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Cypen & Cypen
April 25, 2013

Stephen H. Cypen, Esq., Editor

1.    A MISGUIDED "SOLUTION" TO A NONEXISTENT PROBLEM:  Keystone Research Center, an independent non-partisan research and policy organization, has issued a scholarly white paper on The High Cost to Taxpayers of Forcing Florida Public Employees Into Lower Quality Retirement Plans.  HB7011 was passed by the Florida House of Representatives on March 22, 2013, approving a major restructuring of Florida's public employee retirement system that would raise cost to taxpayers while forcing teachers, police officers, and other public servants into an inferior retirement plan. SB1392, its companion, passed the Senate Appropriations committee.  (The House and Senate individual plans are significantly different, and a compromise does not appear imminent.)  These bills fly in the face of research and experience in more than a dozen states that have considered or have implemented similar retirement plan changes.  The bills would eliminate for new public employees the option of a guaranteed pension that provides a defined retirement benefit based on the employee's salary and years of service. The proposals would require new employees to join the state's 401(k)-type plan, which defines only the amount contributed by employer and employee each year.  The bills would increase the taxpayer cost of Florida's public-employee pensions by lowering the investment returns on assets of the Florida Retirement System. Even since 2001, a difficult period for financial markets, investment returns have covered two-thirds of costs of public-sector pensions in Florida, lowering pension contributions required by public employers and hence by taxpayers. Under the proposals, pension fund assets would have to be invested in a less risky and more liquid portfolio as remaining plan participants age and retire as a group. Consequently, investment returns would fall -- and the cost to taxpayers rise. The proposals could also harm current members of Florida's defined benefit plan because future financial difficulties for the pension fund could lead to benefit cuts and employee contribution increases beyond those already enacted in 2011.  The policy brief reviews in more detail: 

  • The analytical reasons that pension plan investment strategies change, and investment returns fall, once a defined-benefit plan is closed to new employees. 
  • Studies in 12 states that highlight the decline in investment returns once defined benefit plans stop taking in new hires. 
  • The disappointing real-world outcomes in three states that have closed defined benefit plans to new hires. 

All three types of evidence -- logic, studies in other states and actual experience -- point to the same conclusion: closing Florida's defined benefit pension to new employees will increase the costs of public-sector pensions for taxpayers.  Besides being costly, the move is unnecessary, Florida has one of the best funded defined benefit retirement systems in the country, and its financial condition will improve as the FRS gradually reflects recent financial market gains and the cost savings in Florida's 2011 pension changes.  The report is chock full of facts and figures that are relevant to the current debate.  One key fact caught our attention: since Florida public school teachers already earn a salary nearly $10,000 below the national average (seventh lowest in the nation), lower quality pensions will make more acute the challenge to recruiting effective teachers into every classroom.  Sarabeth Snuggs, is a co-author.  She is former director of the Division of Retirement Services for the State of Florida, which administers the Florida Retirement System.  She retired in December 2012 after 35 years with FRS, and served as Director of FRS Pension Plan for the last nine years of her career.  Read the entire twelve-page gem at
2. MILLIMAN REVISED STUDY REFLECTS 30-YEAR PROJECTION OF OPEN DEFINED BENEFIT PLAN AND IMPACT OF CLOSING THE DEFINED BENEFIT PLAN TO NEW MEMBERS EFFECTIVE JANUARY 1, 2014, INCLUDING PROJECTED BLEND RATES FOR THE NEXT 30 FISCAL YEARS:  Following its February 15, 2013 report (See C & C Newsletter for February 21, 2013, Item 1), Milliman has generated a 30-year projection study of the Florida Retirement System reflecting the defined benefit plan remaining open to new entrants during the entire projection period. This open plan projection can be used as a baseline when evaluating the impact of proposals to close the DB plan to new entrants. It also provides insight into the expected funding progress of the System under current plan provisions. The following are from Milliman’s commentary, which says closing the DB to new members, commonly referred to as a “soft freeze,” would have several results:

  • A soft freeze does not impact the current amount of the unfunded actuarial liability. It reduces the normal cost component of defined benefit funding in future years. 
  • If future members cannot join the DB Plan, the result is a declining DB payroll base on which contributions to fund the DB plan are traditionally made. This would produce increasing contribution rates as a percentage of payroll, as the payroll over the cost of the UAL is spread declines. This would be mitigated based on Florida law continuing to require that UAL contributions also be made by employers of IP members and other DC plan participants. 
  • The UAL component when developing the Annual Required Contribution for financial reporting purposes will increase because GASB would require a different amortization technique. GASB 25 may require that the UAL be amortized using either level dollar amounts, or the amortization must reflect the decrease in DB plan payroll for financial reporting purposes.
  • Over time, the DB plan cost per DB participant would increase as the less expensive shorter service and younger participants are eliminated from participation in the DB plan. 
  • Over time, the State Board of Administration may lose the ability to invest with a long-term perspective as annual cash flow becomes more and more negative. Under a closed plan, as the active population shrinks and the retired population continues to grow, benefit payments will exceed the contributions made to the plan by continually increasing amounts. This will possibly necessitate future changes in asset allocation in order to provide sufficient sources of cash for benefit payments, which in turn could impact the rates of return earned by the Fund’s assets. Although any changes may not necessarily need to occur for many years. This could jeopardize the ability of FRS’s assets to earn the assumed valuation rate of return of 7.75% per annum long-term, thereby putting upward pressure on costs towards the end of the projection period. (The study does not consider the impact of potential asset allocation changes or the impact of the soft freeze on the assumed asset rate of return.)  

The study should not be used to set contribution rates for the 2013-2014 Plan Year.  See the entire 136 page revised study at

3.    THE RETIREMENT GAMBLE -- WHY YOU CANNOT AFFORD TO RETIRE:  For most Americans, traditional retirement is now a pipe dream: six in ten people believe they will have to delay retirement, just 14 percent are very confident they will be able to live comfortably once they stop working and 17 percent believe they will never retire at all.  Who is to blame?  The Retirement Gamble, airing Tuesday, April 23, at 10 p.m. on PBS (check local listings), is an eye-opening investigation of a financial services industry that may be draining your retirement savings with every passing year.  Using his own retirement fund as a case study, correspondent Martin Smith undertakes an investigation that has implications for every working American. Through interviews with Wall Street executives at the helm of the mutual fund industry, professionals of all ages who are trying to navigate the retirement crisis and current and former financial advisers who may or may not have their clients’ best interests at heart, he investigates the rise of the 401(k) -- a product Americans buy without knowing its true cost.  The investigation reveals:

  • On any given street, one household may be paying 10 times as much to invest in a 401(k) as the household next door; 
  • Over the course of a lifetime, a seemingly low annual fee of 2 percent can reduce what your balance would have been by more than 60 percent -- potentially adding years to your working life; 
  • Popular 401(k) providers often charge a plethora of hidden fees, burying them under opaque names like “Expense Ratio;”
  • Many financial advisers are not required to advise their clients what is in their best interest; they are only obligated to give advice that is “suitable”; and
  • The best way to maximize your return might be to cut Wall Street out of the equation, and invest in low-cost, unmanaged index funds.

Whether you are just starting your professional career, or nearing what you hope will be your golden years, The Retirement Gamble is essential viewing if you hope to one day retire.  The program may also be viewed on line at

4.       A FLORIDA CITY MAY IMPOSE FEE WHEN PUBLIC DOCUMENTS ARE DOWNLOADED AND SUBMITTED BY ELECTRONIC MAIL TO REQUESTOR: The Florida Attorney General recently answered substantially the following question:
      May the City of Miami Gardens impose a fee upon the requestor when documents are downloaded and submitted by electronic mail, in lieu  of photocopying?

In sum, the City of Miami Gardens may charge the “actual costs of duplication” for electronic mail forwarded to a public records requestor in lieu of photocopying those records.  When calculating the “actual cost of duplication,” charges may not be made for labor costs or associated overhead costs.  However, section 119.07(4)(d), Florida Statutes, provides that if the nature or volume of public records to be inspected or copied requires the extensive use of information technology resources or extensive clerical or supervisory assistance, or both, the City may charge a reasonable services charge based on the cost actually incurred by the agency for such extensive use of information technology resources or personnel.  The fact that the request involves use of information technology resources is not sufficient to incur the imposition of the special service charge.  AGO 213-03 (January 30, 2013).

5.    WHEN PENSION SYSTEMS ARE UNDER PRESSURE, YOU NEED TO LOOK AT THE BACKSTOP:  Writing in Russell Investments’ “Fiduciary Matters,” Bob Collie says low interest rates and straitened finances continue to put pension systems -- of all types -- under pressure. Some argue public pension plan return assumptions are unrealistically high. One writer said there is almost zero probability that CalPERS will earn the assumed 7.5% on its portfolio anytime soon.  But that statement does not seem right, for a very important reason: returns are uncertain. Maybe CalPERS (or anyone else) will earn 7.5% over the next year or five years or twenty years; maybe they will not. The odds of achieving a 7.5% return are better than zero and less than 100%. And if the assumption were lowered to 3%, the odds would improve, but they would still be better than zero and less than 100%.  This circumstance means that the backstop matters a lot.  In face of the inevitable uncertainty about investment returns, we need to be a lot clearer about just how important is the role of the plan sponsor or other entity left holding the bill in the event of a shortfall. If you assume an aggressive 7.5% and fail to achieve that return, what happens? Who steps in to act as backstop? If you assume a cautious 3% and fail to achieve that, who is the backstop?  The answer to that question has implications both for how a pension system ought to be funded and for how it ought to be invested. In general, a cautious funding regime (with a lower expected rate of return on assets) tends to accompany a cautious investment strategy, and a less-cautious funding regime (with a higher expected return assumption) tends to accompany an aggressive investment strategy. This relationship may seem correct if you consider the aggressive investment strategy is designed to deliver higher returns, and so should require less contribution on average from the plan sponsor.  But when it comes to benefit security, it is not what happens on average that matters, but rather what happens in the bad times. And in the bad times an aggressive investment strategy does not offset an aggressive funding regime -- it compounds it.  So, the higher the return expectation on which the funding regime is based, and the more aggressive the investment strategy, the more important it becomes to think about what happens during those bad periods, or if experience simply turns out below expectations over a long period. Benefit security, in that situation, comes back to the backstop. If the backstop fails, behind the backstop are the participants themselves; their benefits would not be paid. For public plans, the backstop may be (for the lucky ones) the Federal government or (for the less lucky) the city of Prichard, Ala., where pension assets ran out in 2009. The municipality stopped paying benefits, resuming (after a series of court cases) in 2012, at a significantly reduced level. Whether the backstop is willing and able to fulfill its role should be a consideration both in the choice of how to fund the system and in how it is invested. Thus, for example, the Federal government is able to provide effectively no funding at all for some of its pension liabilities -- a state of affairs that would (rightly) not be allowed to happen at plans whose backstops have less deep pockets.  Public pensions happen to be attracting a lot of attention at the moment. But these considerations apply to any pension system. DB pensions are worth protecting, worth getting back onto a sound footing. Re-establishing a firmer foundation for each of these systems will take clear thinking. In all cases, proper analysis of the state of the system needs to take into account not only how the system is funded and how it is invested, but also who the backstop is.

6.       NEW CFTC AND SEC RULES REQUIRE RISK OF IDENTITY THEFT PROGRAMS: The Commodity Futures Trading Commission and the Securities and Exchange Commission are jointly issuing final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. These rules and guidelines implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions’ respective enforcement authorities to address identity theft. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program designed to detect, prevent and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and debit card issuers that are subject to the Commissions’ respective enforcement authorities, to assess the validity of notifications of changes of address under certain circumstances.  The rules are effective thirty days after publication in the Federal Register and Compliance Date is six months after the effective date (approximately November 15, 2013).  [Release Nos. 34-69359, IA-3582, IC-30456]
7.       FLORIDA TEACHERS CHALLENGE EVALUATION SYSTEM AS UNFAIR:  Teachers in Florida filed a lawsuit in U.S. District Court in Gainesville, claiming the state’s new teacher evaluation system is unfair because it partly rates their job performance on test scores of students they do not know and subjects they do not teach.  Backed by local teachers unions and their parent organization, the National Education Association, the suit marks the first time teachers have brought a legal challenge to new evaluation systems that base compensation and job security on student scores.  The union seeks an injunction to halt the system, which the state legislature approved in 2011.   Since 2009, 36 states and the District of Columbia have required that teachers be evaluated in part based on student scores on standardized tests. The idea has received a boost because of Obama administration policies, particularly Race to the Top.  Under federal law, every state tests students annually in reading and math in grades 3 through 8 and once in high school. Those parameters omit other subjects (including art, music, science, health and social studies) and large numbers of younger and older students.  When rolling out new teacher evaluation systems, school districts have faced a predicament: how do you judge teachers who educate students in grades that are not tested or in subjects the tests do not cover.  How do you use math and reading scores to evaluate an art teacher?  Officials in Florida, Tennessee and the District of Colombia decided to evaluate those teachers by using test scores of other teachers’ students.  (Huh?)  The complaint, which was reviewed by the WashingtonPost, can be accessed at
8.       COUNTY VETERANS COURT IS EFFECTIVE:  A specialized court for veterans struggling with addiction and mental illness in Hennepin County, Minnesota, is largely considered a success in its first two years and should continue, according to a study reported by  Of the 131 defendants accepted into the county’s Veterans Court from 2010 to 2012, 83 percent committed fewer offenses after six months in the program, as compared with the six months before entering.  That statistic proves the program is effective and saves taxpayers money.  The cost for a veteran in treatment or a mental health setting is $2,000 to 3,000 per day. The cost is about $25 per day for the same person to be on probation with Veterans Court.  The court, specifically designed to serve veteran defendants through a hybrid of mental health court and drug court models, primarily handles offenses such as drunken driving and domestic assault. Others include terroristic threats, drug possession or property crimes. Forty-one participants graduated, eight were terminated for noncompliance and seven voluntarily withdrew.  Participants must complete chemical dependency treatment and domestic abuse programming.  Nearly all of the participants are men, two-thirds are white and nearly half have been deployed overseas at least once, most commonly to Iraq. Graduates spend an average of 14 months in Veterans Court, and make an average of nine appearances. About three-fourths of graduates have no new offenses at six, 12 and 18 months after entering the program. At 24 months, 56 percent still have not reoffended. Congratulations to Hennepin County’s Veterans Court. 
9.    CAREERBUILDER SURVEY FINDS MOST UNUSUAL THINGS BOSSES HAVE ASKED WORKERS TO DO:  As a general proposition, almost a quarter of workers say that their boss asks them to help out with non-work related tasks.  Here are some real-life examples of the most unusual request received from the boss:  

  • Boss asked employee to be a surrogate mother for her -- more than once.  
  • Boss asked employee to fire boss’s brother. 
  • Boss asked employee to remove her stitches (from where?)
  • Boss asked employee to clip her dog’s nails.   

Sixty-six percent of workers gave their current boss an above-average rating.  And while many workers reported they respect their boss (64%), only 37% said they have learned from him, and one-third feel smarter than their boss. 
10.     ANOTHER TRAGEDY:  Our prayers go out to the families of those who were killed in Boston on April 15, 2013, and to those who were injured. 
11.     REVISED 60’s HITS FOR BABY BOOMERS:   Johnny Nash -- I Can't See Clearly Now. 
12.     PHILOSOPHY OF AMBIGUITY: Is there another word for synonym?

13.     ON THIS DAY IN HISTORY:  In 1951, NY Yankee Mickey Mantle goes 1-for-4 in his 1st game.
14.     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. 
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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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