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Miami

Cypen & Cypen
NEWSLETTER
for
May 23, 2013

Stephen H. Cypen, Esq., Editor

1.    NATIONAL LEAGUE OF CITIES SAYS PUBLIC PENSION PLANS ARE NOT IN A CURRENT CRISIS!: Most state and local employee retirement systems have substantial assets to weather the economic crisis, according to National League of Cities.  There is currently $2.7 trillion already set aside in pension trusts for current and future retirees. Public pensions are funded and paid out over decades; state and local government retirees do not draw down their pensions all at once. State and local employee retirement systems do not seek federal financial assistance. One-size-fits-all federal regulation is neither needed nor warranted, and would only inhibit recovery efforts at the state and local levels.  In 2010, more state and local governments enacted significant modifications to improve the long-term sustainability of their retirement plans in 2010 than in any other year in recent history.  In the past few years, nearly two-thirds of states have made changes to benefit levels, contribution rate structures or both; many local governments have made similar fixes to their plans.  All pension obligations are legally binding, often backed by explicit state constitutional or statutory guarantees, states are generally free to change any provision of their retiree health plans, including terminating them, because they do not carry the same legal protections. Therefore, it is misleading to combine unfunded pension liabilities with unfunded retiree health benefits as an argument for impending pension meltdown.  Over the last 25 years (which saw three economic recessions and four years of negative median public fund investment returns) actual public pension investment returns averaged 9.25 percent, which exceeded projections. These actual returns exceed the 8% average public pension investment assumption, as well as the average assumed rate of return used by the largest corporate pension plans.  The portion of state and local government spending dedicated to retirement system contributions is about three percent. Pensions are a trust that public retirees and their employers contributed to while they were working.  While there are pension trusts that are fully funded with enough assets for current pension obligations, there are legitimate issues with underfunding because of the Great Recession and stock market declines. Some experts argue that a modest increase in contributions to take advantage of compounded interest, modifications to employee eligibility and benefits, or both, may be sufficient to remedy the underfunding in most states.  The unprecedented number of benefit and financing changes in public plans over the last few years will help to minimize any required increases. The vast majority of public employees are required to contribute a portion of their wages, typically, five to ten percent, to their state or local pension, and these contribution rates are being raised in many state and local governments.  Public employees live in every city and county in the nation. More than 90 percent retire in the same jurisdiction where they worked. The over-$175 billion in annual benefit distributions from pension trusts are a critical source of economic stimulus to communities throughout the nation, and act as an economic stabilizer in difficult financial times. Recent studies have documented public retirement system pension distributions annually to generate over $29 billion in federal tax revenue, more than $21 billion in annual state and local government tax revenue, and a total economic impact of more than $358 billion.  We cannot over stress the importance that this piece comes from National League of Cities, which is dedicated to helping city leaders build better communities.  Working in partnership with the 49 state municipal leagues, National League of Cities serves as a resource to an advocate for more than 19,000 cities, villages and towns it represents.
 
2.    SECURITIES LENDING IS BAAAAACK…:  In the aftermath of the financial shake-up five years ago, many defined benefit plan sponsors ended or paused their securities lending activities. According to plansponsor.com, however, over the last two years, sponsors have resumed securities lending. Proponents say that securities lending has stabilized to offer a steady stream of modest basis point returns to conservative asset holders.   Securities lending provides lower returns than it did before the financial crisis, but risk and return go hand-in-hand. (Oh, yeah, what happened last time?)  From 2008 to 2009, securities lending saw significant disruptions because of liquidity issues. Demand for securities dropped, which led sponsors to evaluate securities lending activities, and, subsequently, many sponsors left the market. As the liquidity issues cleared up, the market began to function more normally, so plans revaluated and elected to reinstate securities lending. Still, securities lending has not returned to its pre-2008 levels. Estimates on the current size of the securities lending market are approximately $1.7 trillion, down from approximately $3.8 trillion in early 2008.  We were not sold back then, and were not sold now.
 
3.    2013 TRENDS IN STATE AND LOCAL GOVERNMENT WORKFORCE:  Center for State & Local Government Excellence has issued its Survey Findings on State and Local Government Workforce Trends for 2013.  The picture is brightening for the state and local government workforce, although 33% still report pay freezes and 18% report layoffs. These figures compare with 51% reporting pay freezes in 2012, and 28% report­ing layoffs. Here are some other key findings:

  • Twenty-seven percent report that hiring freezes are in place compared with 42% in 2012. 
  • Fifty-six percent modified health benefits.
  • Seventy-four percent rated staff development the most important workforce issue in 2013; followed by employee morale (70%) and managing workloads (68%).

The pace of retirements is high, with 22% reporting that employees have accelerated their retirement date. Twenty-nine percent of current employees saw an increase in their pension contributions, as did 34% of new hires. When asked if employees were financially prepared for retirement, 44% said “no,” and 18% said, “yes.”
 
4.    DB PLANS STARTING TO ALLOW LUMP SUM DISTRIBUTIONS: There has been a major shift in how defined benefit plans distribute benefits, according to plansponsor.com.  In recent years, some plan sponsors have amended their plans to allow participants to take lump sums when they terminate employment.  The norm was different 10 years ago -- lump sums were not a distribution option for anyone. The goal was to keep the money in the plan for as long as possible after a participant left. In the past, when a person left employment, his benefit was typically left behind in the plan.  In most cases, there was no option for the employee to get his benefit cashed out.  Employers preferred to hold on to the money in the plan because positive investment gains usually offset the need to make additional employer contributions. Sponsors believed they could earn a consistent 8% a year. Additionally, there was a perceived downside to paying out lump sums to terminated employees not retiring, because substantial “leakage” occurred: funds were spent rather than rolled over to an individual retirement account.  Now, however, employers are aware of the interest and investment risk they retain when benefits remain in the plan. Therefore, they may attempt to de-risk their plans by, for example, offering terminated employees lump sums.  Although many are attracted to a lump sum, the need to manage the lump sum to insure income for life does away with purpose of the DB plan in the first place. 
 
5.    YOU WORK, YOU RETIRE AND THEN YOU DIE: The Institute of Economic Affairs has released a paper entitled “Work Longer, Live Healthier.”  In the past 50 years, labor market participation among older people has declined significantly, although the trend has reversed in recent years. In the European Union, about 70% of people between 60 and 64 are inactive.   In the case of the United Kingdom, there has been a significant drop in the employment rate among older men. That rate among men aged 50-55 decreased from over 90% to less than 70% between 1968 and the end of the 1990s. Employment for men aged 60-64 slumped from around 80% to 50%, and for those aged 65-69, it halved from 30% to about 15%. While people have been retiring earlier on average, they have also been living longer. A 61-year-old man in 1960 had the same probability of dying within a year as a 70-year-old man in 2005. Healthy life expectancy at age 65 has also increased in the United Kingdom, but at a somewhat slower pace than regular life expectancy. Life expectancy at age 65 increased by 4.2 years for men between 1981 and 2006. During the same period, healthy life expectancy at age 65 increased by 2.9 years for men. Increases in the number of healthy years of life that we can enjoy have not been reflected in longer working lives – indeed, the reverse is the case: people were working longer half a century ago.  If rising pension ages and labor force participation at older ages caused greater ill health, then it would be a matter for concern. Most research on the relationship between health and working in old age has produced ambiguous results. Research in this area is inherently difficult because of the fact that, just as retirement can influence health, health can influence retirement decisions.  To date, research has not generally examined the relationship between the number of years spent in retirement and health. This issue is important: it is possible that health will initially improve when somebody retires and then, after a while, start to deteriorate due to reduced physical activity and social interaction.  New research in the paper indicates that being retired decreases physical, mental and self-assessed health. The adverse effects increase as the number of years spent in retirement increases. The results vary somewhat depending on the model and research strategy employed. By example, the following results were obtained: 

  • Retirement decreases the likelihood of being in “very good” or “excellent” self-assessed health by about 40%. 
  • Retirement increases probability of suffering from clinical depression by about 40%.  
  • Retirement increases probability of having at least one diagnosed physical condition by about 60%.  
  • Retirement increases probability of taking a drug for such a condition by about 60%.

Higher state pension ages are not only possible (given longer life expectancy) and desirable (given fiscal costs of state pensions), but later retirement should, in fact, lead to better average health in retirement. As such, government should remove impediments to later retirement that are to be found in state pension systems, disability benefit provisions and employment protection legislation. IEA Discussion Paper No. 46 (May 2013).
 
6.    COUPLES RETIRING IN 2013 WILL NEED $220,000 TO PAY MEDICAL EXPENSES THROUGHOUT RETIREMENT:  A 65-year-old couple retiring in 2013 is estimated to need $220,000 to cover medical expenses throughout retirement, according to Fidelity Investments. This year’s figure represents an 8 percent decrease over last year’s estimate of $240,000.  Fidelity has calculated an annual estimate of medical expenses for retirees since 2002. For many Americans, health care is likely to be among their largest expenses in retirement. The estimate does not include any costs associated with nursing home care, and applies to retirees with traditional Medicare insurance coverage.  Fidelity’s estimate had increased an average of 6 percent annually between 2002 and 2012. It decreased only once before, in 2011, due to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. The estimate decreased for the second time in 2013 due to lower than expected Medicare spending in recent years, as well as a reduction in projected Medicare spending in the near future.
 
7.    FLORIDA TEACHER LAWSUIT COULD SPAWN OTHERS: The lawsuit filed by Florida teachers last month, challenging the constitutionality of the state’s new teacher evaluation system, was touted as the first of its kind, but unlikely to be the last (See C & C Newsletter for April 25, 2013, Item 7).  The teachers’ complaint, backed by the state's largest teacher union -- the Florida Education Association -- and the National Education Association, centered on one fact: the new system, which required student performance to make up a certain percentage of a teacher’s annual performance review, led to teachers being evaluated based on the test scores of students they had never taught. Sometimes, they were judged by the test scores of students from another school altogether. The lawsuit alleges that this method of assessment infringes on the teachers’ due process and equal protection rights under the U.S. Constitution, because Florida law allows evaluations to be used in personnel decisions, including raises and terminations. Because the case revolves around a constitutional question, it will be heard by federal judges in the U.S. District Court for Northern Florida. A ruling overturning the state’s teacher evaluation system completely, which is what plaintiffs seek, could then serve as precedent for lawsuits in other states.  Advocates have already turned their eyes to Arizona and Tennessee, according to governing.com. Both states will soon implement teacher evaluation programs that will allow teachers to be assessed in part by the performance of students they did not directly teach. The Florida case would definitely have some implications in other states. Like Florida, those states have solved a problem common to all teacher evaluations based on student performance -- many teachers teach subjects, such as art, music or science, not covered by statewide standardized tests -- by applying a school wide average of test scores to those teachers whose subjects are not tested. Such is the same allegedly unfair treatment that led the Florida teachers to file their lawsuit.
 
8.    THIRTY-FOURTH ANNUAL POLICE OFFICERS’ AND FIREFIGHTERS’ PENSION TRUSTEES’ SCHOOL: The 34th Annual Florida Police Officers’ and Firefighters’ Pension Trustees’ School at FSU’s Center for Academic & Professional Program Services in Tallahassee was held on May 20-22, 2013.  Congratulations to all for presenting a great program.  We will miss you, Trish!

9.    WHEN INSULTS HAD CLASS:  "Why do you sit there looking like an envelope without any address on it?"  Mark Twain

10.  PHILOSOPHY OF AMBIGUITY: If one synchronized swimmer drowns, do the rest drown too?
 
11.  ON THIS DAY IN HISTORY: In 1977, Supreme Court refuses to hear appeals of Watergate wrong doers H.R. Haldeman, John Ehrlichman and John Mitchell.
 
12.  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. 
 
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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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