation over twenty years.  The current recession and resulting fiscal difficulties faced by state and local governments have renewed interest in compensation of the public workforce in regard to pay, pensions and other benefits.  The report examines the extent to which state and local government compensation in the United States is comparable to compensation in the private sector.  Levels of compensation help determine both competence and efficiency of governmental services.  Excessive levels waste resources, depriving governments of the opportunity to address other costly objectives or to reduce burdens on taxpayers.  Insufficient levels make it difficult, if not impossible, to attract workers of the quality needed to provide services demanded by citizens.  Comparability with the private sector is the most generally-accepted standard by which economists and compensation specialists judge whether processes for determining compensation in the public sector are working.  The report analyzes differences in pay between each sector as reported for the last several decades, up to and including the latest estimates.  The report also estimates variation of these trends across some of the largest states.  Next, to compare overall compensation across public and private sectors, the report describes benefit levels and composition in public and private sectors.  The earnings-comparability estimates are adjusted to include benefits.  The analysis finds that: 

  • Public and private workforces differ in important ways.  For example, jobs in the public sector require much more education on average than those in the private sector.  Employees in state and local sectors are twice as likely as their private sector counterparts to have a college or advanced degree. 
  • Wages and salaries of state and local employees are lower than those for private sector workers with comparable earnings determinants.  State employees typically earn 11 percent less; local workers earn 12 percent less. 
  • Over the last 20 years, earnings for state and local employees have generally declined relative to comparable private-sector employees. 
  • Benefits (such as pensions) constitute a greater share of employee compensation in the public sector. 
  • State and local employees have lower total compensation than their private- sector counterparts.   On average, total compensation is 6.8 percent lower for state employees and 7.4 percent lower for local workers, compared with comparable private-sector employees. 

The recession calls for equal sacrifice, but long-term patterns indicate that average compensation of state and local employees is not excessive.  Indeed, if the goal is to compensate public and private workforces in a comparable manner, then the data do not call for reductions in average state and local wages and benefits.  Why are we not surprised? 

 2. PLAN ADMINISTRATOR’S ERRONEOUS PLAN INTERPRETATION ENTITLED TO DEFERENCE:  In a recent United States Supreme Court case, petitioner was Xerox Corporation's pension plan.  Respondents were employees who left Xerox in the 1980s, received lump-sum distributions of retirement benefits earned up to that point and were later rehired.  To account for the past distributions when calculating respondents' current benefits, the plan was initially interpreted to call for an approach that has come to be known as the "phantom account" method.  Respondents challenged that method in an action under the Employee Retirement Income Security Act of 1974.  The District Court granted summary judgment for the plan, but the Second Circuit vacated and remanded, holding that the plan's interpretation was unreasonable and that respondents had not received adequate notice that the phantom account method would be used to calculate their benefits.  On remand, the plan proposed a new interpretation that accounted for the time value of money respondents had previously received.  The District Court declined to apply a deferential standard to this interpretation, and adopted instead an approach proposed by respondents that did not account for the time value of money.  Affirming in relevant part, the Second Circuit held that the District Court was correct not to apply a deferential standard on remand, and that the District Court's decision on the merits was not an abuse of discretion.  In a 5-to-3 ruling, the United States Supreme Court held that the District Court should have applied a deferential standard of review to the plan's interpretation.  People make mistakes.  Even administrators of ERISA plans, which should come as no surprise, given that ERISA is an enormously complex and detailed statute, and the plans that administrators must construe can be lengthy and complicated.  The Court previously held that an ERISA plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion.  The question in this case is whether a single honest mistake in plan interpretation justifies stripping the administrator of that deference for subsequent related interpretations of the plan.  The high court held that it does not.  ERISA represents a careful balancing between ensuring fair and prompt enforcement  rights under a plan and encouragement of the creation of such plans.  Deference preserves this careful balancing, and protects the statute’s interests in efficiency, predictability and uniformity.  Conkright v. Frommert, Case No. 08-810 (U.S., April 21, 2010). 

 3. MEDIAN U.S. CORPORATE PENSION FUND RETURNS SURGE:  The  median pension fund for S&P 500 companies returned 16.2% in 2009, the highest level in five years, according to a Wilshire Consulting Report summarized in  The 2009 returns mark a sharp turnaround from the -27.4% loss in 2008.  The median return in 2007 was 8.2%, 11.2% in 2006, 8.5% in 2005 and 10.8% in 2004.  Meanwhile, the median discount rate used to discount future benefits fell from 6.25% to 6%.  Combined, the defined benefit pension assets of the 308 S&P 500 company pension plans totaled $992.9 Billion at year end, up from $883 Billion the year before.  Liabilities were up by $21.9 Billion, hitting a total of $1.2 Trillion.  The aggregate funding level is now 83.4% up from 80.2%.  The Wilshire Report showed that the average asset allocation for these plans included a 54.1% allocation of equities and 34% to bonds.  They also invested 1.7% in real estate, 1.4% in private equity, 0.8% in hedge funds and 8% in cash/other instruments.  The median pension fund, however, invested 56.2% in equities, 33.6% in fixed income and 4% in cash/other instruments. 

 4. SEC CHARGES “PROMINENT” MIAMI BEACH BUSINESSMAN:  The Securities and Exchange Commission has charged a “prominent” Miami Beach-based businessman and philanthropist with fraud for orchestrating a $900 Million offering fraud and Ponzi scheme.  SEC alleged that Nevin K. Shapiro, founder and president of Capitol Investments USA, Inc., sold investors securities he claimed would fund Capitol’s grocery diverting business.  Shapiro told investors that the securities were risk-free with rates of return as high as 26 percent annually.  Instead, Shapiro was actually conducting a Ponzi scheme and illegally using investor money to pay for other unrelated business ventures and fund his own lavish lifestyle.  When investors questioned Capitol’s business, Shapiro showed them fabricated invoices and purchase orders for nonexistent sales.  Grocery diverters like Capitol purchase lower-priced groceries in one region and resell them for a profit to another region where prices are higher.  According to SEC’s complaint, filed in U.S. District Court for the Southern District of Florida, Shapiro used his business relationships and word-of-mouth to solicit investors and sell them short-term promissory notes.  SEC’s complaint further alleges that Shapiro misappropriated at least $38 Million of investor funds to enrich himself and finance outside business activities unrelated to the grocery business, including a sport representation business and real estate ventures.  His lavish lifestyle includes a $5 Million home in Miami Beach, a $1 Million boat, luxury cars, expensive clothes, high-stakes gambling and season tickets to premium sporting events.  Shapiro additionally tapped approximately $13 Million of investor funds to pay large undisclosed commissions to individuals who attracted other investors.  Does the name “Premium Sales” ring a bell?  Release 2010-63 (April 21, 2010).

 5. JEFFERSON COUNTY, ALABAMA, PERSONNEL BOARD MEMBERS WILL COMPLETE TERMS:  Following decades of civil-rights litigation regarding discriminatory employment practices, the district court for the Northern District of Alabama assumed a direct supervisory role over the Personnel Board of Jefferson County, Alabama, in 2002.  Incident to its supervisory function, the district court appointed two individuals to the three-member Board when vacancies arose in 2007. Shortly thereafter, the Alabama legislature passed an Act that entirely reconstituted composition of the Board.  In 2008, the district court declared that Act void ab initio, and affirmed that the court-appointed members would serve the remainder of their terms.  The City of Birmingham appealed the decision.  The City's appeal was dismissed, as the court did not have jurisdiction to consider the matter because the appealed order, an interlocutory injunction, had since merged with a subsequent final order that neither party challenged.  Birmingham Fire Fighters Association 117 v. City of Birmingham, AL, Case No. 08-16604 (U.S. 11th Cir., April 22, 2010).  

 6. FORECLOSURE STATS:  The first quarter of 2009, foreclosure filings -- default notices, auction sale notices and bank repossessions -- were reported on 803,489 properties, which translates into an increase of nearly 24% from the same period in 2008.  According to the U.S. Foreclosure Market Report, the numbers mean that one in every 159 homes received a foreclosure filing during January, February and March of 2009. 

 7. DESPITE JOKES, LAWYERS HELP WITH A TRICKY SYSTEM:  Lawyers are  often the butt of jokes and derogatory names like shyster and ambulance-chaser.  But most lawyers do not get offended.  If lawyers cannot laugh at lawyer jokes, they're taking themselves too seriously.  Besides, remember the old saying that there is a little bit of truth behind every bit of humor.  For every bit of truth, though, there is another truth:  without lawyers, navigating the complicated justice system can be tricky. And while attorneys’ fees sometimes can seem sky-high, most lawyers work hard for their clients and take on a significant amount of pro bono work.  Here are a few mild examples from the Traverse City (Michigan) Record-Eagle

What is wrong with lawyer jokes?  Lawyers do not think they are funny and nobody else thinks they are jokes. 

How many lawyers does it take to roof a house?  It depends on how thinly you slice them. 

It was so cold the other day that I saw a lawyer with his hands in his own pockets.

Remember, Law Day is May 1; take your lawyer to lunch. 

 8. 6 WAYS COUPLES CAN MAXIMIZE SOCIAL SECURITY PAYOUTS:  Married readers should carefully review the following piece adapted from U.S. News & World Report.   Couples who are currently married, or who have stayed together at least 10 years, tie their working records -- and resulting Social Security checks -- together, as long as they both live.  In the case of Social Security payments, the result is often better for the couple.  Spouses have Social Security claiming options that single people do not.  Here are some ways couples can boost their Social Security benefits: 

Utilize spousal payments.  Spouses are entitled to a Social Security payout of up to 50 percent of the higher earner's check if that amount is higher than benefits based on his or her own working record.  Retired couples where one spouse did not work or had low earnings have the most to gain from this provision.  However, low-earning spouses must wait until full retirement age to collect the full 50 percent.  (For baby boomers born between 1943 and 1954, full retirement age is 66.)  Benefits are reduced for spouses who collect before their full retirement age.  For example, a low-earning spouse whose full retirement age is 66 would only be eligible for 35 percent of the higher earner's benefit at age 62.  The spousal benefit does not increase above 50 percent of the higher earner's benefit if claiming is delayed beyond the full retirement age. 

Claim and suspend.  The lower earner cannot receive spouse's benefits until the higher earner files for retirement benefits.  Workers who have reached full retirement age may apply for retirement benefits and then request to have the payment suspended.  Claiming and suspending payments allows the lower earner to claim a spousal benefit and the higher earner to continue working and earn delayed retirement credits until age 70.  Social Security checks increase by 7 percent to 8 percent for each year of delayed claiming between full retirement age and age 70.  After age 70 there is no additional benefit for waiting to collect. 

Claim twice.  Dual-earner couples who have reached their full retirement age can claim Social Security twice:  first as a spouse and later using his or her own work record.  A person may choose to sign up for only a spouse's benefits at full retirement age and continue accruing delayed retirement credits on his or her own Social Security record.  The worker may then file for benefits based on his or her own work at a later date and receive a higher monthly benefit due to delayed retirement credits.  For example, a man planning to retire at age 70 could claim a spouse's benefit based on his wife's earnings at age 66 and then claim again based on his own working record when he exits the workforce at age 70.  High-income couples with relatively equal earnings gain most using this strategy. 

Include family.  Social Security recipients who have children under age 16 or who are disabled can secure additional Social Security payments for the child and a spouse caring for the child, even if the spouse is under age 62.  Each child is eligible for up to 50 percent of the retiree's full benefit.  However, payments to family members are capped, typically at 150 percent to 180 percent of the retiree's benefit payment.  If total payments due to the retiree's spouse and children are above this limit, their benefits will be reduced.  The retiree's payout, however, will not be affected. 

Ex-spouses are eligible.  A former spouse may be eligible for benefits if the marriage lasted at least 10 years.  The divorced spouse must be age 62 or older and unmarried.  The amount of benefits an ex-spouse claims has no effect on benefits the worker and her or her current spouse can receive.

Boost the survivor's benefit.  Widows and widowers are entitled to the higher earner's full retirement benefit.  Surviving spouses can begin receiving Social Security benefits at age 60, or age 50 if they are disabled.  Benefits are reduced by up to 28.5 percent if claimed before recipient's full retirement age.  The surviving member of a dual earner couple can also claim a reduced benefit on one working record and then switch to the other.  For example, a woman could take a reduced widow's benefit at age 60 and then claim 100 percent of the retirement benefits based on her own working record when she reaches full retirement age.  Most survivor benefits are paid to women because wives are generally younger than their husbands and live longer.  A husband can increase the monthly survivor's benefit his wife will receive by 60 percent by waiting to sign up for Social Security until age 70. 

Finally, an explanation we can understand. 

 9. FORD CONTRIBUTES $300 MILLION TO PLANS:  Ford Motor Co. contributed $300 Million to its worldwide pension plans in the first quarter, according to pionline.  The automaker previously said it expected to contribute $1.1 Billion this year.  In 2009, Ford contributed $900 Million worldwide, including $400 Million in the first quarter.  Ford did not break down how much of the most recent contribution went to its U.S. pension plans, which had $38.4 Billion in assets as of December 31, 2009.  Ford Tough. 

10. CalPERS WANTS PRIVATE EQUITY FIRMS TO CUT FEES:  Officials at California Public Employees’ Retirement System are asking all private equity firms that have significant relationships with the $213.3 Billion system to follow the lead of Apollo Global Management, and cut their fees.  Pionline reports that Apollo agreed to make $125 Million in fee reductions over the next five years on funds it manages solely for CalPERS.  The system has begun looking for ways to cut costs on private equity, hedge funds and real estate because the majority of its overall expense is investment management fees, particularly private equity and real estate funds.

11. ALL PUNS INTENDED:  Two antennas met on a roof, fell in love and got married. The ceremony wasn't much, but the reception was excellent. 

12. OXYMORON:  Why is it called "after dark" when it really is "after light"? 

13. FABULOUS RANDOM THOUGHTS:  MapQuest really needs to start their directions on #5.  Pretty sure I know how to get out of my driveway.

14. SIMPLE BUT BRILLIANT...QUOTES FROM WILL ROGERS, PROBABLY THE GREATEST POLITICAL SAGE THIS COUNTRY HAS EVER KNOWN:  The quickest way to double your money is to fold it and put it back into your pocket.

15. QUOTE OF THE WEEK:   “Most of us, by the time we’re up on the rules, are generally too old to play.”  Pappy Maverick.  For those of your old enough to remember, Pappy Maverick was the father of brothers Bret Maverick and Bart Maverick, on the 50s/60s television show Maverick

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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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