Cypen & Cypen
MAY 22, 2008
Stephen H. Cypen, Esq., Editor
Standard & Poor’s reports that in 2007 S&P 500 pension plans returned to over funding, with $63 Billion in excess assets. The markets and economy have slowly recovered from the 2000-2002 bear market and 2001 recession. While corporate operating earnings posted 18 consecutive quarters of double-digit growth, setting record profits in aggregate and obtaining record high cash levels, corporate pension plans remained in the red, with corporations making minimal contributions. The current downturn in corporate earnings started in the fourth quarter of 2006, produced three quarters of negative earnings and is expected to continue into the second quarter of 2008, with improvement estimated to be seen in the third quarter or fourth quarter of 2008. For companies in the S&P 500, defined benefit plans as a group returned to their fully funded status, which was last seen in 2001, with $63.4 Billion in excess assets over obligations. The improved funding is the result of increased assets (2.3%) assisted by recognized market gains, decreased liabilities (-4.6%) and a general reduction in the number of covered workers in defined benefit pension funds. Adding to the mix is the current series of buyout offers within the automotive industry in exchange for reduced, limited or forfeited future benefits. Funding improved to 104.4% from 97.3% in 2006, but remained well below the 128.2% level of 1999. Fully funded plans increased to 127 from 85 in 2006 and 47 in 2005. Discount rates continued to rise, posting their third year of increases (6.13% for 2007 vs. 5.75% in 2006 and 5.11% in 2005), which aided in reducing projected benefit obligations. Estimated pension return rates declined one basis point to 8.02% from 8.03% in 2006, which marked the seventh consecutive annual reduction.
On March 5, 2008, the Florida Third District Court of Appeal (a state appellate court) rejected arguments from former City of Miami police officer Hames that his pension should not be forfeited (see C&C Newsletter for March 6, 2008, Item 1). (That case is currently pending disposition of a motion for rehearing filed by Hames.) Meanwhile, Hames had brought several actions against the City of Miami Fire Fighters’ and Police Officers’ Retirement Trust (and others) in the United States District Court (a federal trial court). That court rejected Hames’s claims in a decision reported at 479 Fed. Supp. 2d 1276 (S.D. Fla. 2007). Now, the United States Court of Appeals for the Eleventh Circuit (a federal appellate court) has upheld the federal trial court’s ruling. The prior decision by the Florida Third District Court of Appeal mooted Hames’s federal claim that state review procedures were unconstitutionally defective in that the state standard of review would be a miscarriage of justice standard. In addition, Hames’s due process challenge to procedures at the administrative level, his First Amendment retaliation claim and his Eighth Amendment claim were all without merit. And, most importantly, the federal appellate court agreed that the crime of which Hames was convicted did trigger the statutory forfeiture. Once again, we were honored to have served as co-counsel to the Trust, one of our regular clients. Hames v. City of Miami, Case No. 07-11821 (U.S. 11th Cir., May 20, 2008).
Internal Revenue Service recently hosted a roundtable discussion (see C&C Newsletter for March 13, 2008, Item 7) with representatives of the government plan community to start a dialogue to improve compliance with Internal Revenue Code requirements for qualified plans. IRS is encouraging government plans to take advantage of its determination letter program. (Cycle C, the first period during which government plans can file for a determination letter on their qualified status under IRS’s staggered schedule for obtaining determination letters, opened February 1, 2008 and runs through January 31, 2009.) Further, IRS wants government plans to take advantage of mechanisms under Employee Plans Compliance Resolution System for correcting plan errors and to make plans aware of its increasing emphasis on enforcement. Through this dialogue, IRS hopes to learn more about issues facing government plans, their level of compliance with IRC provisions, barriers to compliance they face and ways IRS can work with these plans to lower or remove barriers and improve compliance. Once it educates itself about these plans and how they operate, IRS plans to increase its enforcement activity. Toward this end, IRS intends to send a fairly comprehensive questionnaire on these issues to a random sample of government plans. “I’m from Washington, and I’m here to help you.” Right.
From the high price of milk and eggs to the unprecedented cost of gasoline, inflation is affecting every American. Among the largest groups affected are the 78 million baby boomers inching ever closer to retirement and current retirees who are experiencing soaring costs and a volatile economy. In fact, according to the Risks and Process of Retirement Survey Report, a new study from Society of Actuaries, inflation is the top retirement concern. According to the report, pre-retirees and retirees are worrying about keeping the value of their assets up with inflation as well as having enough money to pay for long-term care, paying for adequate health care and challenges of maintaining a reasonable standard of living after loss of a spouse -- all of which are also impacted by inflation. The report identifies concerns raised from both pre-retirees and retirees on their retirement resources and offers approaches to help manage them. Among today’s 65-and-older population, average life expectancy for American men and women is 17 and 20 years, respectively. Nearly one-third (30%) of all women and almost 20% of men age 65 can expect to reach 90 years old. As a result, pre-retirees and retirees are concerned that inflation will impact adequacy of their retirement investments and savings by significantly contributing to their depletion. To manage this risk, actuarial approaches include investment strategies to preserve principal, such as investing in annuities, joint and survivor annuities and deferred annuities commencing at later ages, such as 75 or 80. In ongoing efforts to identify, understand and manage retirement risks facing today’s pre-retirees and retirees, SOA will release a series of three retirement survey reports on phases of retirement, long-term care concerns and retirement risks for women. The three survey reports are scheduled to be released later this year.
Fifty-two percent of public pension plans currently invest in alternative investments or plan to do so in the future, according to a 2007 survey. Another survey, by National Association of Public Pension Attorneys, found that in-house counsel reported a median fund allocation of 13% to alternatives at funds invested in that asset class. Individual public fund allocations ranged from 1% to 41%. The current issue of the NAPPA Report reveals that 72 NAPPA governmental members participated in the survey earlier this year. Respondents were asked to identify their top five issues in negotiating alternative investment fund documents. Primary concerns fell into several categories:
Fee provisions, most-favored-nation clauses, tax matters, manager conflicts of interest, advisory board issues, retention of key manager personnel and public fund investment restrictions were also cited as problematic by NAPPA members. So, when your board counsel raises issues with reference to alternative investment contractual documents, you should listen very carefully.
On February 29, 2008 Internal Revenue Service released a Private Letter Ruling dated November 29, 2007 (PLR 200809011) dealing with treatment of disability benefits paid to firefighters and public safety officers. In 1990, IRS previously ruled on the matter. However, the recent letter to IRS requested reconsideration of the prior ruling in view of a current state court decision holding that a state statute establishes a rebuttable presumption that an employee’s heart condition arises out of or in the course of his or her employment. The effect of this rebuttable presumption is to shift the burden of proof. Internal Revenue Code Section 104(a)(1) generally provides that gross income does not include amounts received under workers’ compensation acts as compensation for personal illness or injuries. That section, however, does not apply to a retirement or pension annuity to the extent that it is determined by reference to the employee’s age or length of service or the employee’s prior contributions or to amounts received as compensation for a nonoccupational injury or sickness to the extent they are in excess of the amount provided in the applicable workers’ compensation act. IRS reaffirmed that a pension received by a disabled firefighter under state statute that created a rebuttable presumption that the disability was service-connected is excludable from gross income. One caveat: when, as here, the pension benefit is the greater of a flat percentage or the amount of accrued benefit, only the amount equal to the flat percentage is excludable under IRC Section 104(a)(1).
I wondered why the baseball was getting bigger. Then it hit me.
“If people don’t want to come to the ballpark, how are you going to stop them?” Yogi Berra
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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.