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Cypen & Cypen
MAY 11, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


Ten years ago, in May, 1996, at the urging of a few client-trustees, we inaugurated our Newsletter. At the time, we assumed that we might have enough material for a periodic Newsletter, perhaps monthly, perhaps quarterly. Well, we started out monthly and sustained that pace for seven years. Since then, the amount of information out there has made a weekly Newsletter appropriate. And since then, we have gone from a hard-copy mailed to a few trustees to an e-mail version, sent electronically to subscribers all over the world. One further point, in case you are wondering: we do not purchase a “canned” Newsletter and slap our name on it. On the contrary, the Newsletter is personally written by your Editor, after scouring dozens of sources on a daily basis. Our Editor reads a multitude of materials, just so you don’t have to read them. We hope you enjoy the Newsletter and will continue to for years to come. If you do, please tell your friends and colleagues. We always welcome constructive criticism and ideas for articles. Our editorial policy is to correct errors or misstatements as soon as they are brought to our attention and verified.


In 2004 the average annual income of men over age 65 was $32,420.00, whereas women earned only $17,124.00. Employers’ health care costs rose 6.1% in 2005, as business spent an average of $7,089.00 per worker on health coverage. A recent survey has found that 75% of baby boomers are not confident about their retirement years. Health care costs fueled the low confidence rate.


We just reviewed the 2006 Social Security Trustees Report (see C&C Newsletter for May 4, 2006, Item 5). However, a recent New York Times editorial provides an interesting perspective. Buried in the newly-released 2006 Annual Report on Social Security, there is good news on the program’s long-term health. But do not expect to hear President Bush talking about it. His main comment on the new report is that the system is “going broke.” Apparently he still wants people to believe that their only options are ending up with nothing from the government in old age or relying on financial markets. That is a false choice and Americans recognized it as such when they rejected his push last year for private accounts. Projected “cost rates” in this year’s report show smaller annual deficits in Social Security than had previously been assumed, starting around mid-century. The 75-year projection ends in 2080 with a shortfall that is less than last year’s estimates by $57 Billion, in today’s dollars. That is important, because the smaller the deficit, the less drastic the reforms needed to keep the program going strong. The deficit is lower because government statisticians now assume that American women will have two children, on average, versus an earlier estimate of 1.95. The happy result for Social Security is that more taxpayers will make for a healthier system. This is not to suggest that increased fertility is the key to strengthening Social Security. It obviously helps, as would more immigration or stronger wage growth. What the big impact of small adjustments shows is that Social Security is a dynamic system, adaptable to the 21st Century. Currently, it is able to pay full benefits until 2040. Reforms that are enacted between now and then must be structured to take advantage of shifts that work in the system’s favor, and to protect against those that do not. To that end, phasing in a modest package of benefit cuts and tax increases over the next several decades is the best way to ensure that the system will not come up short a generation from now.


In 1971, fourteen years after Omaha declared that its fire department would be racially integrated, it instituted the first of a series of affirmative action plans for the department. Pursuant to the fire department’s promotion process, candidates who pass both a written and a practical test are placed on an eligibility list in rank order of their scores. When a promotion position opens, the fire department’s personnel director sends the names of the top five candidates on the eligibility list to the fire chief. If there are multiple openings, the personnel director refers three times as many candidates as there are openings. In the event that there are several candidates tied for the last referral position, the personnel director refers them all. If a position is underutilized, the personnel director is required to refer minority candidates from the eligibility list who are not among the top three candidates. The fire chief individually reviews each of the candidates referred to him by the personnel director based on test scores, ranking, seniority, educational background, discipline record, job performance and attendance. When there is an underutilization, race is also taken into account by the fire chief. Non-minority firefighters appealed the district court’s grant of summary judgment on their reverse discrimination claim against the city. On appeal, the United States Court of Appeals for the Eighth Circuit reversed. In determining whether a race-conscious remedy is narrowly tailored, the court looks at factors such as efficacy of alternative remedies, flexibility and duration of the race-conscious remedy, relationship of the numerical goals to relevant labor market and impact of the remedy on third parties. In examining these factors, the court must ensure that racial classifications are not used any more broadly than the asserted compelling interest requires. To ensure narrow tailoring, the court must conduct “a most searching examination” requiring “the most exact connection between justification and classification.” Here, the relationship of Omaha’s numerical goals to the relevant labor market is not sufficiently exact to withstand this searching examination. Because Omaha employs use of racial classifications in situations where there is no identified past discrimination, its affirmative action plan, as applied to promotional decisions, is not narrowly tailored to further the goal of remedying past discrimination. Kohlbek v. City of Omaha, Case No. 04-2060 (U.S. 8th Cir., May 1, 2006).


Military personnel, as well as civilian public safety officers, risk their lives and face the prospect of incurring disabilities as they protect and defend the general public on a daily basis. To help assess the appropriateness of disability benefits available to military personnel, Congress mandated that the United States Government Accountability Office study the disability benefits available to federal, state and local government employees who serve the public in high-risk occupations and are injured in line of duty. In response, GAO compared disability benefits available to military personnel with disability benefits payable to civilian PSOs at the federal level, and in six states and six cities that were selected to illustrate the range of benefits provided. The study focused on benefits provided to law enforcement officers and firefighters at the federal level, to state police at the state level and to firefighters at the local level. For each program included in the review, GAO identified benefits available for temporary disability, permanent partial disability and permanent total disability, and then calculated the lifetime present value of benefits provided to various hypothetical individuals in different circumstances. GAO found that neither military personnel nor any of the civilian PSOs included in the study consistently have more line-of-duty disability benefits available to them in all situations. The report highlights the variation in type and amount of benefits provided across programs, depending on specific program provisions and individual circumstances. For example, during the initial period of treatment, recovery and evaluation, program provisions governing availability of continuation of pay and temporary disability benefits offer certain advantages for military servicemembers compared with selected civilian PSOs. When disabilities are permanent, however, the amount of benefits provided over a lifetime for permanent partial or totally incapacitating disabilities are sometimes greater for military veterans and sometimes greater for the selected civilian PSOs, depending on such variables as type and degree of impairment and the individual’s pre-injury salary level. GAO-06-4 (April 7, 2006).


Organizations that provide seller-funded down-payment assistance to home buyers do not qualify as tax-exempt charities, Internal Revenue Service said in a ruling released May 4, 2006. Down-payment-assistance programs provide cash assistance to homebuyers who cannot afford to make the minimum down payment or pay the closing costs involved in obtaining a mortgage. Such programs can qualify as tax-exempt charitable and educational organizations under Internal Revenue Code Section 501(c)(3) when properly structured and operated. In the ruling, IRS provides a detailed discussion of the guidelines. The ruling makes clear that seller-funded programs are not charities because they do not meet requirements of Section 501(c)(3). Increasingly, IRS has found that organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangement. In a typical scheme, there is a direct correlation between amount of the down-payment assistance provided to buyer and payment received from seller. Moreover, seller pays the organization only if the sale closes, and the organization usually charges an additional fee for its services. IRS is increasingly concerned with organizations that are taking advantage of homebuyers who need assistance for a down payment to realize the American dream of homeownership. So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the image of honest, legitimate charities. IR-2006-074 (May 4, 2006).


Wilshire Associates Incorporated has issued its 11th report on the financial condition of state-sponsored defined benefit retirement systems, based upon data gathered from the most recent financial and actuarial reports provided by 125 retirement systems sponsored by the 50 states and the District of Columbia. The following are from the Summary of Findings:

  • Wilshire estimates that the ratio of pension assets-to-liabilities (funding ratio) for all 125 state pension plans was 87% in 2005, up from an estimated 86% in 2004.
  • For the 58 state retirement systems that reported actuarial data for 2005, pension assets and liabilities were, respectively, $612.8 Billion and $762.4 Billion. The funding ratio for these 58 state pension plans was 80% in 2005, up from 79% for the same plans in 2004.
  • For the 58 state retirement systems that reported actuarial data for 2005, pension assets grew 8.3%, or $47.1 Billion, from $565.7 Billion in 2004 to $612.8 Billion in 2005, while liabilities grew 6.3%, or $45.2 Billion, from $717.2 Billion to $762.4 Billion. The slightly faster pace in rising asset values compared with the continued steady growth in liabilities for the 58 state pension plans led to a modest reduction in the aggregate shortfall, as the $151.5 Billion shortfall in 2004 narrowed to a $149.6 Billion shortfall in 2005.
  • For the 104 state retirement systems that reported actuarial data for 2004, pension assets and liabilities were, respectively, $1,538.8 Billion and $1,799.9 Billion. The funding ratio for all 104 state plans was 85% in 2004.
  • Of the 58 state retirement systems that reported actuarial data for 2005, 84% have market value of assets less than pension liabilities or are “underfunded.” The average underfunded plan has a ratio of assets-to-liabilities equal to 77%.
  • Of the 104 state retirement systems that reported actuarial data for 2004, 87% are “underfunded.” The average underfunded plan has a ratio of assets-to-liabilities equal to 81%.
  • State pension portfolios have a 67.7% average allocation to equities, including real estate and private equity, and 32.3% allocation to fixed income. The 67.7% equity allocation is slightly higher than the 65.3% equity allocation in 2001. The increasing equity allocation suggests that pension plans remain committed to stocks.
  • Asset allocation varies widely by retirement system. Thirty-three of 125 retirement systems have allocations to equity that equal or exceed 75% and six systems have equity allocations below 50%. The 25th and 75th percentile range for equity allocation is 62% to 75%.
  • Finally, Wilshire forecasts a long-term median plan return equal to 7.7% per annum, which is .3 percentage points below the median actuarial interest rate assumption of 8%.


According to a short piece from, U.S. companies cannot continue providing pensions that adequately cover their employees’ retirement years, although reducing benefits may hurt recruiting. Nearly three in four of 3,100 respondents in a survey of the American Institute of Certified Public Accountants said they did not think U.S. companies could continue providing employees with pensions. More than half indicated that the erosion of these benefits would hurt recruiting and retention efforts. About 57% believe that rising health care costs are the biggest barrier to a company’s ability to offer pension benefits. Of the respondents in the survey, 60% work for private companies and 21% are employed in public corporations. The remaining respondents are in the not-for-profit and government arenas. Virtually all respondents said their companies offer some type of retirement benefit, but the majority are offering a 401(k) plan with matching contributions. Less than 5% said their companies offer no retirement plan.


“Human beings are the only creatures on Earth that allow their children to come back home.” Bill Cosby

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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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