Cypen & Cypen   Miami
Home Attorney Profiles Clients Resource Links Newsletters navigation
825 Arthur Godfrey Road
Miami Beach, Florida 33140

Telephone 305.532.3200
Telecopier 305.535.0050

Click here for a
free subscription
to our newsletter

Cypen building

Cypen & Cypen
JUNE 30, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The Aircraft Mechanics Fraternal Association, in behalf of its United Airlines and Northwest Airlines represented membership, is requesting that the Pension Benefit Guaranty Corporation conduct an audit of the plans and an initial review for any potential conflicts of interest. The June 20, 2005 letter is addressed to Department of Labor Secretary Elaine Chao (who serves as Chairperson of PBGC) and Bradley Belt, PBGC Executive Director. The letter states that PBGC and responsible fiduciaries should, as a matter of course, undertake audits of distressed plans in order to determine whether any of the parties providing financial services to the plans may have contributed to their demise. The letter makes reference to the recent Securities and Exchange Commission staff report that raised serious questions about whether some pension consultants are fully disclosing potential conflicts of interest that may affect objectivity of advice given to their pension plan clients. (See C&C Newsletter for May 19, 2005, Item 1.) The letter also refers to reports that private fraud investigators have uncovered instances where banks custodying pension assets have had undisclosed financial arrangements with money managers handling plan assets. “All the above referenced revelations are troubling and should be investigated. While the plan sponsor may be bankrupt, the parties that have been dealing with the plan are not and it may be possible to recover assets from these parties on behalf of the plan’s participants.” In the meantime, an article in the June, 2005 Forbes states that United Airlines lists Russell Investment Group as its chief pension consultant, while Russell also invests money for United through alliances with other money managers. Dum de dum dum.....


In addition to pensions, many state and local governmental employers provide other postemployment benefits (OPEB) as part of the total compensation offered to attract and retain services of qualified employees. OPEB include postemployment health care, as well as other forms of postemployment benefits, like life insurance. Governmental Accounting Standards Board Statement No. 45 establishes standards for measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures and, if applicable, required supplementary information in financial reports of state and local governmental employers. GASB 45 applies the accounting methodology used for pension liabilities (GASB 27) to OPEB, and is similar in concept to an accounting standard adopted for the private sector in the mid 1990s. GASB 45 supposedly does not increase costs of employment, but attempts more fully to reveal them by requiring governmental units to include future OPEB costs in their financial statements. Under current practice, nearly all governments pay only the cost of OPEB due in the current year, with no effort made to accumulate assets to offset future benefit costs. While not mandating funding, GASB 45 does establish a framework for prefunding of future costs. Amounts required to prefund OPEB on an actuarially sound basis are likely significantly to exceed annual pay-as-you-go outlays for these benefits. Many actuaries believe, based on preliminary studies done for a few proactive governments, that actuarially determined annual contributions could be five to ten times higher than current expenses in many cases. GASB 45 will be phased in, beginning with the largest governments, effective for fiscal periods beginning after December 15, 2006 for governments with total annual revenues of $100 Million or more; after December 15, 2007, for governments with total annual revenues of $10 Million or more but less than $100 Million; and after December 15, 2008, for governments with total annual revenues of less than $10 Million. As always, earlier implementation is encouraged. For your information, pronouncements of the Governmental Accounting Standards Board apply to financial reports of all state and local governmental entities, including general purpose governments; public benefit corporations and authorities; public employee retirement systems; and public utilities, hospitals and other healthcare providers, and colleges and universities.


The elected treasurer-tax collector for Orange County, California, was authorized to invest Orange County funds and the funds of an investment pool, which consisted of Orange County funds and funds on deposit from other governmental entitles. The treasurer raised additional funds by borrowing from brokers and lenders, transferring securities owned by the county as collateral for cash, and promised to repay cash plus interest upon return of the securities. This arrangement is known as a “reverse purchase agreement.” As long as interest rates were stable or declining, the treasurer was able to invest borrowed funds at rates higher than were paid for the funds. When interest rates began to rise in the early spring of 1994, increasing interest rates led to collateral calls by lenders under the agreements. The value of the county’s holdings also declined (by 7%). In December, 1994, Orange County filed for bankruptcy protection and ultimately reported a loss of $1.6 Billion for the year ending June 30, 1995, due to liquidation of most of its securities. The treasurer subsequently pleaded guilty to four felonies, and California Board of Accountancy filed an accusation against KPMG, the county auditor, and four of its accountants. The accountants were alleged to have engaged in unprofessional conduct that was grossly negligent in that the audit work contained extreme departures from applicable professional standards, including the more stringent standards for governmental audits. The Board found good cause to discipline the accountants, three of whom appealed. The Second Appellate District Court of Appeal has now affirmed the disciplinary action, which included suspensions, probations and an award of over $1.8 Million for prehearing prosecution/investigation costs against KPMG. McBride v. The Board of Accountancy of the State of California, Case No. B170613 (2d Dist., June 21, 2005).


Following a decision of the Third District Court of Appeal and rejecting one from the Second District, the Florida Supreme Court has held that Section 843.085(1), Florida Statutes, is unconstitutional. That statute makes it a crime for an individual to exhibit, wear, or display any indicia of authority, or any colorable imitation thereof, of any federal, state, county or municipal law enforcement agency or to display in any manner or combinations the word or words “police,” “patrolman,” “agent,” “sheriff,” “deputy,” “trooper,” “highway patrol,” “wildlife officer,” “marine patrol officer,” “state attorney,” “public defender,” “marshal,” “constable” or “bailiff,” which could deceive a reasonable person into believing that such item is authorized by any of the agencies described. The statute has no intent-to-deceive element, but rather, requires only a general intent. Thus, an individual wearing a shirt containing one of the specified words, even in combination with other words, is subject to prosecution under the statute. In addition, the statute is vague and violates substantive due process, because its imprecision fails to give fair notice of what conduct is prohibited. There was a strong dissent authored by Justice Cantero and joined by Justice Bell, the high court’s two newest members. The dissent closes with hope that the legislature will act quickly to fill the void created by this decision. Sult v. State of Florida, 30 Fla. L. Weekly S470 (Fla., June 23, 2005).


Title I of ERISA generally preempts any state law that relates to an employee benefit plan covered under that title. There are, however, a number of exceptions. Section 514(d) of Title I acts as a federal savings limit on ERISA’s broad preemption, providing that nothing in this title shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law. The Family and Medical Leave Act is a law of the United States whose overall purpose and structure parallel those of the State of Washington’s Family Care Act. However, unlike FMLA, the State of Washington’s Family Care Act affords all employees the automatic right to substitute paid sick leave for unpaid leave to care for a relative. Thus, according to the Department of Labor, the state Family Care Act’s leave substitution provision is saved from ERISA preemption by ERISA’s federal savings clause, because a determination that ERISA preempts the Family Care Act would “impair” FMLA, which expressly encourages more generous state family leave rights than FMLA provides directly. EBSA No. 2005-13A (May 31, 2005).


Prior to 2000, the Jacksonville Police and Fire Pension Fund provided that surviving spouses of firefighters and police officers who died outside line of duty became ineligible for benefits upon remarriage. A 2000 amendment to the plan sought to remove the penalty imposed upon surviving spouses in the event of remarriage, by allowing benefits to continue even upon remarriage. However, the amendment was prospective only, and included a limitation that surviving spouses who became ineligible for benefits because they were remarried before October 1, 2000 remained ineligible for as long as their marriage continued. A surviving spouse, married to a police officer who had died of non-duty related causes, remarried prior to October 1, 2000, making her ineligible for future benefits. Not being able to take advantage of the amendment, she sued the City of Jacksonville and the pension fund, challenging the amendment on equal protection grounds. The Equal Protection Clause of the Fourteenth Amendment prohibits state and local governments from denying to any person within its jurisdiction equal protection of the laws. To determine whether a law violates the Equal Protection Clause, the court must first examine the classification made by the law to determine whether a suspect class or fundamental right is involved. If neither is involved, the court will uphold the classification if there is a rational relationship to a legitimate governmental interest. Here, the classification clearly does not involve a suspect class or a fundamental right. Under the rational-basis standard, a legislative classification is accorded a strong presumption of validity and must be upheld against Equal Protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification. Given such presumption, a state or local government whose law is being challenged does not have to produce evidence to sustain its rational. Nevertheless, defendants successfully asserted that the classification is rationally related to a legitimate interest in providing actuarially sound and affordable pension benefits. Further, they argued that providing prospective, rather than retrospective, application is an effective cost management tool. The court also found it conceivable that the Jacksonville City Council wanted to make the amendment prospective only because it knew that former beneficiaries entered into remarriage before October 1, 2000 with the knowledge and expectation that they would be losing their benefits, and planned accordingly. Inasmuch as plaintiff failed to negate all rational bases, the court dismissed her complaint with prejudice. Parrish v. Consolidated City of Jacksonville, Case No. 3:04-cv-986-J-32HTS (Md. Fla., June 22, 2005).


Following fast on the heels of GASB 45 that deals with Other Post Employment Benefits (see Item 2 above), Governmental Accounting Standards Board has issued Statement No. 47, establishing accounting standards for termination benefits. In financial statements prepared on the accrual basis of accounting, employers should recognize the liability and expense for voluntary termination benefits (for example, early-retirement incentives) when the offer is accepted and the amount can be established. A liability and expense for involuntary termination benefits (for example, severance benefits) should be recognized when a plan of termination has been approved by those with authority to commit the government to the plan, the plan has been communicated to employees and the amount can be estimated. For financial reporting purposes, a plan of voluntary termination is defined as a plan that (a) identifies, at a minimum, the number of employees to be terminated, the job classifications or functions that will be affected and their locations and when the terminations are expected to occur and (b) establishes terms of termination benefits in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated. If a plan of involuntary termination requires that employees render future service in order to receive benefits, the employer should recognize a liability and expense for the portion of involuntary termination benefits that will be provided after completion of future service ratably over the employees’ future service period, beginning when the plan otherwise meets the recognition criteria discussed above. For termination benefits provided through an existing defined benefit OPEB plan, provisions of this statement should be implemented simultaneously with the requirements of Statement 45. For all other termination benefits, this statement is effective for financial statements for periods beginning after June 15, 2005. Of course, earlier application is encouraged.


From Court TV we learn that a Kansas high school student has been charged with battery against his teacher, using an unusual weapon -- vomit. A 17 year old student is due in court on July 1 to face a misdemeanor battery charge for throwing up on his Spanish teacher. According to state law, offenders can be charged with battery if the action intentionally causes physical contact with another person when done in a rude, insulting or angry manner. The district attorney claims that the young barfer threw up on his teacher as part of an end-of-semester prank, and said he hopes to teach the teen that his actions were no laughing matter. Says the prosecutor, “we view this as a juvenile prank that was in incredibly poor taste, no pun intended.” If the student is convicted, he will likely receive probation and be required to perform community service. Defense counsel does not dispute that his client vomited on the teacher, but claims the incident was an accident. Counsel did acknowledge, however, that the student and teacher have a “sour relationship” -- no pun intended? -- but contends the teacher’s confrontational behavior while the young man was ill made him nervous and nauseated. The prosecutor intends to prove that the boy ate an extra big lunch, made his intentions known to others and went out of his way on the last day of school to vomit on his teacher. One legal expert feels that it may be difficult to prove intent in a case involving vomit. The question boils down to whether the act voluntary. If not, there is no crime. Prosecutors have an uphill battle to prove the act was a battery.

Copyright, 1996-2006, all rights reserved.

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.

Site Directory:
Home // Attorney Profiles // Clients // Resource Links // Newsletters