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Cypen & Cypen
May 3, 2012

Stephen H. Cypen, Esq., Editor

1.     STATE AND LOCAL PUBLIC-EMPLOYEE RETIREMENT SYSTEM ASSETS INCREASE MORE THAN $257 BILLION IN 2010:    The nation's state and local public-employee retirement systems had $2.7 Trillion in total cash and investment holdings in 2010, a $257.2 Billion or 10.6 percent increase from $2.4 Trillion in 2009, according to new statistics from the U.S. Census Bureau.  This performance follows a $722.2 Billion loss the previous year.  These statistics come from the 2010 Annual Survey of Public-Employee Retirement Systems, which provides an annual look at the financial activity and membership information of the nation’s state and local public-employee retirement systems, including revenues, expenditures, investment holdings and number of retirement systems/beneficiaries.  There were $346.1 Billion in earnings on investments in 2010, compared with prior year losses totaling $621.1 Billion.  The year 2010 was the first showing positive earnings since 2007.  Retirement systems have substantial investments in financial markets and consequently earnings are dependent on changes in market performance.  Employee contributions decreased by 0.5 percent, from $39.3 Billion in 2009 to $39.1 Billion in 2010. Government contributions increased by 1.5 percent, from $85.2 Billion in 2009 to $86.4 Billion in 2010.  Employee contributions made up 31.2 percent and government contributions made up 68.8 percent of total contributions.  Total payments increased by 6.0 percent, from $201.7 Billion in 2009 to $213.8 Billion in 2010.  Payments consist of benefits, withdrawals and other payments.  Benefits increased by 6.4 percent, from $188.9 Billion in 2009 to $201.0 Billion in 2010. Benefit payments equal 94.0 percent of total payments.  Most investment categories showed increases, with decreases in only cash and short-term investments, mortgages and real property.  These three categories comprised 7.9 percent of total holdings.  Corporate stocks rose by 13.4 percent, from $820.2 Billion in 2009 to $930.2 Billion in 2010.  Corporate stocks made up 34.8 percent of total holdings. Corporate bonds increased by 2.8 percent, from $413.1 Billion in 2009 to $424.9 Billion in 2010.  Foreign and international securities increased by 13.8 percent, from $370.8 Billion in 2009 to $421.9 Billion in 2010.  Corporate stocks and bonds and foreign and international securities comprised two-thirds of total holdings at 66.4 percent in 2010.  Governmental securities (which include U.S. Treasury) increased by 7.8 percent, from $215.2 Billion in 2009 to $232.0 Billion in 2010.  Governmental securities composed 8.7 percent of total holdings.  Statistics are shown for revenues, expenditures, cash/investments and membership information by national, state and local levels, in addition to a national summary table.   
2.      FEDERAL COURT INVALIDATES FLORIDA GOVERNOR’S EXECUTIVE ORDER ON MANDATORY DRUG TESTING:    On March 22, 2011, Florida Governor Rick Scott issued Executive Order 11-58, directing all state agencies within his purview to provide for mandatory drug testing for all prospective new hires.  The EO also required that the covered agencies provide for random drug testing of all existing employees such that any employee at these agencies can be tested at least quarterly.  By drug testing, the Governor meant exclusively urinalysis.  Approximately 85,000 individuals, comprising 77 percent of state government personnel, work at the covered agencies.  American Federation of State, Country and Municipal Employees (AFSCME) Council 79, which represents approximately 40,000 employees at the covered agencies, brought suit against the Governor in federal court.  AFSCME contended that the EO violated the Fourth Amendment’s prohibition of unreasonable searches.  The Governor made three arguments for why the Union’s complaint should be dismissed as a matter of law.  He argued that the Union lacked standing to challenge the EO.  He also claimed that the EO did not violate the Fourth Amendment.  Finally, he characterized the Union’s challenge to the EO as “facial,” contending that the Union cannot show the EO is unconstitutional in all possible applications.  On cross-motions for summary judgment, the Court granted the Union’s and denied the Governor’s.  The Union had standing to sue on its own behalf.  To sue on its own behalf, the Union must establish that: (1) it suffers or will suffer an injury-in-fact that is concrete, particularized and imminent; (2) that the injury is fairly traceable to the Governor’s challenged action; and (3) that the injury will likely be redressed by a favorable decision.  In addition, the Union had standing by means of the alternative route for associational standing -- the right to sue on behalf of its members.  In circuit case law, unions lack standing to assert rights of non-members.  Thus, insofar as an applicant to a covered position is not, at time of the pre-employment testing, a member of the Union, the Union lacks standing to sue on behalf on these individuals.  However, the Union claims that it has standing to represent current members, who, the Union asserts, are also affected by the pre-employment testing provision.  Where a current member applies for a promotion or transfer, the Union contends, the member will be treated as a new hire and thus required to undergo mandatory pre-employment testing.  Accordingly, the Union had standing to challenge the pre-employment portion of the EO.  On the merits, the U.S. Supreme Court maintains that the government, unlike private employers, can test its employees for illegal drug use only when the testing is consistent with the Fourth Amendment.  Here, the asserted public interest failed to justify the program.  All prior cases that upheld drug-testing policies were tailored to address a specific, serious problem.  In contrast, the rationale for the Governor’s policy consisted of broad prognostications concerning taxpayer savings, improved public service and reductions in health and safety risks that result from a drug-free workplace.  The Court construes the Union’s challenge to be “as-applied.”  The Union made no claim as to constitutionality of the EO as it relates to pre-employment testing of non-current employees or random testing of those hired after the issuance of the EO.  (The Court leaves these questions unresolved in the order.) Entering a permanent injunction against enforcement of the EO, the Court found (1) there was a legal violation; (2) there is a serious risk of continuing irreparable injury if an injunction is not granted; and (3) there are no adequate remedies at law.  American Federation of State, County and Municipal Employees (AFSCME) Council 79 v. Scott, Case No. 11-civ-21976-UU (S. Fla., April 25, 2012).  
3.      A NEW MODEL FOR INVESTING?:    Pionline has a piece on Institution Driven Investing.  Despite signs the U.S. economy is coming back, these times are still perilous for investors.  The world is still in recovery from a credit crash.  Trillion-dollar federal deficits and near-zero interest rates are producing massive distortions in the market.  Europe continues to wobble, and the global center of financial gravity is shifting.  In a world marked by so many unknowns and potential pitfalls, institutional and pension fund managers need a new way to look at investing -- one that starts with characteristics of the institution and then works up from there.  The new strategy is called Institution Driven Investing because it is based on a risk-and-needs assessment specific to each institution. This assessment, in turn, is reflected in every investment in the portfolio:  each one is judged in terms of its impact on the institution -- not just the potential returns it might produce but equally important, the potential losses.  Based on those potential losses, boundaries are drawn and never crossed because doing so might compromise the institution’s financial integrity.  This strategy does not rule out investments that involve risk, even considerable risk.  But the strategy assures that the totality of risk does not compromise the mission of the pension fund or institution.  An IDI-based portfolio is not static, however; it is constantly evolving.  Markets constantly change, so selection of the best assets in the market that do not exceed risk requirements must change, too.  Institutions also evolve over time, and these changes likewise must be reflected in the investment strategy.  Does Institution Driven Investing work in the real world? Yes.  The model is an educational institution, the Cooper Union in New York City, which, like so many other such institutions and pension funds, depends heavily on revenues from its portfolio.  In Cooper Union’s case, investment income provides 60% of the school’s revenues.  (Cooper Union provides full scholarships to all its 1,000 students!)  After the recession of the early 2000s, Cooper Union faced a financial crisis because its endowment had been invested in traditional assets and was greatly diminished by the market declines.  Most sources of income were market-correlated, and fluctuated considerably with the economy.  The mismatch between revenues and expenses dictated that the first priority was to stabilize income and avoid future losses.  Unhedged investments in stocks and bonds, real estate, natural resources, private equity, venture capital and directional hedge funds did not fit the risk profile of the institution since they increased the correlation with markets already inherent in all the other revenue sources.  Instead, they focused on achieving a constant cash flow from investment assets. Rather than seeking out maximum returns available, they chose investments that were both steady and relatively uncorrelated to markets.  The 2008-2009 meltdown proved the soundness of this approach.  Value of the endowment fell by only 8%, and cash flow was maintained.  In sum, Institution Driven Investing requires that each institution make judgments based on its specific situation -- there is no one-size-fits-all model.  But for pension funds and other institutions that depend on portfolio income, it is a strategy that avoids devastating losses, ensures a steady, safe return on investments, and protects and preserves the institution’s core mission. 
4.      DID EFFICIENT MARKET HYPOTHESIS DRIVE CRASH?:    The efficient market hypothesis and the capital asset pricing model led to the 2008 financial crisis, a leading group of investors has claimed, calling for immediate action to prevent it from happening again.  Harry Markowitz, pioneer of modern investment theory, was the first person to make risk the centerpiece of portfolio management.  This view inspired origin of the capital asset pricing model and the efficient market hypothesis, both of which have since dominated portfolio theory.  However, evolution of these two theories led to the inference that markets are efficient and that active management does not work, which is simply untrue.  According to, CAPM argues that by making various assumptions, much of the variation in investment returns comes from market movements, with each investment containing systemic and idiosyncratic risks.  Thus, the only reason why an investor should earn more by investing in one stock rather than another is that one is riskier than the other.  Furthermore, the group concludes that CAPM not only ignores investors’ behavior biases, but it also omits factors that have a significant role in influencing future returns, such as:  price-earnings ratios, debt-equity ratios that measure leverage and book-to-market equity ratios.  In addition, while the EMH states that stocks always trade at their fair value on stock exchanges, making it impossible for investors either to purchase undervalued stocks or sell stocks for inflated prices, the group argues that it should be impossible to outperform the overall market through expert stock selection or market timing.  Therefore, passives are bound to beat actives that seek to exploit mispriced assets relative to a risk-adjusted benchmark, since the invisible hand of the market works faster than any single investor.  Nevertheless, the anomalies mean that the whole paradigm of rational expectations that reigned supreme for nearly fifty years is no more than an ideological aspiration about how markets ought to work under the tenets of neo-classical economics.  So there. 
5.      SUSTAINABLE INVESTMENT:    California Public Employees Retirement System has announced release of its first stand-alone report on its Environmental, Social and Governance (ESG) work.  The report, entitled “Towards Sustainable Investment – Taking Responsibility,” explains the fiduciary framework CalPERS has adopted to integrate sustainability across the total fund, illustrates achievements from the last few years and outlines its vision for the future.  Inside the report, you will find

  • CalPERS views on Sustainable Investing
  • The “3 Ps” of the CalPERS program:  Priorities, Performance and Procurement
  • How CalPERS integrates ESG in its own operations
  • Its strategic themes of alignment of interest, climate change and human capital 
    View the entire report at
    Incidentally, CalPERS pays out approximately $14 Billion in pension benefits each year to its members.  Payments come from three sources:  CalPERS members, contributions from their employers and investment returns.  Investments typically provide two-thirds or more pension payments giving CalPERS a need to provide long term sustainable returns. 
       According to a new LIMRA survey, three quarters of advisors who offer retirement income services to their clients said they had adjusted their business to do more retirement income planning over the past year.  With 10,000 Boomers turning 65 each day for the next 18 years, advisors are recognizing the substantial market for retirement income planning.  Outside of the pure demographics, LIMRA’s research has found that only one-third of Americans feel they are saving enough for retirement and a majority of pre-retirees (people within 5 years of retirement) feel that they are not prepared for retirement.  LIMRA’s study, “Advisor Perspectives on Retirement Planning,” found that for 4-in-10 advisors, retirement planning constitutes half or more of their business activities.  More seasoned advisors tended to advise more clients regarding retirement planning.  Similar to prior LIMRA research, 6-out-of-10 advisors deem longevity to be the greatest risk facing their clients.  Formal written retirement plans play a critical role in most advisors’ practices.  6-in-10 advisors say that formal written plans are well received by their clients.  Earlier LIMRA research reveals that only 3-in-10 pre-retirees who have worked with an advisor have a written retirement plan. 
    7.      LOCAL AREA PERSONAL INCOME, 2010:    The Bureau of Economic Analysis, U.S. Department of Commerce, has released estimates of personal income at the county level for 2010.  Among large counties (those with a population of at least 250,000), personal income grew 3.7% in 2010, equaling the growth rate of the nation.  Personal income in small and medium-sized counties grew 3.9% and 3.6%, respectively, in 2010.  The following chart depicts the highest per capita totals of localities for 2010: 
    Area           2010          2009                   2000                   1990
    New York, NY     $111,386   $104,384   $83,947     $52,740
    Teton, WY                    $94,672     $90,113     $65,255     $35,323
    Marin, CA           $82,936     $81,081     $69,936     $34,640
    Sully, SD             $80,165     $60,114     $44,621     $26,832
    Arlington, VA      $79,967     $77,710     $50,815     $31,026
    AlexandriaVA    $76,362     $74,608     $48,781     $31,168
    Pitkin, CO           $76,318     $74,907     $69,106     $31,349
    Nantucket, MA    $73,654     $67,285     $50,053     $30,712
    Westchester,NY$73,159    $71,857     $54,600     $34,033
    Fairfield, CT       $71,768     $70,494     $59,589     $33,682
    BEA 12-15 (April 25, 2012) 
    8.      FILARSKY TELLS DELIA TO READ SUPREME COURT OPINION IN HELL:     Supreme Court litigants rarely obtain celebrity status after decisions are rendered.  For example, Norma McCorvey, better known as Jane Roe, is probably the most famous former litigant because she switched sides and became a pro-life advocate in 1995.  California attorney Steve Filarsky, however, managed to extend his Supreme Court fame for a few extra minutes.  The case stemmed from Filarsky’s role as a private attorney working for the City of Rialto, Cal. in an employment investigation.  Nick Delia, the firefighter who was being investigated, sued the city, the fire department, two fire chiefs and Filarsky for violating his constitutional rights in course of the investigation.   The federal court of appeals concluded that Filarsky was not entitled to qualified immunity because he was a private attorney.  The Supreme Court disagreed, noting that Delia’s claim arose from Filarsky’s work for the government (see C&C Newsletter for April 26, 2012, Item  7).  Filarsky has written Delia to express his thoughts on his victory.  The letter stated:
    Congratulations.  You are now in the history books! You will be able to read about it eternally from hell.
    Not so sincerely,
    Steve A. Filarsky
    The Supreme Court’s opinion in the case recounts that Delia’s attorney threatened Filarsky a number of times in his objections to the investigation.  Here is a sample:
  • We might quite possibly find a way to figure if we can name you Mr. Filarsky ... If you want to take that chance, you go right ahead.
  • Everybody is going to get named, and they are going to sweat it out as to whether or not they have individual liability.
  • Make sure the spelling is clear [in the order] so we know who to sue.

Considering the facts, we wonder if the court will discipline Filarsky for directly contacting a party who is represented by counsel. 
    A report from, indicates that a New York appeals court has suspended an immigration lawyer from law practice for two years after a federal grievance committee found he had submitted briefs of “shockingly poor quality.”  The state court opinion summarized the federal grievance committee’s conclusions. Sobolevsky had submitted briefs of shockingly poor quality.  Defects included incorrect clients’ names, inclusion of irrelevant boilerplate, and reference to evidence that had not been submitted.  Sobolevsky blamed the problems on a variety of factors, including the onset of glaucoma and disruptions caused by a law office move.  He also asserted that a paralegal did some of the deficient work, itself an admission of unauthorized practice of law.  Maybe Sobolevsky should stick to boxer shorts. 
10.    THIRTY-THIRD ANNUAL POLICE OFFICERS’ AND FIREFIGHTERS’ PENSION TRUSTEES’ SCHOOL:   The 33rd Annual Police Officers’ and Firefighters’ Pension Trustees’ School at FSU’s Center for Academic & Professional Program Services in Tallahassee will take place on May 14-16, 2012.  You may access information and updates about the Trustees’ School, including area maps, a copy of the program when completed and links to register with FSU, as well as the Doubletree Hotel, on the Retirement Division’s website at  All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this unique, insightful and informative program. 
11.    GOLF WISDOMS:      The more your opponent quotes the rules, the greater the certainty that he cheats.      
12.    PARAPROSDOKIAN:  (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part.  It is frequently used for humorous or dramatic effect.):     “I haven’t slept for ten days, because that would be too long.” Mitch Hedberg          
13.    QUOTE OF THE WEEK:   “You never saw a fish on the wall with its mouth shut.”  Sally Berger
14.    ON THIS DAY IN HISTORY:  In 1937, Margaret Mitchell wins Pulitzer Prize for “Gone With the Wind.”  
15.    KEEP THOSE CARDS AND LETTERS COMING:  Several readers regularly supply us with suggestions or tips for newsletter items.  Please feel free to send us or point us to matters you think would be of interest to our readers.  Subject to editorial discretion, we may print them.  Rest assured that we will not publish any names as referring sources. 
16.    PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you.




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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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