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Cypen & Cypen
APRIL 7, 2011

Stephen H. Cypen, Esq., Editor

1.      CAN STATE AND LOCAL PENSIONS MUDDLE THROUGH?: A new Issue in Brief from Center for Retirement Research at Boston College asks whether or not state and local pensions can muddle through. Finances of state and local pension plans are headline news almost daily. Indeed, although these plans were moving toward prefunding their promised benefits, two financial crises in ten years have thrown them seriously off course Measured by standards of the Government Accounting Standards Board, between 2008 and 2009 the ratio of assets to liabilities for the sample of 126 plans dropped from 84 percent to 79 percent.  But this decline is only the beginning of the bad news that will emerge as losses are spread over the next several years.  Furthermore, funded levels are closer to 50 percent if liabilities are discounted by a riskless rate, as recommended by some economists and financial experts.  What do these numbers imply for the future of these plans? Here's what is happening.  States and localities have increased contributions and extended retirement ages for new employees, but these changes will take a long time to have any substantial effect.  In most states, constitutional protections and court rulings have prohibited public employers from cutting benefits for existing employees.  Thus, the only option for a quick fix would be an infusion of tax revenues.  However, the recession has decimated tax revenues and increased demand for state and local services. Thus, the question is whether these plans have enough assets to muddle along until the economy and the stock market recover.  Or do they face a liquidity crisis?  The first section of the brief looks at the simple ratio of assets to benefits over time and across plans in 2009. The second section moves to a more dynamic approach and investigates two concepts for estimating when plans would run out of money.  Under a “termination” concept, where benefits earned to date and plan assets are put in an “old” plan and normal cost payments cover all future accruals, most plans have enough assets to last for at least 15 years.  Under a more realistic “ongoing” framework, where normal costs are used to cover benefit payments, most plans have enough for at least 30 years. Just as with private investors, the outlook of public pensions is closely tied to recovery of the economy and the stock market. (Specifically as to Florida, using the “ongoing” method, the Florida Retirement System is literally off the charts – good until beyond the year 2100.) Number 15, March 2011

2.      SEEING THROUGH PENSION TRANSPARENCY ACT: Paul Zorn recently made a presentation for the National Council on Teacher Retirement Legislative Briefing on The Public Employees Pension Transparency Act. PEPTA was introduced into the House of Representatives in December 2010, reintroduced in February 2011 (as H.R. 567) and has 46 co-sponsors (see C&C Special Supplement for February 1, 2011 and C&C Newsletter for February 17, 2011, Item 7). A companion Senate bill with 7 co-sponsors, was introduced as S. 347. The bills would require sponsors of state and local government employee pension plans to report funding information annually to the Secretary of the Treasury.  Governments failing to report this information would lose their ability to issue tax-exempt debt until they comply. In addition, they would prohibit the federal government from accepting any current or future obligations of state and local pension plans. However, the legislation would not alter existing funding standards for state and local plans or require federal funding standards. The following would have to be remeasured if the annual report does not measure assets at fair value or if liabilities are not discounted using U.S. Treasury bond yields: 

  • Schedule of funding status;
  • Alternative projections;
  • Statement of plan investment returns;
  • Degree and manner plan sponsor expects to eliminate current unfunded liability.

As a result, there will be measures substantially different from those used to fund the plan or used for accounting/financial reporting purposes. The Act’s purpose is to remedy the “lack of meaningful disclosure” regarding state and local government pension assets and liabilities. Meaningful disclosure is important, since it is the basis for knowing how much to contribute, what funding progress has been made and whether adequate contributions have been made. However, a strong argument can be made that meaningful disclosure is best determined using conventional actuarial measures, which better reflect the dynamics of funding the plan and better reflect what taxpayers are likely to pay over the long term. Using the approach presented in the proposed legislation would likely provide a distorted picture of plan funding. Late last year, organizations representing state and local governments issued a press statement that critiqued the legislation (see C&C Newsletter for December 9, 2010, Item3): 

  • It is unwarranted, since state and local governments are not seeking a federal “bailout”
  • Many states have already enacted significant legislation modifying their retirement plans
  • It conflicts with existing governmental accounting standards
  • It increases state and local government costs;
  • It undermines investor confidence in the municipal bond market.

Thus, Zorn concludes that rather than providing meaningful measures, the proposed legislation could create a distorted picture of pension liabilities, driven largely by changes in the 30-year Treasury bond yields and, rather than providing transparency, the measures would likely create confusion among decision-makers, potentially leading to abandonment of public pension plans. Bingo. 

3.      STATE RETIREES NOT BUSTING THE BUDGET: It is time to set the record straight about state retirees’ pensions and how much they impact the state budget, says a letter-writer to the Chico (California) Enterprise-Record. Claims that pension costs will bankrupt the government are flat wrong.  California's entire contribution to retirement for state employees is less than 5 percent of the state budget.   Assertions that public employee pensions are funded mainly through tax dollars are simply incorrect.  Nearly every public employee -- office worker, technician, analyst, teacher, firefighter -- pays 7 percent to 10 ten percent toward his pension.  Investment returns from California Public Employees Retirement System pay for the lion’s share of pensions.  The state is paying less as a percentage of payroll in pensions today than it did in 1980!  Less than 1 percent of public retirees (mostly high-ranking officials from counties, cities and other public agencies) have pensions above $100,000.  The average state retiree receives a pension of about $25,000 a year after 20 to 30 years of state service.  Half receive $16,000 per year or less.  Unlike the private sector, many public employees do not receive Social Security, making pensions their sole source of retirement income, other than savings.  “As you can see, most of us are not rich ‘fat cats.’  We're your neighbors and friends, and we share your concerns about the health of the economy.” 

4.      ILLINOIS GOVERNOR SAYS BUDGET-CUTTERS HAVE IT WRONG: For governors cutting education and health care and going after public-sector employees to balance budgets, here is a message from Illinois Governor Pat Quinn:  you are wrong, not mistaken, not misinformed, but just plain wrong. “I don't buy into all these radical cuts in government as a way to make life better for ordinary, everyday people,” Quinn told The governor of our fifth-largest state has made his administration a response to those who charge that government is overlarge and unsustainable.  Don't cut, build instead. There has to be a moral dimension to operation of government. Where there is no vision, the people perish. “We're not letting anybody perish in Illinois.” “Earth to Florida Governor Rick Scott.” 

5.      DEFINING “FIDUCIARY”: Employee Retirement Income Security Act requires plan fiduciaries to act prudently and solely in the interest of the plan's participants and beneficiaries, prohibits self-dealing and provides judicial remedies when violations of these standards cause harm to plans. In enacting ERISA, Congress recognized that security of America's employee benefit plans depends on their fiduciaries. Employee Benefits Security Administration has proposed a rule to recast an existing regulation better to reflect relationships between investment advisers and their employee benefit clients. EBSA is responsible for administering and enforcing fiduciary, reporting and disclosure provisions of Title I of ERISA. ERISA defines a plan fiduciary to include anyone who gives investment advice for a fee or other compensation with respect to any moneys or other property of a plan, or has authority or responsibility to do so. In 1975 the Department issued a 5-part regulatory test for “investment advice” that gave a very narrow meaning to this term.  An investment adviser is not treated as a fiduciary unless each of the five elements of the test is satisfied for each instance of advice. Since the mid-70's, there have been significant changes in the retirement plan community, with more complex investment products, transactions and services available to plans and IRA investors in the financial marketplace, and a shift from defined benefit plans to defined contribution plans. EBSA believes it is time to re-examine the types of advisory relationships that give rise to fiduciary duties, and to update the rigid 1975 regulation so that plan fiduciaries, participants and IRA-holders receive impartiality they expect when they rely on their adviser's expertise. Under the proposed rule, a person gives fiduciary investment advice if, for a direct or indirect fee, he provides:

  • Appraisals or fairness opinions about the value of securities or other property;
  • Recommendations on investing in, purchasing, holding or selling securities; or 
  • Recommendations as to management of securities or other property; 

And meets one of the following conditions:

  • Represents to a plan, participant or beneficiary that the individual is acting as an ERISA fiduciary;
  • Is already an ERISA fiduciary to the plan by virtue of having any control over management or disposition of plan assets, or by having discretionary authority over administration of the plan;
  • Is an investment adviser under Investment Advisers Act of 1940; or 
  • Provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to plan assets and will be individualized to needs of the plan. 

There are limitations recognizing that certain activities should not result in fiduciary status: 

  • Persons who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser or seller on opposite side of the transaction from the plan, rather than providing impartial advice.
  • Employers who provide general financial/investment information, such as recommendations on asset allocation to 401 (k) participants under existing DOL guidance on investment education. 
  • Persons who market investment option platforms to 401 (k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice. 
  • Appraisers who provide investment values to plans to use only for reporting their assets to DOL and IRS.

DOL has encouraged full public participation in this rulemaking process.  The hearing record will remain open until April 12, 2011 for additional comments, arguments or information. 

6.      DOES ANYONE CARE ABOUT THE FINANCIAL SECURITY OF AMERICAN WORKERS IN RETIREMENT?:  Aon Hewitt writes that surely America's retirement crisis is as severe, if not more so, than improving health care coverage for the uninsured.  After all, before Congress passed the health care reform bill, over 85% of Americans were covered by some form of health insurance.  In comparison: 

  • 45% of working Americans are currently not covered by an employer-sponsored retirement plan
  • Participation in Individual Retirement Accounts is a dismal 8%
  • Despite some increase in response to the economic downturn, household savings rates as a percentage of disposable income averaged 1.5% in the U.S. over the past 10 years
  • By 2037, Social Security is expected to pay out 75% of promised benefits to retirees
  • 10% of Americans over age 65 live below the poverty line
  • The number of Americans over age 65 increased from 24 million in 1980 to 39 million in 2010 and is expected to reach 89 million in another 40 years

How worried are policymakers about financial security of working Americans in their retirement years?  Will they address any of the above issues?  And if they do, how will it affect the employer's role as a provider of retirement benefits?  Should employers fundamentally rethink their roles? Space will not permit a detailed analysis of the 10-page paper, so interested readers will have to look for themselves, However, the author does suggest a blueprint for change, including the following steps: 

  • Leverage purchasing power on behalf of employees to provide access to high-quality, low-cost institutional investments.
  • Secure customer-service-oriented vendors with comprehensive financial planning services and risk insurance or solutions (such as annuities, access to retiree health) to help employees manage various post-retirement risks at a lower cost.
  • Implement “financially literate by default” designs to manage behavioral risks and address the consumer knowledge gap by providing adequate information on individual liabilities, funded status of nest eggs, as well as identification and costs of various risks.
  • Provide economic incentives that are simple and easy to understand to help employees fund their nest eggs.

If employers take proactive steps using the blueprint, they may indeed make the first step in solving America's retirement problem.  In addition to cost savings and increased financial security for employees, employers may help avoid sweeping government reform around retirement programs that may very well increase cost and administrative complexities. And while we are at it, let’s try to turn around the Queen Mary by hand. 

7.      OKLAHOMA CITY APPROVES $3.65 MILLION GRANT FOR FIREFIGHTERS: The Oklahoma City Council has given final approval of a federal grant that will pay for 29 firefighter positions. The firefighter union President praised the action to seek the grant, according to It is going to be good for the city, good for the citizens and it is certainly going to help the safety of firefighters. The grant comes from the Federal Emergency Management Agency. The money will allow Oklahoma City to restore firefighter positions lost in July because of budget cuts. 

8.      FORMER CHURCH OFFICIAL SAYS RETIREES MAY HAVE BEEN SHORTCHANGED: A onetime top official of the Catholic Archdiocese of Boston is blasting the church’s handling of pension payments for retired lay church workers, six years after he defended the archdiocese’s management of clergy pensions against criticism. The unusual development, reports, comes shortly after the Daughters of St. Paul sued the archdiocese in an effort to extricate the retirement accounts of the nuns’ lay workers from archdiocesan control (see C&C Newsletter for March 31, 2011, Item 13). The former archdiocesan chancellor, saying he was acting out of moral outrage, disclosed that he had asked State Attorney General and the Secretary of State to appoint an independent trustee to oversee the funds to protect lay workers from being financially harmed by the archdiocese’s handling of the transition from a traditional pension plan to retirement accounts funded largely by employee contributions.  The ex-official also expressed his concerns in a letter to Internal Revenue Service.  He served as chancellor, overseeing the church’s finances, from 2001 to 2006.  In 2005, some Catholics questioned the archdiocese’s handling of contributions to the clergy pension fund.  At the time, the then-official forcefully rebutted the charges, confirming the money was handled appropriately. 

9.      LILLY LEDBETTER ACT RESTORED WHITE POLICE OFFICERS’ RACIAL DISCRIMINATION CLAIM: White police officers who resigned and later were allowed to return to the force were treated as entry-level officers in terms of pay, benefits and seniority. But when an African-American officer who had resigned applied to return, the City Council, expressing an interest in diversity, enacted an ordinance crediting him for his prior years of service. The white officers’ Title VII and Equal Protection Claims have been revived by the retroactive effect of the Lilly Ledbetter Fair Pay Act of 2009, which amends Title VII by providing that the statute of limitations for filing an Equal Employment Opportunity Commission charge alleging pay discrimination resets with each paycheck affected by a discriminatory decision. Also, the court held that the paycheck accrual rule applies to pay discrimination claims under Section 1983. Groesch v. City of Springfield, Illinois, Case No. 07-2932 (U.S. 7th Cir., March 28, 2011). (Thanks to Chuck Carlson for this summary.) 

10.    UNDER PA. LAW, EXCEPT FOR EXTRAORDINARY SITUATIONS, PUBLIC SAFETY OFFICERS ENTITLED TO PRE-ACTION HEARING: In an appeal involving application of the Fourteenth Amendment’s Due Process Clause to suspension of police officers in Pennsylvania, Schmidt, an officer in Pennsylvania’s Capitol Police, claimed that senior officials violated his due process rights when they failed to provide him a hearing before suspending him without pay.  Under Pennsylvania law, police officers and firefighters cannot be suspended or terminated without just cause. The recognition of this property interest in their positions has been applied both to terminations and to suspensions.  Absent extraordinary circumstances, the statute has been interpreted as creating a property interest requiring at least a brief and informal pre-termination or pre-suspension hearing. In the instant case, the District Court held that, despite Schmidt’s property interest in his position, because there was a post-suspension hearing provided by the Collective Bargaining Agreement, no pre-suspension hearing was necessary.  The appellate court has now held that, except for extraordinary situations, under Pennsylvania law, even when union grievance procedures permit a police officer to challenge his suspension after the fact, a brief and informal pre-termination or pre-suspension hearing is necessary.  However, because this rule had not been clearly established at time of Schmidt’s suspension, the appellate court concluded that the officials were entitled to qualified immunity. Schmidt v. Creedon, Case Nos. 09–2051 and 10–1633 (U.S. 3rd Cir., March 29, 2011). 

11.    DC PLAN LEAKAGE PROBLEM ALARMING: Defined contribution plan executives worry about leakage, yet action on stemming the early withdrawal of savings seems to be coming in at a trickle, a new report from Aon Hewitt shows.  Leakage is early withdrawal by participants of money from their retirement accounts for uses other than retirement.  According to the report, reviewed by, leakage includes hardship and non-hardship withdrawals, loans that are eventually repaid, defaulted loans and cashouts.  The last applies to employees who leave their jobs before retirement age, and do not roll over money into another qualified plan or an individual retirement account. In the three broad areas of leakage – withdrawals, loans and cashouts -- plan executives’ actions did not match their claims of concern.  The relative inactivity is a combination of deciding whose problem it is, along with not knowing what to do, which refers to differing attitudes about the role of the plan sponsor and responsibility of the participant.  Cashouts remain a chronic fact of retirement-savings life. The youngest participants and those with the smallest balances are cashing out more often -- and being hurt more in the long run -- than other participants.  Clearly, cashouts are the most injurious behavior by participants to long-term savings. Among plan executives, 74% expressed concern about cashouts, but only 12% said they plan to take action to curb them. Among employees who left a job before retirement age last year, 41.9% cashed out, 29% left their money in the former employer’s plan and 29.1% rolled the balance over to a qualified plan or an IRA. Lots of concern and not much action by plan executives also characterized loans:  94% expressed concern about excessive loan usage, yet only 24% said they planned to act to curb loans. Some 85% of executives interviewed said they were concerned about hardship withdrawals, and 63% said their plans had experienced withdrawal increases in the past two years, but only 12% said they plan to take action to curb withdrawals.   

12.    ASSETS OF PUBLIC-EMPLOYEE SYSTEMS REACH HIGHEST LEVEL SINCE 2008: The U.S. Census Bureau has released its Quarterly Summary of the Finances of Selected State and Local Government Employee Retirement Systems. For the 100 largest public-employee retirement systems in the country, total holdings and investments were up two consecutive quarters.  With a quarter-to-quarter increase of 5.5 percent, total holdings and investments rose from $2,498.6 Billion in third quarter of 2010 to $2,636.6 Billion in the fourth quarter of 2010, reaching the highest level since the second quarter of 2008.  Total holdings and investments continued to show a year-to-year increase for the fifth consecutive quarter, rising 7.6 percent from $2,451.4 Billion in the fourth quarter of 2009. Specifically: 

  • Holdings of corporate stocks were up 4.4 percent, from $819.1 Billion in the fourth quarter of 2009 to $855.1 Billion in the fourth quarter of 2010. 
  • Corporate bonds were up 0.6 percent, from $428.9 Billion in third quarter of 2010 to $431.5 Billion in the fourth quarter of 2010. 
  • International securities reached the highest level since the beginning of this investment category's data collection 8 years ago, increasing 6.8 percent from $452.0 Billion in the third quarter of 2010 to $482.8 Billion in the fourth quarter of 2010.
  • Federal government securities fell 3.2 percent, from $164.1 Billion in the third quarter of 2010 to $158.8 Billion in the fourth quarter of 2010. 
  • Employee and government combined contributions totaled $32.0 Billion in the fourth quarter of 2010, an increase of 18.1 percent from $27.1 Billion last year. 

These 100 systems comprised 89.4 percent of financial activity among such entities. 

13.    EEOC SUES NEW YORK TOWN FIRE COMPANIES FOR AGE DISCRIMINATION: Volunteer fire companies in the Town of Clarence, New York, violated federal law by preventing older firefighters from accruing service credits because of their age, the U.S. Employment Opportunity Commission charged in a lawsuit. The suit alleges that between 1992 and 2006 four fire companies for the Town of Clarence unlawfully prohibited volunteer firefighters, once they reached a certain age, from accruing service award credits toward their “length of service award programs,” the equivalent of a retirement pension. The fire companies cut off service credit at age 62, which resulted in firefighters who continued to work past that age losing pension amounts. EEOC argues that this action violates Age Discrimination in Employment Act, a federal law that protects workers age 40 and older from age discrimination. Although the fire companies amended their respective LOSAP’s in January 2006 to allow firefighters to earn service credits regardless of age, the companies did not retroactively award credits or increase pension amounts for firefighters who were denied credit from 1992 until 2006. After first attempting to reach a pre-litigation settlement with the companies, EEOC filed suit in U.S. District Court for the Western District of New York to require them to award the credits and pay the affected firefighters or their beneficiaries. This action is not the first one taken by EEOC in this area (see C&C Newsletter for March 3, 2011, Item 4). U.S. Employment Opportunity Commission Press Release 3-31-11. 

14.    FIRST QUARTER PENSION FUNDING RATIOS UP FIVE PERCENT: reports that pension funding ratios increased approximately 5% in the first quarter of 2011, following a 10% rise in the fourth quarter of 2010, leading to an estimated first quarter of 2011 funding of 90% on average. The new data come from Legal & General Investment Management America and its Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan. 

15.    REMARKABLE QUOTES FROM REMARKABLE JEWS: Too bad that all the people who know how to run this country are busy driving taxis and cutting hair. George Burns

16.    BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  I Have a Degree in Liberal Arts; Do You Want Fries With That? 

17.    PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):   Why does someone believe you when you say there are four billion stars, but check when you say the paint is wet? 

18.    QUOTE OF THE WEEK:    “Deep summer is when laziness finds respectability.” Sam Keen

19.    ON THIS DAY IN HISTORY: In 2003, U.S. troops capture Baghad; Saddam Hussein’s regime falls two days later. 

20.    KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items? Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources. 

21.    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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