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Cypen & Cypen
MAY 28, 2009

Stephen H. Cypen, Esq., Editor

1.  WILL ALASKA REVERT TO DB PLAN?: reports on the Anchorage Fire Department’s worries that the Alaska Public Employees’ Retirement System’s defined contribution tier will cause retention problems.  The department commits a great deal of resources to training new hires, and prior to 2006, the city counted on the state pension plan to act as an incentive for fire personnel to remain in Anchorage.  Now, with no incentive to stay, fears are that Anchorage-trained fire personnel will skip town as soon as DC benefits vest.  It is difficult to attract people, such as paramedics, to the state, and, once there, it is hard to get them to stay.  The city invests money up front, and now fears that it will train people and then lose them to other fire departments.  Other Alaskan public employers are echoing the same concerns -- enough so that Alaskan legislators are now seriously considering reverting to a defined benefit system.  Alaska would not be the first state to experience buyer’s remorse after converting to a DC system.  Both Nebraska and West Virginia went back to DB structures after experimenting with DC accounts.  In May 2005, the Alaska Legislature voted to begin implementation of a DC plan for all new public employees hired on or after July 1, 2006.  (Previously-hired employees remain in the DB system.)  When Alaska Governor Sarah Palin ran in 2006, she indicated that she disagreed with conversion of state plans to DC, and wanted to revisit the issue.  (Now that she is contemplating the Republican Party nomination for President in 2012, she is neutral on the issue.)  


According to Milliman’s 2009 Pension Funding Study, its Ninth Annual, the ongoing financial crisis drove the 100 largest corporate pension plans to a record $300 Billion loss of funded status in 2008.  Asset losses fueled a decrease in funded status from about 106% at the end of 2007 to under 80% at the end of 2008.  Losses continue into 2009 with a $30 Billion decrease in funded status in the first two months.  At the end of February, funded status of these 100 pension plans stood at 74%, lowest level since May 2003.  Actual asset returns (negative 18.9% for 2008 fiscal years) were below expected returns (8.1%), after five straight years of asset gains.  Asset values dropped by $833 Billion by the end of February 2009 to levels not seen since July 2003.  Expected returns have remained fairly level (8.1% in 2008, 8.3% in 2007 and 2006) but may decline in 2009 because of reductions in asset allocation to equities.  Reflecting gains in funded status over the five prior years, pension expense decreased in 2008, to $10.4 Billion (from $18.9 Billion in 2007), lowest level since 2002.  Contributions to the 100 pension plans studied increased only slightly in 2008 ($29.7 Billion versus $27.2 Billion in 2007).  Losses in funded status during 2008, coupled with new funding requirements under the Pension Protection Act, are projected to increase required contributions to more than $50 Billion for 2009.  Many companies are expected to defer some of the increased contribution requirements to 2010, increasing contributions in that year to what may be record levels.  The percentage of pension plans invested in equities declined from 55% to 44% during 2008.  The decrease in equity allocations is primarily because of market declines and, to a much lesser extent, a change in investment policies.  A return to a 55% equity allocation by the end of 2009 (through investments or portfolio rebalancing) will require a $100 Billion investment in equity markets.  As a group, the 100 largest corporate pension plans surveyed had pension plan assets of more than $900 Billion at the end of 2008.  


Pension Benefit Guaranty Corp.’s deficit rose to an all-time high of $33.5 Billion as of March 31, 2009, according to congressional testimony given by its Acting Director, as reported by Pensions & Investments.  The deficit, for the first half of fiscal year 2009 ending September 30, is up more than 200%, or $22.5 Billion, from September 30, 2008.  The increase in PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses.  (And, of course, the record deficit does not include Chrysler’s expected $10 Billion-plus underfunding.) 


Are you wondering what mom should be paid for her work as mom? has evaluated the “mom job” of both the Working and Stay-at-Home moms.  Based on a survey of more than 12,000 mothers, determined that the time mothers spend performing ten typical job functions would equate to an annual salary of $122,732 for a Stay-at-Home mom.  Working moms’ at-home salary is $76,184, in addition to the salary they earn in the workplace.  Job titles that best matched a mom’s definition of her work are (in order of hours spent per week):  housekeeper, day care center teacher, cook, computer operator, facilities manager, van driver, psychologist, laundry machine operator, janitor and chief executive officer.  We meant to do this piece right before Mother’s Day, but mom is always relevant (see C&C Newsletter for May 15, 2008, Item 3). 


It has been awhile since we published any of’s lists, but this one is particularly timely:

1.            “We’re in survival mode.” 

Banks may still be a safe place to stash your cash, with FDIC for now insuring up to $250,000 per depositor.  But after years of lending money to just about anyone with a pulse, the industry is paying a steep price.  Losses on bad loans issued during the credit bubble could top $1.4 Trillion.

2.            “Our fees will only go up.”

Don’t look now but punitive fees -- for overdrawing your account, say, or using a competitor’s ATM -- are increasing.  The average ATM service charge doubled between 1998 and 2007, and overdraft fees brought in $17.5 Billion in revenue in 2006, up from $10.3 Billion in 2004. 

3.            “We change our interest rates all the time.”

Regardless of what your credit card agreement says, you can never be sure how much interest banks will charge you.  Banks can change the terms of your agreement, raising rates when they like, although you can opt out and pay off the balance at the old rate as long as you never use the card again.

4.            “College campuses are a gold mine for us.”

Students are customers of the future, and banks are increasingly courting them, often right on campus.  More than 120 universities have cut deals with banks to issue student-ID cards that are also ATM and check cards.  Schools can make millions from these deals, sometimes even taking a small cut of individual purchases. 

5.            “In debt?  The courts won’t help.”

Since the late 1990s, banks have been including mandatory arbitration agreements in their contracts for many products, including auto loans, checking accounts, home-equity loans and credit cards.  Such agreements prohibit you from suing and instead require you to use an arbitrator -- someone picked by the arbitration firm named in your credit card contract to hear the dispute and decide the outcome.

6.            “We’re excited about your trip to Europe, too!”

It’s not bad enough that the dollar had been hovering near historic lows against most major currencies, but when you travel overseas, every transaction comes with big fees attached.  Some credit card companies charge 1 percent of the purchase for converting currency.  And issuing banks may take another cut, which can bring the total to 3 percent of your purchase price. 

7.            “For all the fine print, we don’t disclose very much.”

Bank documents come loaded with small type, detailing terms and conditions.  But good luck finding out exactly what you are signing up for when you open an account. 

8.            “Your money might be better off elsewhere.”

Banks offer lots of ways to earn interest on your money -- among them, simple savings, CDs, money-market accounts and IRAs.  But they don’t always yield the best return.  In early 2009, the average savings account, for example, was paying about 0.5 percent interest.  But even in this low-interest-rate climate, you can do better -- 3 percent or more -- if you shop around.

9.            “When it comes to banks, smaller is sometimes better.”

Banks have been consolidating like crazy over the past decade.  In 1990 the top 10 banks controlled 25 percent of the market; by 2008 they controlled half.  Though big banks offer many conveniences, they can come at a price: high fees.  In 2006 the 10 largest banks generated 54 percent of revenue from fees and service charges.  By contrast, the 10 smallest banks generated just 28 percent from those sources.

10.            “Your online account info isn’t necessarily accurate.”

Online banking has changed the way people handle their finances.  Unfortunately, your bank account may not always show the proper balance. With electronic transactions, ATMs, check cards and direct deposits, banking has gotten more complicated. 


A Florida woman has been indicted for keeping her dead mother’s body in a bedroom for six years while collecting more than $200,000 in pension benefits, Reuters reports.  Police found the mother’s decaying body on a bed in a spare bedroom at the mother’s home, when they were called to investigate a report of nuisance cats.  The woman said her mother had died in 2003.  The woman collected over $61,000 from Social Security and more than $176,000 from a military pension.  She could face up to 15 years in prison.  Local media reported that the 61-year-old woman told police her mother died of old age, and she kept the remains because she could not afford burial expenses. Yo, Mama.  Mama? ... Mama? 


Last week’s piece about Saturday Night Live’s skit on recent bank stress tests contained an incorrect link.  The following is a reprint, with the right link: 

Well, it did not take long for Saturday Night Live to weigh in on the Treasury Department’s stress test applied to the 19 largest U.S. banks.  To view the spoof, go to  Will Forte as Treasury Secretary Timothy Geithner, is great, as usual.  We thank loyal reader G.F., in Jefferson City, MO, for sending us the link. 


In democracy it's your vote that counts.  In feudalism it's your count that votes. 


“Take time to repair the roof when the sun is shining.”  John F. Kennedy



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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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