Cypen & Cypen
MAY 14, 2009
Stephen H. Cypen, Esq., Editor
1. 1999 REVISIONS TO CHAPTERS 175 AND 185, FLORIDA STATUTES, IMPAIRED PRIOR CONTRACT FOR USE OF PREMIUM TAX MONIES:
A Tallahassee Circuit Judge has issued an important ruling involving Chapter 99-1, Laws of Florida, which took effect on March 12, 1999. Many years ago, City of Delray Beach voluntarily established a pension plan for its firefighters and police officers pursuant to Chapters 175 and 185, Florida Statutes. In 1993, the City, Firefighters Union, Police Officers Union and Board of Trustees of the City of Delray Beach Police Officers and Firefighters Retirement System reached an agreement concerning use of premium tax revenues received by the City pursuant to Chapters 175 and 185, Florida Statutes. (Said agreement provided that the amount of premium tax revenues received by the City in 1993 would be used to fund existing pension benefits and to provide an annual 1% increase in pension benefits received by plan members who retired after September 30, 1993. Further, all premium tax revenues received by the City each year in excess of the 1993 amount would be used to provide an annual retirement benefit enhancement, in addition to the foregoing 1% annual increase, of up to 3%, based upon amount of excess premium tax funds available.) The Florida Division of Retirement was not a party to the agreement. Effective March 12, 1999, the Florida Legislature enacted Chapter 99-1, Laws of Florida, extensively revising Chapters 175 and 185, Florida Statutes. Prior thereto, the Delray Beach pension plan defined compensation to exclude, inter alia, overtime. As part of the 1999 revisions, Section 185.02, Florida Statutes, as to police officers, required compensation to include total cash remuneration including overtime (which in no event shall be limited to less than 300 hours per year). The only minimum benefit argument not provided by the Delray Beach plan was inclusion of overtime pay in compensation of police officers. The Florida Division of Retirement took the position that all premium tax revenues received by the City in excess of the amount received for calendar year 1997 must first be used to meet minimum benefit provisions of Chapters 175 and 185, Florida Statutes, and once said minimum benefits were satisfied, any additional premium tax revenues could be used for annual benefit enhancements pursuant to the 1993 agreement. There were insufficient revenues to fulfill requirements of the 1993 agreement and the 1999 statutory revisions. The City of Delray Beach disagreed with the Division’s interpretation, and brought an action against Florida Division of Retirement, the Board of Trustees, the Firefighters Union, the Police Officers Union and certain current and former employees of the City (who claimed rights under the 1993 agreement). The trial court granted summary judgment in favor of the City and against the Division of Retirement. Virtually no degree of contract impairment has been tolerated in this state. The obligation of a contract is considered impaired in the constitutional sense when substantive rights of the parties thereunder are changed or when new and different liabilities are imposed. The 1999 statutory revisions substantially impaired the rights of recipients under the 1993 agreement. Further, the court found that pursuant to Sections 175.032(17) and 185.02(15), Florida Statutes, benefits under the 1993 agreement constituted a “supplemental plan.” As a consequence, in accordance with Section 185.35(3), Florida Statutes, the definition of police officer compensation in Section 185.02(4), Florida Statutes, did not apply in the first place. The court authorized the City and the pension board to continue application and enforcement of the 1993 agreement, without including 300 hours of police overtime in compensation of police officers, as would otherwise be required by Chapter 99-1. Any funds set aside by the City or pension board in compliance with Chapter 99-1 (which the City and the Board did, without prejudice, so as not to jeopardize receipt of premium tax monies), which should have rightfully been allocated for benefit enhancements in accordance with the 1993 agreement shall be applied pursuant to the provisions of that agreement, without application of the 1999 statutory revisions. We were honored to have represented our regular client, Board of Trustees of the City of Delray Beach Police Officers and Firefighters Retirement System, which advocated both positions ultimately adopted by the court. City of Delray Beach, Florida v. Florida Department of Management Services, Division of Retirement, Case No. 37 2008 CA 002862 (Fla. 2d Cir., May 8, 2009).
2. SEC DIVISION OF ENFORCEMENT NEEDS GREATER ATTENTION:
The United States Government Accountability Office has published its Report to Congressional Requesters, entitled “SECURITIES AND EXCHANGE COMMISSION - Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement” (GAO-09-358, March 2009). The Securities and Exchange Commission’s Division of Enforcement plays a key role in meeting the agency’s mission to protect investors and maintain fair and orderly markets. In recent years, Enforcement has brought cases yielding record civil penalties, but questions have been raised about its capacity to manage its resources and fulfill its law enforcement and investor protection responsibilities. GAO was asked to evaluate, among other issues, (1) SEC’s progress toward implementing GAO’s 2007 recommendations; (2) the extent to which enforcement has an appropriate mix of resources dedicated to achieving its objectives; and (3) the adoption, implementation and effects of recent penalty policies. GAO analyzed information on resources, enforcement actions and penalties; and it reviewed current and former SEC officials and staff, and others. GAO recommends the SEC Chairman (1) consider an alternative organizational structure for the new Office of Collections and Distributions; (2) further review the level and mix of resources dedicated to enforcement, and assess impact of its internal case review process; (3) examine whether the 2006 corporate penalty policy is achieving its intended goals; and (4) take steps to ensure appropriate staff participation in policy development and review. SEC agreed with GAO’s recommendations. Meanwhile, last week, the Senate Banking Subcommittee that oversees the SEC held a hearing on the agency’s Enforcement Division. Lawmakers wanted to determine if the Enforcement Division is up to the task of policing the marketplace at a time of shattered investor confidence and financial upheaval. (GAO-09-613T, May 7, 2009)
3. MORE STATES START PENSION INQUIRIES:
The sprawling investigation into New York’s pension investments hints at a much bigger problem than the handful of indictments so far would suggest, according to the New York Times. What started as an investigation by the New York attorney general into the state comptroller’s office -- where the New York attorney general says favors were being exchanged for contracts to invest pension money -- has mushroomed into a broad look at more than 100 firms by attorneys general in at least 30 other states (including Florida). A survey of practices across the country portrays a far-reaching web of friends and favored associates: political contributors, campaign strategists, lobbyists, relatives, brokers and others, capitalizing on relationships and paying favors. These influential figures can determine how pension funds are invested, as well as state university endowments, municipal bond proceeds, tobacco settlement funds, hurricane insurance pools, prepaid tuition programs and other giant blocks of public money. The Securities and Exchange Commission might have to strengthen controls at the federal level. Although SEC has jurisdiction over investment firms, it has no authority when it comes to local officials. Investing public money on the basis of political considerations, rather than merit, heightens the risk of waste and loss, an urgent issue, given the market losses of the last year. When the Government Accountability Office studied a group of pension funds known to be advised by consultants with conflicts of interest, it found their average yearly investment returns were 1.3 percent lower than those of other pension funds. That amount may sound small, but it can severely erode a fund over time because losses multiply. The New York attorney general says it is too early to estimate the size of any losses caused by improprieties in New York. Even if the losses cannot be measured, though, he considers it essential to stop the uncontrolled peddling of access.
4. GAO HEDGE FUND OVERVIEW:
On May 7, 2009, Orice M. Williams, Director of United States Government Accountability Office Financial Markets and Community Investment, testified before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. The Director’s remarks have been published by GAO as “HEDGE FUNDS - Overview of Regulatory Oversight, Counterparty Risks, and Investment Challenges” (GAO-09-677T). In 2008, GAO issued two reports on hedge funds, highlighting the need for continued regulatory attention and for guidance better to inform pension plans on risks and challenges of hedge fund investments. (Hedge funds are pooled investment vehicles that are privately managed and often engage in active trading of various types of securities and commodities futures and options contracts.) Hedge funds generally qualified for exemption from certain securities laws and regulations, including the requirement to register as an investment company. Hedge funds have been deeply affected by the recent financial turmoil. But an industry survey of institutional investors suggests that these investors are still committed to investing in hedge funds in the long term. For the first time, hedge funds are allowed to borrow from the Federal Reserve under the Term-Asset Backed Loan Facility. As such, the regulatory oversight issues and investment challenges raised by the 2008 report still remain relevant. The testimony discusses: (1) federal regulators’ oversight of hedge fund-related activities; (2) potential benefits, risks and challenges pension plans face in investing in hedge funds; (3) measures investors, creditors and counterparties have taken to impose market discipline on hedge funds; and (4) potential for systemic risk from hedge fund-related activities. To accomplish this task, GAO relied upon its issued reports and updated data where possible.
5. CalPERS POLICY REQUIRES DISCLOSURE OF AGENTS/FEES:
On May 11, 2009 CalPERS Board’s Investment Committee adopted a new policy that would require disclosure of placement agents and fees paid to those agents who seek CalPERS business. The proposed policy would require that:
The new guidelines would affect external managers who retain placement agents to arrange meetings, prepare presentation materials, identify potential limited partners and otherwise facilitate communication with CalPERS regarding potential investment of its assets. CalPERS commits capital to external managers and funds but is not involved in fees they pay to agents who may represent their business to the pension fund. Recently, federal and state investigators have alleged certain placement agents may have paid bribes or kickbacks in “pay-to-play” arrangements to help their investment firm clients obtain capital commitments from public pension funds (see item 3 above and C&C Newsletter for April 30, 2009, Item 8). The goal of the policy is to help insure that CalPERS investment decisions are made solely on the merits of the investment opportunity by individuals who owe a fiduciary duty to CalPERS. The “California Public Employees’ Retirement System Statement of Policy for Disclosure of Placement Agent Fees” can be found at http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/policy/200905/item03-01.pdf.
6. VETERANS CLAIMS ASSISTANCE ACT DID NOT REMOVE BURDEN OF PRODUCTION OF EVIDENCE FROM CLAIMANT:
Skoczen, a World War II veteran, filed a claim with the Department of Veterans Affairs for various conditions, including post-traumatic stress disorder. The regional office granted service connection for PTSD, assigning an initial 50 percent rating. Skoczen then filed a notice of disagreement, after which the Board of Veterans’ Appeals increased the rating to 70 percent. Skoczen appealed to the Veterans Court, arguing that he was due a 100 percent rating because VA did not carry its alleged burden affirmatively to prove that 100 percent rating requirements had not been met. He further argued that statutory and regulatory changes effected by the Veterans Claims Assistance Act removed any burden of production of evidence from a claimant. The Veterans Court disagreed, affirmed the Board’s decision and rejected Skoczen’s contentions that a veteran need only submit a facially valid claim. The VCAA, enacted in 2000, amended the statutory to remove any reference to “burden” upon a claimant. The new language requires a claimant to “present and support” a claim for benefits. In affirming judgment for VA, the United States Court of Appeals rejected Skoczen’s argument for a system in which a veteran can, for example, file a claim for 100 percent disability for PTSD, and, unless VA produces affirmative evidence that refutes the claim, then the veteran must be awarded benefits for a 100 percent disability. Under general procedures, even as revised by VCAA, a claimant must submit a plausible claim for benefits. Once claimant steps over that rather low hurdle, VA’s duty to assist starts. From this point forward, VA has the obligation to assist the veteran in supporting his claim. If zero evidence is produced in support of a material issue, that indicates at least two possibilities. It may be that no evidence exists to support the particular issue, in which case VA can rule against the veteran on that issue. Alternatively, VA may have failed to satisfy its duty to assist, that failure being the cause of lack of supporting evidence, in which case claimant can contend the VA should have used further efforts and thus did not comply with the statutory duty to assist. Significantly, Skoczen did not assert any failure of VA to comply with its duty to assist. Skoczen v. Shinseki, Case No. 2008-7084 (U.S. Fed. Cir., May 7, 2009).
7. FEDERAL APPELLATE COURT RULES THAT GM DID NOT FAIL TO DIVERSIFY PENSION ASSETS OR SUBJECT PLAN TO EXCESSIVE FEES:
Young and others appealed federal trial court judgments dismissing their class action complaints against General Motors Investment Management Corporation and State Street Bank and Trust Company that alleged breach of fiduciary claims under Employee Retirement Income Security Act. The district court found Young’s claims time-barred, and did not consider defendants’ alternative argument that the action should be dismissed for failure to state a claim upon which relief could be granted. The appellate court affirmed on the well-settled principle that an appealed decision may be affirmed on any ground that finds support in the record, regardless of the ground upon which the trial court relied. ERISA requires a fiduciary to diversify investments so as to minimize risk of large losses. The language contemplates a failure to diversify claim when a plan is undiversified as a whole. Young merely alleged that individual funds within the plan were undiversified, which is insufficient to state a claim for lack of diversification. ERISA also provides that a fiduciary must act with the care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in conduct of an enterprise of like character and with like aims. A claim for excessive fees is one of imprudent investment. The standard for excessive fee claims articulated in context of the Investment Company Act is useful for reviewing a claim of excessive fees under ERISA. Thus, to establish a valid excessive fees claim, the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to services rendered and could not have been the product of arm’s-length bargaining. Young failed to allege that the fees were excessive relative to the services rendered. Because the appellate court found that Young’s complaint failed to state a claim upon which relief can be granted, it did not reach the question of whether the action was time-barred. Young v. General Motors Investment Management Corporation, Case No. 08-1532 and 08-1534 (U.S. 2d Cir., May 6, 2009) (summary order - no precedential effect).
8. PLANS’ PERFORMANCE AND FUNDED STATUS IMPROVE:
Two new reports discussed in Pensions & Investments show better funded status for corporate pension plans. According to Wilshire Trust Universe Comparison Service, the median corporate plan returned -6.31% for the quarter and -26.0% for the year ended March 31, 2009. For the same periods, the median public pension plan returned -5.92% and -25.93%. In a separate report, the funding status of Towers Perrin’s hypothetical benchmark pension plan increased 5.5 percentage points in April, to 69.2%. The March-April upturn served to erase approximately one-third of the gap in funding that emerged during the first six months of the capital market crisis.
9. REQUIRED HEALTH RISK ASSESSMENT MAY VIOLATE ADA:
U.S. Equal Employment Opportunity Commission Office of Legal Counsel has responded to a request for public comment, which posed the following question: Does the requirement to participate in a Clinical Health Risk Assessment to qualify for participation in a current health plan constitute a violation of the Americans With Disabilities Act? A County has implemented a Clinical Health Risk Assessment as a requirement to obtain coverage under its self-funded plan. Employees must agree to participate in the Clinical Health Risk Assessment, which includes answering a short health-related questionnaire, taking a blood pressure test and providing blood for use in a blood panel screen. Employees declining to participate in the program and members of their families become ineligible for coverage under the County health plan. The information from the Health Risk Assessment goes directly and exclusively to the employee; the County only receives information in the aggregate. Title I of the Americans With Disabilities Act limits when an employer may obtain medical information from applicants and employees. Before a job offer is made, ADA prohibits all disability-related inquiries and medical examinations, even if they are related to the job. After a conditional offer is made, an employer may ask disability-related questions and require medical examinations, as long as it does so for all entering employees in the same job category. Once employment begins, an employer may make disability-related inquiries and require medical examinations only if they are job-related and consistent with business necessity. Although EEOC has not taken a formal position on the question asked, requiring that all employees take a Health Risk Assessment that includes disability-related inquiries and medical examinations as a prerequisite for obtaining health insurance coverage does not appear to be job-related and consistent with business necessity, and, therefore, would violate ADA. Disability-related inquiries and medical examinations are permitted as part of a voluntary wellness program. A wellness program is voluntary if employees are neither required to participate nor penalized for non-participation. In this instance, however, an employee’s decision not to participate in the Health Risk Assessment results in loss of opportunity to obtain health coverage to the employer’s plan. Thus, even if the Health Risk Assessment could be considered part of a wellness program, the program would not be voluntary because individuals who do not participate in the Assessment are denied a benefit as compared to employees who participate in the Assessment. Please note that Counsel’s letter is an informal discussion of the issues raised and does not constitute an official opinion of the U.S. Equal Employment Opportunity Commission.
10. DOL CLARIFIES EMPLOYEE NOTIFICATION PROCEDURES UNDER FMLA:
On January 6, 2009, the U.S. Department of Labor, Employment Standards Administration, Wage and Hour Division, responded to a request for clarification of employee notification procedures under the Family and Medical Leave Act (FMLA 2009-1-A). (The letter was written prior to January 16, 2009, effective date of the new FMLA Regulations, but makes reference to them.) The requester stated that employers believe that a 1999 Department of Labor opinion letter prevented them from applying internal call-in policies, disciplining employees under no call/no show policies or disciplining employees who call in late, as long as employees provide notice within two business days that the leave was FMLA-qualifying, regardless of whether they could have practically provided notice sooner. The requester believed this interpretation of FMLA employee notification requirements placed an untenable burden on employers who are attempting reasonably to schedule their workforce based on foreseeable availabilities of employees and to apply uniform rules on call-in to all employees. FMLA requires employees to provide notice of the need for leave due to birth or placement of a child or for their own serious health condition or to care for a covered family member with a serious health condition, thirty days before leave is to begin, where possible. Where it is not possible to provide thirty days notice of the need for such leave, employees must provide such notice as is practicable. In adopting the final rule, the Department noted that the one to two business days time frame set forth in the 1999 regulations had been misinterpreted as permitting employees two business days from learning of their need for leave to provide notice to their employers, regardless of whether it would have been practicable to provide notice more quickly. Deletion of the two-day rule does not change the fact that whether notice is given as soon as practicable will be determined based upon particular facts and circumstances of an employee’s situation. To the degree that the 1999 opinion has been interpreted to create a flat two-day rule, the current letter rescinds it.
11. RECENT FLORIDA ATTORNEY GENERAL OPINIONS:
A. AGO 2009-14 (April 23, 2009). Section 286.011(a), Florida Statutes, does not authorize a city council to meet in executive session to consider terms of settlement negotiations in conflict resolution proceedings under the “Florida Governmental Conflict Resolution Act.” That section is an exception to the general rule that all public meetings are required to be open to the public at all times. The exception permits a public entity, under certain conditions, to meet in private with its attorney to discuss pending litigation to which the entity is presently a party. Chapter 164, Florida Statutes, the Florida Governmental Conflict Resolution Act, requires local and regional governmental entities to participate in extra-judicial conflict resolution procedures, which, themselves, are subject to the Florida Sunshine Law. A very important factor must be recognized here: one disputing municipality had filed suit against another; but, in accordance with Section 164.1041, Florida Statutes, the court had abated the action until the procedural options had been exhausted. So, no litigation was actually pending between the parties.
B. AGO 2009-15 (April 23, 2009). A city may hold an attorney-client session under Section 286.011(a), Florida Statutes, to discuss pending litigation where the named defendant is a city employee who is fully indemnified by the city and for whom the city is responsible for a full cost and coordination of defense, even though the city is not a named party. Rational conclusion.
C. AGO 2009-19 (April 23, 2009). This opinion answers four questions (presumably not those asked on the Jewish holiday Passover):
(1) Since a city is authorized to excise powers for a municipal purpose, creation of a Facebook page must be for a municipal, not private purpose. The placement of material on a city’s page would presumably be in furtherance of such purpose and in connection with transaction of official business and thus subject to the provisions of Chapter 119, Florida Statutes (the Public Record Law). In any given instance, however, determination would have to be made based on the definition of “public record” contained in Section 119.11, Florida Statutes. Similarly, whether a Facebook page of the friends would also be subject to the Public Records Law would depend on whether the page and information contained therein were made or received in connection with transaction of official business by or on behalf of a public agency.
(2) A city is under an obligation to follow the public records retention schedules established by law.
(3) While Article I, Section 23, Florida Constitution, may be implicated in determining what information may be collected by a city, the constitutional provision expressly states that the section shall not be construed to limit the public's right of access to public records and meetings as provided by law. Thus, to the extent that information on a city’s Facebook page constitutes a public record within the meaning of Chapter 119, Florida Statutes, Article I, Section 23, Florida Constitution, is not implicated.
(4) Communications on a city’s Facebook page regarding city business by city commissioners may be subject to Florida’s Government in the Sunshine Law, Section 286.011, Florida Statutes. Thus members of a city board or commission must not engage on a city’s Facebook page in an exchange or discussion of matters that foreseeably will come before the board or commission for official action.
Oh what problems technology hath wrought.
12. CREATIVE PUNS FOR “EDUCATED MINDS”:
A rubber band pistol was confiscated from algebra class because it was a weapon of math disruption.
13. QUOTE OF THE WEEK:
“Take care to get what you like, or you will be forced to like what you get.” George Bernard Shaw
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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.