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Cypen & Cypen
NEWSLETTER
for
MAY 5, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. NCPERS BATTLES AGAINST PRIVATIZATION OF RETIREMENT:

National Conference on Public Employee Retirement Systems is totally involved in the battle to stop privatization of public pension benefits by eliminating defined benefit plans and totally replacing them with defined contribution plans. NCPERS has published the following myths and facts about privatizing public employee retirement in California:

Myth 1 - Public employee pension costs are devastating government budgets throughout California.
Facts - Despite the misleading statements, privatizing pensions will not balance state or local budgets. In fact, forcing new employees into private stock market retirement accounts will actually create huge transition costs of over $7.6 Billion for California’s teacher and public employee pension systems.

Myth 2 - Throughout the state, important services are being cut to make mandatory pension payments.
Facts - The problem with the state and local budgets is not pensions. The problem is with the revenue side of the budget, which relies almost solely on booming personal income and the stock market. So, in times of economic downturn, government budgets go down too. The state, for example, made no pension payments for certain employees in 2000, but, when the stock market performed poorly, had to pay over 14% of payroll in 2004.

Myth 3 - At the statewide level, California’s two largest pension funds, CalPERS and CalSTRS, are each underfunded by more than $20 Billion.
Facts - In reality, unfunded liabilities are normal and acceptable for the funds, which were recently overfunded at a rate of 123.5%, resulting in employers cutting their contributions by over $6 Billion. Over the last ten years, employer contributions to CalPERS averaged only 11.7%, with employees contributing 11.5% and the market earning 76.8% of the income that goes to the pension fund.

Myth 4 - But increasingly, due to union backed changes in the law over the last seven years, public employees are retiring on lavish pensions.
Facts - Some 400,000 retired California school employees, police, firefighter, garbage workers and health professionals receive an average CalPERS benefit of $19,128.00 per year, barely above the national average of $18,000.00 for public employees. Given California’s high cost of living, such pensions are hardly lavish. The average age for retirement from public service in California is 60.

Myth 5 - Public employees are double dipping and getting both fat retirements and Social Security payments.
Facts - Many public employees, including most municipal workers and teachers, do not enjoy the benefits of Social Security.

Myth 6 - During the last twenty years, most private sector companies have moved their retirement programs from defined benefit that provide retirement benefits based upon a formula of years employed and final service to 401(k)-type plans that match employee contributions to their own account.
Facts - The majority of large private sector companies have a defined benefit plan similar to public pension plans. Since 1985 the number of large employers offering a defined benefit plan as the primary retirement vehicle has increased. The National Association of State Retirement Administrators reports that only 17% of Fortune 100 companies have a 401(k) style plan as the primary retirement plan.

Myth 7 - Employees have an opportunity for increased retirement income based on their investment decisions.
Facts - A 2004 independent study found that CalPERS added more value to its investments at a lower cost than other large pension funds. According to the San Francisco Chronicle, the median DC plan return from 1990 to 2002 was only 6.86%, compared to CalPERS’s return of 8.9%. When costs are deducted, the story is even clearer: 4.86% v. 8.53% for CalPERS.

Myth 8 - Portability features provide a potential for more retirement income for employees who have several changes during their careers.
Facts - According to an independent human resources consulting firm’s study, 57% of employees who leave their companies choose cash payouts -- including monies contributed by the employer -- rather than rolling the funds over to their next employer’s retirement plan. Further, as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, member contributions to a DB plan now offer similar portability to DC plans.

Myth 9 - This reform proposal will not impact the benefits promised to any current public employee or retiree.
Facts - Current employees are also at risk, because even though benefits will not change, the cost to provide those benefits will rise. Current benefits are partially funded by the revenue stream from newer, younger employees entering the system. The privatization plan dries up this revenue stream, creating a huge unfunded liability. Thus, as the system seeks to absorb lower returns and increased costs, employees could be affected by increased contributions, decreased cost-of-living benefits and reduced future raises that must be used for new pension-related costs.

Although we read elsewhere that Governor Schwarzenegger’s plan is pretty much finished for now, NCPERS wants to make sure that the plan is dead and buried.

2. THE IMPORTANCE OF OVERSIGHT IN PENSION RISK MANAGEMENT:

Contemporary pension plans must hurdle a variety of political and cultural obstacles to implement effective risk management frameworks, but there is light at the end of the tunnel. Writing in the current issue of “Global Association of Risk Professionals,” Dr. Susan M. Mangiero dissects this evolving landscape and offers practical advice on risk controls, technology and staffing. Although the term “risk management” means different things to different people, for purposes of this piece, Dr. Mangiero defines it as the management of multiple risk types -- such as financial, operational and legal -- and assumes some use of derivatives. The author suggests a “Five C” Approach to Risk ManagementK:

Commitment - Ensure that adequate resources are made available to support risk management activities. Promote an organization-wide risk management culture that results in appropriate compensation and operational policies and procedures.

Comprehension - Ensure that all relevant staff members sufficiently understand risk management basics, including the interdependence among departments, to avoid unnecessary losses. Promote risk management best practices.

Controls - Mitigate the adverse effects of rogue trading. Stem losses before they get too large.

Computers - Review risk-adjusted performance and possibly revise strategies. Identify trading limit violations. Improve fund governance.

Communication - Ensure budgetary approval for risk management resources. Instill confidence in beneficiaries and regulators that the plan is well managed.

If a plan has no risk management process in place, now is the time to move forward. For those organizations with an established process, a review and possible revision are in order. Regardless of where fund trustees currently stand with respect to risk control, detailed documentation and justification are crucial. Incidentally, Dr. Mangiero is also the author of Risk Management for Pensions, Endowments, and Foundations, published earlier this year.

3. FLORIDA AGO ANSWERS PUBLIC RECORDS QUESTIONS:

The Florida Attorney General has answered the following questions concerning Chapter 119, Florida Statutes, the Public Records Law:

1. A city is authorized to retain a monetary deposit collected in connection with making copies to comply with the public records request if the requesting party subsequently advises the city that the copies are no longer needed.

2. In the circumstances of question 1 above, the city can bill a requester for any shortfall between the deposit and the actual cost of copying the public records. (The clerk must also refund any amount originally collected as a deposit if the final copying fee is less than the amount collected as a deposit.)

3. A city should determine the length of time copies will be maintained after a public records request is fulfilled but delivery is not made.

4. The above matter (and others, such as time of payment and deposit requirements) should be addressed in a public records request policy.

A standardized policy would facilitate the purpose of the Public Records Law to provide public access and would ensure that all members of the public are treated equally when a city is responding to public records requests. AGO 2005-28 (April 28, 2005). We are available to assist governmental clients in creating and formalizing such policy.


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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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