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Cypen & Cypen
JUNE18, 2009

Stephen H. Cypen, Esq., Editor


There is an interesting article entitled “Two-Hat Issues for Trustees” in the June 2009 Benefits & Compensation Digest.  Although the piece deals with multiemployer trust funds in the private sector, many of the issues are common to public fund trustees (employee-elected vs. employer-appointed).  What, then, is the two-hat issue, sometimes referred as the two-hat dilemma?  A union official or employer wears the hat of a trustee when sitting on the board of a fund.  His duty to participants and beneficiaries is often at odds with the trustee’s loyalties to the entity (union or employer) that appointed the trustee.  An understanding of the two-hat dilemma is essential to all aspects of fiduciary responsibility.  Here are some of the potential two-hat issues listed: 

  • A plan is more than 100% funded.  Labor trustees want increased benefits; management trustees want reduced contributions or a contribution holiday.
  • A plan is severely underfunded.  Labor trustees want increased employer contributions; management trustees want a reduction in benefits.
  • The labor trustees want to keep a service provider who has a reputation for quality and service.  The management trustees want a cheaper provider. 
  • The labor trustees want to become more involved in proxy voting on common stocks held in the pension plan and to vote against what they think is excess compensation to corporate officers.  The management trustees object and state that the compensation paid to officers is often responsible for excellent investment returns. 
  • Labor trustees of a pension plan want the real estate portfolio manager to invest in economically targeted investments that benefit union construction.  The management trustees object and state that better investment returns are available elsewhere. 

One specific issue emerged concerning inappropriate trustee action:  if a trustee’s inappropriate behavior is a fiduciary breach, the other plan trustees have a responsibility to take action.  Trustees cannot be idle when they know or suspect that a trustee has breached his fiduciary responsibilities.  The other trustees should immediately notify the plan attorney and follow his advice to solve the problem.  If a trustee knows of a fiduciary breach by another trustee and does nothing, the trustee who does nothing can be held responsible. 


The Florida Attorney General has received a request for opinion as to whether hand-written notes, taken by a city commissioner on agenda items during a commission meeting but not  disclosed to anyone, are public records subject to disclosure.  The City received a public records request for all such notes, but the subject city commissioner responded that the notes were personal thoughts on agenda items.  Access to public records is guaranteed by Article I, Section 24, Florida Constitution, and Chapter 119, Florida Statutes.  (Public records include documents, papers, letters, maps, books, tapes, photographs, films, sound recordings, data processing software or other material, regardless of physical form, characteristics or means of transmission, made or received pursuant to law or ordinance in connection with transaction of official business by any agency.)  Both the Constitution and statute specify that public records are those records that are in some way connected to "official business."  Thus, any portion of handwritten notes that were not made or received in the official course of business would not be public records.  However, no means should be used to circumvent or evade  requirements of the Public Records Law.  If the purpose of a document prepared in connection with official business is to perpetuate, communicate or formalize knowledge, then it is a public record regardless of whether it is in final form or the ultimate product of the agency.  Moreover, nonfinal documents need not be communicated to anyone in order to constitute a public record.  Accordingly, to the extent the city commissioner has taken notes for his own personal use and such notes are not intended to perpetuate, communicate or formalize knowledge, personal notes taken at a workshop or during a commission meeting would not be considered public records.  (The Attorney General was also asked whether text messages sent or received by city commissioners during city commission meetings are public records.  Because that issue is presently before a circuit court in Broward County, the Attorney General declined to answer so as to avoid intruding upon jurisdiction of the judiciary.)  INFORMAL AGO (June 2, 2009). 


A town council received a pre-suit notice letter under the Bert J. Harris, Jr., Private Property Rights Protection Act.  That statute recognizes that some laws, regulations and ordinance of the state and political entities may inordinately burden, restrict or limit the private property rights without amounting to a taking.  The act, therefore, creates a separate and distinct cause of action from a takings suit to remedy such situations.  However, a claimant under the statute must give 180 days notice prior to filing an action.  A town council asked the Florida Attorney General whether it may conduct a closed meeting pursuant to Section 286.011(8), Florida Statutes to discuss settlement negotiations.  Section 286.011(8), Florida Statutes, a very narrow exception to the Sunshine Law, makes litigation strategy or settlement meetings confidential when they are held between a board and its attorney, and the board is a party before a court or administrative agency.  At the time pre-suit notice was given under the Bert J. Harris Act, no action had been filed in a court or before an administrative agency.  While there may be anticipation of a civil proceeding, the Attorney General could not conclude that one was pending such that the provisions of Section 286.011(8), Florida Statutes, would be available.  Therefore, the Attorney General concluded that a town council which has received a pre-suit notice letter under the Bert J. Harris Act is not a party to pending litigation, and, therefore, may not conduct a closed meeting pursuant to Section 286.011(8), Florida Statutes, to discuss settlement negotiations.  AGO 2009-25 (June 10, 2009). 


In a 38-page decision (which we have not read), a Milwaukee County Judge struck Milwaukee’s controversial paid sick day ordinance that mandates private employers provide paid sick leave (see C&C Newsletter for November 20, 2008, Item 11 and C&C Newsletter for December 11, 2008, Item 9).  The ordinance had been challenged by the Metropolitan Milwaukee Association of Commerce.  MMAC argued that the law was improperly enacted under Wisconsin’s direct legislation statute, that it was preempted by state and federal wage and workplace laws, and that it ws unconstitutional for four reasons.  It claimed the ordinance over extended the City’s police powers, impaired existing contracts, reached beyond the City’s jurisdiction and was vague.  The Judge agreed on the first point, and found the ballot language was not a “concise statement” of the nature of the proposed ordinance. 


Mercer asks that question in the latest installment of its annual survey and analysis of  retirement programs sponsored by companies in the Standard & Poor’s 500.  Here are some of the key findings this year: 

  • Weak asset returns reduced the 2008 median funded status of defined benefit plans to 72%, down from 94% in 2007, and below the previous low of 75% in 2002. 
  • 13% of companies fall into the most serious category of large, poorly funded plans:  less than 75% funded and pension obligations that total more than 40% of market capitalization. 
  • For the first time in 2008, median spending on defined contribution plans exceeded median spending for DB plans. 
  • The average target asset allocation for DB pension assets was 58% equities, a five percentage point decrease over the last four years . 

Of the 500 companies included in the survey: 

  • 376 sponsor a DB plan with $1.45 Trillion reported pension obligations and $1.14 Trillion reported pension assets
  • Six companies have a post-retirement medical plan but no DB pension plan
  • 108 companies sponsor only a DC plan and 360 others sponsor a DC plan in conjunction with either a DB or post-retirement medical plan.



Institutional investors are committing to alternative investments, such as hedge funds and private equity, according to a Greenwich Associates survey.  Public pension funds, endowments and foundations are sticking with equity, credit and commodity markets even though their portfolios suffered losses in 2008.  Public pension funds are taking on more short-term volatility and less liquidity than corporate pension funds, as they are subject to different accounting rules.  A Wall Street Journal analysis of the Greenwich survey indicates that public pension funds are committing more money to riskier alternatives, attempting to cover up for losses of last year.  Fool me once, shame on you; fool me twice, ... . 


The New York Attorney General has announced Riverstone Holdings LLC, an energy-focused private-equity firm, will pay $30 Million to resolve its involvement in a “pay-to-play” probe involving the state’s largest pension fund.  The Attorney General said Riverstone will become the second investment firm to adopt a code of conduct regarding investments with the $122 Billion New York State Common Retirement Fund and other public pension funds nationwide, according to the Wall Street Journal.  The code of conduct includes a ban on use of placement agents and lobbyists, and imposes restrictions on campaign contributions to officials who can influence investment decisions.  The Attorney General wants the code of conduct to become part of New York law.  Riverstone was a joint-venture partner in the Carlyle/Riverstone Global Energy & Power Funds, in which the New York State Common Retirement Fund made about $530 Million in investments.  In May, private-equity firm Carlyle Group LP, Riverstone’s joint venture partner, agreed to pay $20 Million and adopt a pension fund code of conduct (see C&C Newsletter for May 21, 2009, Item 15). 


The Secretary of the United States Department of Labor brought an action against a Master Plan Sponsor and Recordkeeper for alleged violations of the Employment Retirement Income Security Act of 1974.  The Master Plan Sponsor administers retirement plans that provide retirement benefits to employees working under certain public contracts.  The Secretary alleged that the Master Plan Sponsor violated its fiduciary duties by failing to ensure the collection of employer contributions by the trustee and that the plan provision relieving the trustee from the obligation to collect employer contributions is void as against public policy.  The Master Plan and Trust Agreement explicitly state that the trustee is not responsible for monitoring and collecting employer contributions.  A United States District Judge granted summary judgment in favor of the Secretary.  Although the Court concluded that the Master Plan Sponsor was not acting in a fiduciary capacity with respect to the conduct alleged, the subject provision was inconsistent with ERISA requirements for plan provisions under Section 410, irrespective of the Master Plan Sponsor’s status as a fiduciary.  That section contains an anti-exculpation provision, which makes void as against public policy any provision purporting to relieve a fiduciary from responsibility or liability or a responsibility, obligation or duty under ERISA.  The Court found that equitable relief should be granted, declaring that the exculpatory provisions relieving the trustee of the obligation to collect employer contributions are in violation of ERISA Section 403 (trustees have exclusive authority and discretion over management of plan assets) and are void against public policy under Section 410, and requiring that such provisions be stricken from the plans.   As indicated, the claim as to violation of Section 404 (fiduciary duties that are involved in management of employee retirement plans) was denied.  (Note that the Court refused to grant the Secretary’s request for an order requiring the plan and trust agreement to be modified in a way that ensures a fiduciary is responsible for monitoring and collecting employer contributions, and that requires the fiduciary authorized under Section 403 to be independent of the employers who have adopted the Master Plan.)  Solis v. Plan Benefit Services, Inc., Case No. 07-11474 (D. Mass., March 20, 2009). 


The San Antonio Business Journal reports that San Antonio has been ranked the strongest metropolitan area in the country for economic performance, according to the Brookings Institution.  In the first of a series of quarterly reports, Brookings ranked San Antonio, Oklahoma City, Austin, Houston and Dallas as the top five metropolitan areas in the country in economic performance in the wake of the recession.  The rankings are based on six key indicators:  employment, unemployment rates, wages, gross metropolitan product, housing prices and foreclosure rates.  While Texas appears to have scored four out of the top five, Florida presents the mirror image, with four out of the bottom five:  Jacksonville, Lakeland, Tampa, Bradenton and Detroit.  In all fairness, however, metropolitan areas in states with specializations in energy and government employment -- like Texas, New Mexico, Oklahoma, Arkansas and Louisiana -- have largely been insulated from the recession. 


About 1,000 state employees are eligible for early retirement under a new program aimed at reducing Vermont’s workforce without laying off people.  The State Treasurer’s Office has notified state employees who may be eligible for early retirement:  workers who either have more than 30 years with state government or are age 62 and higher with five years.  State workers who qualify and agree to retire by September 1 will receive cash bonuses ranging from $750 - $1,000 for each year they work for state government, and will continue to receive health benefits at the current premium level (80%, for up to seven years), even if a teacher contract changes the equation.  Employees with between five and fifteen years of service to the state will get $750 in retirement incentives for each of those years; workers with more than 15 years will get $1,000 per year.  The total payout expense per employee is capped at $15,000.  The State Treasurer says the program should break even the first year and begin providing savings to the state in years two and three according to  One catch:  only 300 workers will receive the incentive; a lottery will be held if more than 300 apply. 


It is the month of August in a resort town that sits next to the shore of a lake.  It is raining, and the little town looks totally deserted.  Times are tough, everybody is in debt and everybody lives on credit.  Out of nowhere, a rich tourist comes to town.  He enters  the only hotel, lays a $100 bill on the reception counter and goes to inspect the rooms upstairs in order to pick one.  The hotel proprietor takes the $100 bill and runs to pay his debt to the butcher.  The  butcher takes the $100 bill and runs to pay his debt to the pig farmer.  The pig farmer takes the $100 bill and runs to pay his debt to the supplier of his feed and fuel.
The feed and fuel supplier takes the $100 bill and runs to pay his debt to the town's prostitute, who, in these hard times, provides her services on credit.  The hooker runs to  the hotel with the $100 bill and pays off her debt to the hotel proprietor for rooms she used when she brought her clients there.  The hotel proprietor then lays the $100 bill back on the counter so that the rich tourist will not suspect anything.  At that moment, the rich tourist comes down from inspecting the rooms, says he didn’t like any of them, takes his $100 bill and leaves town.  No one earned anything.  However, the whole town is now without debt, and looks to the future with a lot of optimism.  And that, folks, is how the United States Government is doing business today. 


A hole has been found in the nudist camp wall.  The police are looking into it.  


“Genius is one percent inspiration and ninety-nine percent perspiration.”  Thomas Edison


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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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