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Cypen & Cypen
JUNE 2, 2011

Stephen H. Cypen, Esq., Editor

1.      IRS HELPS TAXPAYERS VICTIMIZED BY IDENTITY THEFT: Identity theft is a serious and growing problem in. the United States (see C&C Newsletter for March 3, 2011, Item 8 and C&C Special Supplement for March 4, 2011).  Taxpayers are harmed when identity thieves file fraudulent tax documents using stolen names and Social Security numbers.  In 2010 alone, Internal Revenue Service identified over 245,000 identity theft incidents that affected the tax system.  The United States Government Accountability Office was asked to update its previous work on identify theft.  GAO found that identity theft harms innocent taxpayers through refund and employment fraud. In refund fraud, an identity thief uses a taxpayer’s name and Social Security Number to file for a tax refund, which IRS discovers only after the legitimate taxpayer files. In employment fraud, an identity thief uses a taxpayer’s name and SSN to obtain a job.  When the thief’s employer reports income to IRS, the taxpayer appears to have unreported income on his return, leading to enforcement action. IRS has taken multiple steps to resolve, detect and prevent employment and refund fraud: 

Resolve -- IRS marks taxpayer accounts to alert its personnel of a taxpayer’s identity theft.  The purpose is to expedite resolution of existing problems and alert personnel to potential future account problems. 

Detect -- IRS screens tax returns filed in the names of known refund and employment fraud victims. 

Prevent -- IRS provides taxpayers with information to increase their awareness of identity theft, including tips for safeguarding personal information.  IRS has also started providing identity theft victims with a personal identification number to help identify legitimate returns. 

However, IRS’s ability to address identity theft issues is constrained by

  • privacy laws that limit IRS’s ability to share identity theft information with other agencies; 
  • the timing of fraud detection -- more than a year may have passed since the original fraud occurred; 
  • the resources necessary to pursue the large volume of potential criminal refund and employment fraud cases; and 
  • the burden that stricter screening would likely cause taxpayers and employers since more legitimate returns would fail such screening. 

GAO has made no new recommendations. GAO-11-674T (May 26, 2011)

2.      PENSIONS SLOWLY WARM TO HEDGE FUNDS: In October 2008, the epicenter of the financial crisis, the Pension Benefit Guaranty Corporation reported that it had lost $2.1 Billion on its investments year-to-date, or about 4 percent of its total portfolio. The losses incurred by the federal agency, whose investment pool was largely perceived as a safe backstop to pay pensions of workers and retirees whose employers go bankrupt, was a prime example of how pensions took it on the chin through the financial crisis and the ensuing Great Recession. While markets have gained over the past couple years and tenuous economic growth has returned, many pensions have yet fully to recover as persistently low interest rates globally have depressed returns on core fixed income portfolios. Given the market uncertainty in the wake of the trauma of 2008-2009, it should be no surprise that more pensions are turning to hedge funds and other alternative investment vehicles in search of higher returns. There were 295 public pension plans worldwide allocating to hedge funds as of March 2011, up from 196 in 2007. The mean asset allocation of public pensions into hedge funds increased from 3.6 percent to 6.6 percent over the same period. Pension allocations to hedge funds are just a fraction of those of endowments, which have been estimated at about 25 percent, and can range up to 50 percent. There is evidence of more diversification into alternative investment vehicles such as hedge funds, private equity and real estate, according to 

3.      FLORIDA WILL REGULATE DEATH PAYOUTS: Florida officials announced an agreement with John Hancock Life Insurance Company to set up a process for aggressively identifying deceased life insurance policyholders and getting death payouts to their beneficiaries. As reported by, insurers maintain they are behaving lawfully, because contracts require beneficiaries to inform insurers of a death.  Companies say problems are not widespread, as the vast majority of policyholders’ families make prompt claims per terms of their contracts. Still, under the industry’s current system of waiting for a claim to be filed before a payout is triggered, tens of thousands of customers -- likely families with smaller policies who do not have lawyers or financial advisers keeping track of money matters -- could be losing out on proceeds.  States themselves have a financial stake in the issue.  Insurers are required by state laws to turn over unclaimed property to state coffers.  The current regulatory scrutiny is partly aimed at sizing up whether insurers have been tardy in identifying unclaimed funds and giving them to states.  Under the Florida pact with Hancock, an auditing firm under hire by the state will provide Hancock with reports of life insurance, annuity and other accounts it judges to be unclaimed property that should be turned over to the state.  It will match Hancock’s records against a Social Security death master list and other sources to create its lists.  Hancock will then determine which policies, contracts and accounts it thinks are not ready to be turned over, and will explain why. Florida says it struck the accord with Hancock because improvements are required to help ensure that insurance proceeds are timely paid to consumers or are handed over to the state as unclaimed property. In the agreement, Hancock denies any wrongdoing, and says it settled to avoid the further expense and burden of a protracted examination, investigation or litigation in resolving disputes over its obligations under Florida’s unclaimed-property laws.  Hancock agreed to set aside $10 Million in a bank account for payment of unclaimed property, and to pay investigative and legal fees of $2.4 Million to various Florida agencies.  (In a magnanimous gesture, Hancock said it would not charge customers for any costs in locating beneficiaries.) The Florida agreement follows one that Hancock signed in April with 23 other states to resolve unclaimed property disputes.  

4.      WISCONSIN ANTI-UNION LAW INVALIDATED: A Wisconsin circuit judge has invalidated 2011 Wisconsin Act 10 and has permanently enjoined its enforcement. The law would have eliminated collective bargaining rights for most public sector employees. The court was required to determine whether members of the Wisconsin Legislature violated Wisconsin’s Open Meetings Law, and if so, whether any governmental actions taken as a result were void.  The court found that the State had shown by clear and convincing evidence that a meeting of the Joint Committee of Conference had violated the Open Meetings Law. In her decision, the judge explained why it was necessary to void the legislative actions flowing from those violations, in accordance with the Open Meetings Law. Less than a year ago, the Wisconsin Supreme Court stated that open records and open meeting laws are first and foremost a powerful tool for everyday people to keep track of what their government Is up to. The right of the people to monitor the people’s business is one of the core principles of democracy. This case was an exemplar of values protected by the Open Meetings Law:  transparency in government, the right of citizens to participate in their government and respect for the rule of law.  It is not the court’s business to determine whether 2011 Wisconsin Act 10 is good public policy or bad public policy; that is the business of the Legislature. It is the court’s responsibility, however, to apply the rule of law to the facts before it.  The 33-page decision is a virtual lesson in civics, starting with the seminal United States Supreme Court 1803 decision in Marbury v. MadisonState of Wisconsin ex rel. Ozanne v. Fitzgerald, Case No. 11CV1244 (Wisc. Cir., May 26, 2011). (Apparently the court simultaneously issued separate findings of fact, conclusions of law and judgment. If any reader has access to such document, we would appreciate being pointed in the right direction.) 

5.      FLORIDA LOUD-MUSIC LAW STRUCK DOWN: Catalano was issued a traffic citation under Section 316.3045, Florida Statutes, which restricts the volume at which a car stereo system may be played on a public street. The statute exempts, however, vehicles being used for business or political purposes, which in the normal course of conducting such business use soundmaking devices.  In county court, Catalano pleaded not guilty, moved to dismiss the citation on the ground that the subject law was unconstitutionally vague and overbroad, inviting arbitrary enforcement, and impinging free speech rights.  The trial judge denied the motion, whereupon Catalano changed his plea to nolo contendere, and reserved the right to appeal the denial of his motion to dismiss.  The trial judge accepted the plea, withheld adjudication and imposed court costs, whereupon Catalano appealed to the circuit court. The circuit court concluded that the issue was whether the “plainly audible” standard was too vague and overbroad to pass constitutional scrutiny. Deeming itself bound by a ruling of the Second District Court of Appeal, in which the trial court is located, rather than a conflicting decision of the Fifth DCA, the circuit court invalidated the law. In seeking review via petition for certiorari, the State argued the circuit court had departed from essential requirements of law because the statute did not invite arbitrary enforcement, it comported with free speech and binding precedent had found the section constitutional. The Second District Court of Appeal denied the petition for certiorari because the circuit court had afforded due process and did not depart from the essential requirements of law in finding the statute unconstitutional.  In additional, the court concluded that the statute is a content-based restriction on free expression, which violates the First Amendment.  The court did, however, leave the door ajar: in accordance with the Florida Rules of Appellate Procedure, the court certified the question to the Florida Supreme Court as one of great public importance. Perhaps it is time to watch American Graffiti again. State of Florida v. Catalano, Case Nos. 2D10-973 and 2D10-974 (Fla. 2d DCA, May 11, 2011). 

6.      BABY BOOMERS’ EMOTIONS THREATEN RETIREMENT SECURITY: Near-retirees and retirees are feeling uncertain about the future, fearful of poverty, not confident in their investing abilities and distrustful of unscrupulous financial services/insurance firms, according to a new white paper issued by Financial Engines . “Understanding the Accidental Investor:  Baby Boomers on Retirement,” provides insight on the emotions, behaviors and needs that near-retirees and retirees exhibit about retirement.  According to the white paper: 

  • More than half of participants interviewed expressed some form of uncertainty in what the future may bring;
  • Nearly half had a fear of poverty in retirement;
  • Nearly half were distrustful of the motivations or qualifications of financial services/insurance firms; and
  • More than a third of near-retirees and retirees said they did not feel confident or knowledgeable when it came to making important financial decisions.  

In addition to highlighting the emotions and corresponding behaviors of near-retirees and retirees, the survey identified five common needs that, if met, could potentially help participants overcome their strong emotional barriers: 

  • Flexibility.  Given the uncertainty of retirement, participants expressed a need to have flexibility and control over their retirement investments.  Participants had a high reluctance to be locked into an investment vehicle -- especially early in retirement when uncertainties are at their highest. 
  • Safety.  Due to fear of significant losses right before or in retirement, many participants wanted investments that lowered investment risk or that could provide a steady and reliable source of income over time, and potentially for life.  Many participants desired both.  
  • Help from an Advisor.  Many participants said that they wanted to work with a financial professional they could trust to help them create a plan, and decide on the appropriate course of action.  At the same time, many said they found it difficult to know whom to trust with their life savings. 
  • Sponsor Evaluation.  Participants said that having their employer select and monitor independent retirement income providers made them more likely to accept professional retirement help. 
  • Fee Transparency.  Finally, many demanded clear and easily understood fees.  They said they would not act unless they fully understood the fees associated with a given product or service.

The entire white paper can be downloaded at Incidentally, the people at Financial Engines just may know whereof they speak: the company was founded by Nobel Prize-winning economist William Sharpe. 

7.      PRUDENTIAL PULLS OFF FIRST PENSION BUY-IN TRANSACTION: Prudential Retirement has completed the nation’s first pension buy-in transaction.  Hickory Springs Manufacturing Company signed on as Prudential’s inaugural client, heralding entry of this type of product in the United States marketplace. Hickory selected Prudential’'s Portfolio Protected Buy-in to complete a $75 Million pension risk transfer transaction.  The Portfolio Protected Buy-in is a single premium, separate account solution that helps plan sponsors meet their pension obligations and create retirement security for more Americans.  The product is specially designed for defined benefit plan sponsors that seek to transfer risk while preserving plan funded status.  (Supposedly, the buy-in does not trigger settlement accounting or accelerate pension contributions.) The device does mitigate plan sponsors’ pension plan risks by serving as a plan asset that effectively and simply matches assets to liabilities. Oh, and did we mention, that it allows Prudential to sell a lot more insurance? (Coincidentally, Reuters reports that, in England, where buy-ins are not particularly new, pension trustees are wary of bets on death.) 

8.      AAL MORE IMPORTANT THAN MVL IN PUBLIC SECTOR: The Segal Company’s Public Sector Newsletter deals with whether market valuation of pension liabilities fits the public sector. With state budgets under strain, pensions and other benefits for public employees are front-page news. About pensions, taxpayers and public officials want to know:  just what is the size of our financial obligation to employees and retirees and how much will it cost -- today and tomorrow -- to meet that obligation?  Answering these questions should be straightforward because governmental accounting standards and professional actuarial standards outline accepted methods for measuring pension liabilities.  But, increasingly, alternative measures of pension liabilities are reported in the press. One estimate might peg the size of the liability as two or even three times the size of another estimate.  A great deal of confusion has resulted about which estimate is “correct.” The controversy around measuring pension liabilities centers on a familiar subject for sponsors of public pension plans: market value of liabilities.  The issue explores conceptual differences between competing measures of liabilities.  It also delves into the questions of which measurement is most useful for public sector decision makers.  Finally, it reviews some of the issues that have yet to be resolved regarding measuring these liabilities. (Generally the MVL approach differs from the actuarial accrued liability approach, especially when it comes to the discount rate.  The AAL measure is based on long-term methods and assumptions; the MVL measurements ignore expected investment earnings, and instead use a market rate of interest on fixed-income instruments.) Liability measurements must be useful and relevant to inform stakeholders.  AAL imparts information about issues that are most important to decision makers:  the costs associated with funding promised benefits.  MVL measures are far less useful because they are not designed to answer critical questions facing policymakers, employers and trustees related to current and future benefit obligations.  Ultimately, resolving difficult issues facing public sector pension plans in the present fiscal environment will likely have to include implementing appropriate funding policies and developing sustainable benefit designs. Updating accounting and actuarial standards can be helpful toward meeting these goals, but are only part of the process. 

9.      GOVERNMENT WILL NOT PAY FOR WRECKED FERRARI: An FBI agent assigned to move a rare Ferrari wrecked it during a short drive in Kentucky, and its owner is now suing the U.S. Department of Justice, which has refused to pay $750,000 for the car. The Justice Department, according to the Associated Press, recently responded to the lawsuit by saying it is not liable for certain goods when they are in the hands of law enforcement.  The Ferrari F50 was stolen in 2003, recovered five years later.  The FBI kept the vehicle as part of an ongoing criminal investigation. An agent was assigned to move the Ferrari from a garage in 2009, and invited a friend for a “short ride.” A few seconds after the car left the parking lot, while rounding a curve, the rear of the car began sliding, then fishtailed and slid sideways up onto the curb, eventually coming to rest against a tree. The dealer’s insurance company paid for the theft but the 1995 Ferrari, one of only 50 in the U.S., suffered substantial damage and is a total loss. Because the race vehicle is not a typical car, truck or van, the insurance company is seeking $750,000. And we saydanke schoen to the FBI agent, who must have taken driving lessons from Ferris Bueller. 

10.    LESS ACTIVE AT WORK, AMERICANS HAVE PACKED ON POUNDS: Looking beyond poor eating habits and a couch-potato lifestyle, researchers have found a new culprit in the obesity epidemic:  the American workplace. The New York Times reports that a sweeping review of shifts in the labor force since 1960 suggests that a sizable portion of the national weight gain can be explained by declining physical activity during the workday. Jobs requiring moderate physical activity, which accounted for 50 percent of the labor market in 1960, have plummeted to just 20 percent. The remaining 80 percent of jobs are sedentary or require only light activity.  The shift translates to an average decline of about 120 to 140 calories a day in physical activity, closely matching the nation’s steady weight gain over the past five decades. Today, an estimated one in three Americans are obese.  Researchers caution that workplace physical activity most likely accounts for only one piece of the obesity puzzle, and that diet, lifestyle and genetics all play an important role. But the new emphasis on declining workplace activity also represents a major shift in thinking, and it suggests that health care professionals and others on the front lines against obesity, who for years have focused primarily on eating habits and physical activity at home and during leisure time, have missed a key contributor to America’s weight problem.  The findings also put pressure on employers to step up workplace heath initiatives and pay more attention to physical activity at work. (See C&C Newsletter for May 19, 2011, Item 10.) 

11.    GOLF CART CITY: Can’t qualify for a regular driver’s license? Always wanted the car of your dreams, but couldn’t afford it? Well, then, consider The Villages, Florida, where cars are taboo and golf carts reign. The Villages has over 50,000 golf carts, ranging from customized ’57 Chevys to Cadillac Escalades. Check out the 5-minute video from a recent CBS Sunday Morning:

12.    FIREFIGHTERS PROCEDURAL BILL OF RIGHTS ACT DOES NOT VIOLATE HOME RULE PROVISIONS OF CALIFORNIA CONSTITUTION: A labor dispute between the City of San Jose, California, and the International Association of Firefighters, which represents firefighters employed by the City, spawned an appeal arising from a labor dispute.  After the Firefighters Procedural Bill of Rights Act became effective in 2008, the Union requested that the City meet and confer over implementation of FFBOR’s new procedures for administrative appeals of firefighter discipline.  The City refused to meet and confer on the ground that, as a charter city, it was not obligated to implement the FFBOR. The Union then filed a petition for a writ of mandate and to compel arbitration of the dispute regarding the City’s obligation to meet and confer over implementation of FFBOR.  The City opposed the petition and filed a motion for judgment on the pleadings, in which it argued that under the home rule provisions of the California Constitution, it was not required to implement FFBOR’s procedures for administrative appeals in firefighter disciplinary proceedings because FFBOR’s procedures conflicted with the City’s existing procedures. The trial court denied the Union’s petition, determining that it was based upon the City’s refusal to meet and confer regarding implementation of FFBOR, meaning that the Public Employment Relations Board had exclusive jurisdiction over the dispute.  Alternatively, the trial court denied the petition on the ground that arbitration could not be compelled under the parties’ collective bargaining agreement because the Union had failed to meet its burden to show that the parties had reached an impasse after meeting and conferring in good faith, and, in any event, the petition was moot since the memorandum of agreement had expired. On appeal, the Union contended that the trial court erred in denying its petition for writ of mandate and to compel arbitration because the court had jurisdiction in the matter. However, the appellate court determined that the Union’s petition was not moot, and PERB had exclusive initial jurisdiction because the petition alleged an unfair labor practice: the City's refusal to meet and confer regarding implementation of FFBOR.  Thus, the appellate court affirmed the judgment. The City had filed a cross-appeal from denial of its motion for judgment on the pleadings that found the Union had sufficiently pleaded a petition to compel arbitration and a claim for declaratory relief.  The City’s appeal was based on the ground that, as a matter of law, under the home rule provisions of the California Constitution the City was not obligated to implement FFBOR because it is a charter city.   The cross-appeal was also affirmed, because FFBOR is a procedural statute that did not violate the home rule provisions of the California Constitution, and therefore FFBOR applied to the City. International Association of Firefighters Local Union 230 v. City of San Jose, Case Nos. H035065 and H035425 (Cal. App. 6th Dist., May 24, 2011). 

13.    CONCEPTS AND RECENT TRENDS IN COLAs: GRS’s April 2011 Insight deals with “Postemployment Cost-of-Living Adjustments: Concepts and Recent Trends.”  The sharp investment decline that occurred in 2008-2009 and the resulting financial pressures on state and local governments have led government officials to search for ways of controlling pension costs and stabilizing required contributions.  As a result, many pension plans and plan sponsors are reviewing their plan designs, including reviewing costs associated with postemployment cost-of-living adjustments.  The piece discusses the purpose of COLAs, how they are provided and the advantages/disadvantages of different types of COLAs.  Most public pension plans have provided postemployment COLAs either on an ad hoc basis or on an automatic basis. A key feature of ad hocCOLAs is that they require approval of the plan sponsor’s governing body (or in some cases the plan’s board).  In contrast, automatic COLAs do not require the governing body’s approval, and are often based either on a fixed annual rate (for example, 3%) or on the Consumer Price Index -- often with an upper limit (say, CPI up to 3%). Several public pension plans base COLAs on investment earnings that are above some benchmark rate of return for the year (perhaps the assumed long-term rate of return).  COLAs based on investment returns were introduced in the 1990s due, in part, to the relatively high investment returns earned in that decade.  More recently, some plans have implemented a combined approach, including a relatively low fixed COLA (for example, 2%) in combination with a COLA based on investment earnings that exceed long-term expected returns. The following summarizes the general COLA approaches used by over 100 large public plans included in the Public Fund Survey conducted by National Association of State Retirement Administrators and National Council on Teacher Retirement: 

  • Ad hoc COLAs - 20%. 
  • Fixed Rate (often 3%) - 27%. 
  • CPI (often capped at 3%) - 35%.
  • Based on investment returns - 6%. 
  • Other (often based partly on investment returns) - 12%. 

(These other approaches include COLAs that are based on amounts that accumulate in reserve accounts and ad hoc COLAs that are provided when plan resources are judged sufficient to fund the COLA on an actuarial basis (that is, “Break-Even” COLAs).  The article also discusses advantages and disadvantages of different COLA designs  and recent changes in public pension COLAs. 

14.    RAMBLINGS: Pakistan News: Pakistani officials are demanding that U.S. spies in Pakistan identify themselves. In a related story, al Qaeda is demanding that U.S. drones be equipped with warning sirens. 

15.    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 didn't say it was your fault, I said I was blaming you. 

16.    QUOTE OF THE WEEK:  “Some people are too tired to give a smile. Give them one of yours.” Anonymous

17.    ON THIS DAY IN HISTORY: In 1953, Coronation of Queen Elizabeth II in Westminster Abbey. 

18.    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. 

19.    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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