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Cypen & Cypen
NEWSLETTER
for
April 5, 2012

Stephen H. Cypen, Esq., Editor

1.     FLORIDA PERC DEFINES “FINANCIAL URGENCY”:    Section 447.4095, Florida Statutes, provides: 
 
In the event of a financial urgency requiring modification of an agreement, the chief executive officer or his or her representative and the bargaining agent or its representative shall meet as soon as possible to negotiate the impact of the financial urgency.  If after a reasonable period of negotiation which shall not exceed 14 days, a dispute exists between the public employer and the bargaining agent, an impasse shall be deemed to have occurred, and one of the parties shall so declare in writing to the other party and to the commission.  The parties shall then proceed pursuant to the provisions of s. 447.403.  An unfair labor practice charge shall not be filed during the 14 days during which negotiations are occurring pursuant to this section. 
 
In a recent appellate decision (see C&C Newsletter for June 9, 2011, Item 1), the Florida Public Employees Relations Commission was charged to define the term “financial urgency.”  Now, PERC has responded by defining financial urgency as a financial condition requiring immediate attention and demanding prompt and decisive action, which requires modification of an agreement; however, it is not necessarily a financial emergency or a bankruptcy.  Determination of financial emergency requires a close examination of the employer’s complete financial picture on a case-by-case basis.  Resolving a financial urgency case requires a finding that the financial condition of the employer constituted a compelling governmental interest, which required immediate modification of the parties’ agreement.  When invoking Section 447.4095, Florida Statutes, the employer is held to the standard of good faith as defined in Section 447.203(17), Florida Statutes.  Good faith is a matter of intent; it is a state of mind that is usually determined by inference from a party’s conduct.  Walter E. Headley, Jr., Miami Lodge #20, Fraternal Order of Police, Inc. v. City of Miami, Case No. CA-2010-119 (FPER March 27, 2012). 
 
2.      FLORIDA ATTORNEY GENERAL OPINES ON FIREFIGHTER/POLICE OFFICER PENSION BOARD MAKE-UP:  The Florida Attorney General has issued advisory legal opinion as follows:  

  • The City of North Miami Beach may not, by ordinance, add criteria for selection of the Police and Firefighters Pension Plan Board’s fifth member. 
  • No provisions of Chapter 175 or 185, Florida Statutes, would preclude amendment of the city’s ordinance to add an interest-based or constituency-based provision defining what constitutes a quorum of the board of the Police and Firefighters Pension Plan Board. 

As to the first answer, Section 185.05(1), Florida Statutes, does not impose any qualifications on the “fifth member” of a board of trustees of a local law plan.  However, subsection (7) of Section 185.05, Florida Statutes, specifically provides that the provisions of this section may not be altered by a participating municipality operating a chapter or local law plan.  Thus, the statutory scheme relating to composition of the board of trustees for firefighter and police pensions may not be altered by a municipality participating in a local law plan, such as the City of North Miami Beach.  Based on the clear language of Section 185.05(7), Florida Statutes, which states that participating municipalities operating either a chapter or local law plan are precluded from altering provisions of Section 185.05, Florida Statutes, the City of North Miami Beach may not by ordinance add criteria for selection of the Police and Firefighters Pension Plan board’s fifth member to a municipal ordinance.  The addition of such criteria would effectively alter the provisions of Section 185.05, Florida Statutes, in contradiction of Section 185.05(7).  The second answer deals with provisions defining what constitutes a quorum of the board, particularly interest-based or constituency-based quorum requirements.  (An interest-based quorum is one determined according to presence or representation of various constituencies.  It is also called a constituency-based quorum.)  The proposed North Miami Beach ordinance would require that a city resident member of the board and a plan member of the board be present in order to constitute a quorum.  No provision of either Chapter 175 or 185, Florida Statutes, prescribes composition of a quorum for purposes of conducting business.  While the City of North Miami Beach may not alter provisions relating to voting, in the absence of any provision in these chapters delineating quorum requirements, it would appear that this is a subject matter upon which the City may legislate.  We would agree with the first answer but disagree with the second.  AGO 2012-05 (January 25, 2012).  
 
3.      PENSIONS FIND RISKIER FUNDS NOT WORTH IT
:   Searching for higher returns to bridge looming shortfalls, public workers’ pension funds across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds, according to The New York Times.  But while their fees have soared, the returns have not.  In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.  A sampling presented an unflattering portrait of alternative bets:  over a five year period, funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of funds that largely avoided the riskier assets.  They also paid nearly four times as much in fees. 
 
4.      CHALLENGES OF HEDGE FUNDS AND PRIVATE EQUITY INVESTING:     U.S. Government Accountability Office has issued a report entitled “Recent Developments Highlight Challenges of Hedge Fund Private Equity Investing.”  While plan representatives GAO contacted generally stated that their hedge fund and private equity investments met expectations in recent years, a number of plans experienced losses and other challenges, such as limited liquidity and transparency.  National data indicated that hedge fund and private equity investments were significantly affected by the 2008-2009 financial crisis, and plans and experts GAO contacted indicated that pension plan investments were not insulated from losses.  Most of the 22 plan representatives GAO interviewed said that their hedge fund investments met expectations overall, despite, in some cases, significant losses during the financial crisis.  A few plan representatives, however, expected hedge fund investments to be much more resilient in turbulent markets, and found the losses disappointing.  Given the long-term nature of private equity investments, almost all of the representatives were generally satisfied with these investments over the last 5 years.  Some plan representatives described significant difficulties in hedge fund and private equity investing related to limited liquidity and transparency, and the negative impact of actions of other investors in the fund --sometimes referred to as co-investors.  For example, representatives from one plan reported they were unable to cash out of their hedge fund investments due to discretionary withdrawal restrictions imposed by the fund manager, requiring them to sell some of their stock holdings at a severe loss in order to pay plan benefits.  Most plans have taken actions to address challenges related to their hedge fund and private equity investments, including allocation reductions, modifications of investment terms and improvements to the fund selection and monitoring process.  National data reveal that plans have continued to invest in hedge funds and private equity -- for example, one survey revealed that the percentage of large plans investing in hedge funds grew from 47 percent in 2007 to 60 percent in 2010 -- and most plans have also maintained or increased their allocations to these investments.  However, most plans have adjusted investment strategies as a result of recent years’ experiences.  For instance, three plans have reduced their allocations to hedge funds or private equity.  Other plan representatives also took steps to improve investment terms, including more favorable fee structures and enhanced liquidity.  Nevertheless, some plan representatives and experts indicated that smaller plans would likely not be able to take some of these steps.  The Department of Labor has provided some guidance to plans regarding investing in derivatives, but has not taken any steps specifically related to hedge fund and private equity investments.  In recent years, other entities have addressed this issue.  For example, in 2009, the President’s Working Group on Financial Markets issued best practices for hedge fund investors. Further, both GAO and a Department of Labor advisory body have recommended that the department publish guidance for plans that invest in such alternative investments.  To date, it has not done so, in part because of a concern that lack of uniformity among such investments could make development of useful guidance difficult.  In 2011, the Department of Labor advisory body specifically revisited the issue of pension plans’ investments in hedge funds and private equity, and a report is expected later this year.  GAO-12-324 (February 16, 2012)
 
5.      TRADITIONAL ACTIVE MANAGERS MAY LOWER FEES:  Active equity and bond managers are cutting fees on some institutional strategies, joining their more costly alternative investment management counterparts in offering savings to belt-tightening pension funds.  According to pionline, these actions may just be the beginning.  A protracted period of low returns would increase pressure on investment managers -- especially those without consistent outperformance -- to reduce fees.  Factors such as maturing pension funds’ need to use returns to pay benefits instead of reinvesting them, aggregation of asset owners and competition among managers for declining asset pools are also putting pressure on mainstream managers to cut fees.  While some managers are willing to renegotiate fees, others are opening investment shops that cite lower fees as a differentiator designed to win institutional business.  However, consultants caution that fee declines to date in mainstream asset classes have been minimal, and good managers that can deliver strong performance will be able to charge reasonable fees in almost any environment.  
 
6.      WHEN IS A RETIREMENT NOT A RETIREMENT:   Internal Revenue Service recently issued a Private Letter Ruling that concluded employees who “retire” on one day in order to qualify for a benefit under a plan, with the explicit understanding between the employee and employer that they are not separating from service with the employer, are not legitimately retired.  Accordingly, because these employees would not actually separate from service and cease performing services for the employer when they “retire,” these “retirements” could not constitute a legitimate basis to allow participants to qualify for early retirement benefits (which are then immediately suspended).  Such “retirements” will violate Section 401(a) of the Internal Revenue Code, and result in disqualification of the plan.  However, in accordance with Section 401(a)(36) of the Internal Revenue Code, employees who have attained age 62 upon benefit commencement may qualify for and receive an early retirement benefit under the plan while they continue in employment.  Two points of interest:  (1) the regulations provide that an employee may demonstrate that the employer and employee reasonably anticipated that the employee would cease providing services, but, that, after the original cessation of services, circumstances caused the employee to return to employment and (2) Section 401(a)(36) of the Internal Revenue Code provides that, for plan years beginning after December 31, 2006, a pension plan does not fail to qualify solely because the plan provides that a distribution may be made to an employee who has attained age 62 and who has not separated from employment at time of distribution.  Finally, as is the usual case, the ruling letter is directed solely to the taxpayer who requested it and may not be used or cited by others as precedent.  PLR 201147038 (November 18, 2011). 
 
7.      FEDERAL COURT INVALIDATES PORTIONS OF WISCONSIN PUBLIC EMPLOYEE LAW:   With the passage of the 2011 Wisconsin Act 10, denominated the “Budget Repair Bill,” the State of Wisconsin took a sweeping right turn from a half century of developments in the rights of its public employees to unionize, collectively bargain and collect union dues.  Plaintiffs, representing seven of Wisconsin’s largest public unions, did not challenge the exercise of political will by the Legislature or Governor, apparently acknowledging that the wisdom of this change is for the court of public opinion -- a forum where heated discourse and recall elections continue.  Instead, on Equal Protection and First Amendment grounds, plaintiffs challenged the law’s creation and treatment of two new classifications of public employees:  “general” and “public safety.”  Under Act 10, the state left the rights of public safety employees to unionize and collectively bargain unchanged, while general employees lost most of these rights.  Plaintiffs challenged three specific provisions of Act 10 impacting only general employees and their unions:  (1) elimination of mandatory dues and fair share fees and stripping of all collective bargaining rights, except on “total base wages;” (2) the apparently-unprecedented requirement for annual recertification by an absolute majority of union members (as opposed to conditional or member-driven recertification by a simple majority of those actually voting); and (3) a prohibition on voluntary withholding of union dues from a general employee’s paycheck.  Plaintiffs filed a motion for summary judgment and the state moved for judgment on the pleadings.  Relying principally on the modest protections afforded by the Equal Protection Clause, plaintiffs argued no rational basis existed for the general and public safety classifications, other than the award of naked political patronage -- the primary beneficiaries of the “public safety” classification being unions that publicly and monetarily supported Governor Walker’s November 2010 election.  The state, on the other hand, contended that creation of a new class of public safety unions and exempting those unions and their members from extensive changes in the rights of Wisconsin’s other public employee unions and their members was rationally related to the legitimate government interest of preventing disruption of essential government services.  The sole issue before the court, therefore, was whether the State’s dismantling of public union rights in piecemeal fashion implicated constitutional protections.  Plaintiffs asserted two causes of action:  (1) an Equal Protection claim as to all three challenged provisions in Act 10; and (2) a First Amendment claim as to the prohibition on automatic dues withholding for members of general employee unions.  The court found that plaintiffs did not met their burden with respect to their Equal Protection challenge to Act 10’s principal provisions limiting collective bargaining rights of general employees and their unions.  The state, however, did not articulate, and the court could not articulate, a rational basis for picking and choosing from among public unions, those (1) that must annually obtain an absolute majority of its voluntary members to remain in existence or (2) that are entitled to voluntary, assistance with fundraising by automatic deduction, at least not a rational basis that does not offend the First Amendment.  So long as the State of Wisconsin continues to afford ordinary certification and dues deductions to mandatory public safety unions with sweeping bargaining rights, there is no rational basis to deny those rights to voluntary general unions with severely restricted bargaining rights.  Accordingly, the court (1) granted the state’s judgment on those claims challenging restrictions on collective bargaining rights of general employee unions on Equal Protection grounds and (2) granted plaintiffs summary judgment on their claims challenging annual, absolute majority union recertification and denial of voluntary union dues deductions as to general employee unions on Equal Protection and First Amendment grounds.  The court entered appropriate relief:  an injunction requiring a return to automatic dues deductions for all members of public unions no later than May 31, 2012, which should give sufficient time for defendants to seek a stay of the injunction from the Seventh Circuit Court of Appeals; and for the state to adopt a workable procedure to return to automatic deductions should the Seventh Circuit deny a stay; while balancing the plaintiffs’ and their now-voluntary members’ rights to a return to payroll deductions.  Consistent with the above, the court also immediately enjoined Act 10’s annual, mandatory recertification of general employee unions by an absolute majority of their members. Wisconsin Education Association Council v. Walker, Case No. 11-cv-428 (WD Wis., March 30, 2012). 
 
8.      GOLF WISDOMS:    The statute of limitations on forgotten strokes is two holes.          
 
9.      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.):  “When we have freedom, we do the wrong thing.” - Drew Conley     
 
10.    QUOTE OF THE WEEK:   “A happy ending is often a question of a timely departure.”  Koos Van Zomeren 
 
11.    ON THIS DAY IN HISTORY:  In 1993, Florida Marlins first game – beat L.A. Dodgers 6-3. 
 
12.    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. 
 
13.    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 http://www.cypen.com/subscribe.htm.  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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