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Cypen & Cypen
June 20, 2013

Stephen H. Cypen, Esq., Editor

1.  PUBLIC SECTOR PENSION REFORM: State and local governments remain bastions of retirement plan sponsorship for public sector employees: 99 percent of full-time public sector employees have access to an employment-based retirement plan. Primary coverage in the sector is typically through a defined benefit pension plan. However, state and local pension funds experienced large declines in asset values during the 2008-09 recession and financial markets crash. The recession also reduced tax revenues, making it difficult for many governments to fund the annual contribution associated with their DB plan. State and local governments and the plans they sponsor continue to face financial challenges in the recession’s aftermath. Budgetary pressures, evolving workforce demographics, and longer-term pension plan finance and benefit trends have led almost all states and many local governments to consider and implement various reforms of the plans they sponsor. The degree of reform ranges from adjustments to contribution requirements and benefit levels in existing DB plans to more fundamental changes that would incorporate defined contribution elements into the primary plan structure. Changes have typically focused on reducing costs and risks to governments of plan sponsorship. Yet, other values are also at stake. Public employee pensions are an important part of the overall system of retirement security in the U.S. and the economy. Furthermore, the design, financing, and credibility of public pension plans may greatly affect the quality and composition of the state and local government workforce. The importance of public sector pension plans, combined with stresses and changes they are experiencing, led TIAA-CREF Institute and the Nelson A. Rockefeller Institute of Government to sponsor the forum, Public Sector Pension Reform: Addressing Pressing Fiscal Realities from a Long-Term Perspective.  Several important findings and themes emerged from the forum discussions: 

  • Financial stress in state and local public pensions is widespread, yet the depth and expected duration of the challenges vary greatly. A small number of states account for a disproportionate share of aggregate unfunded liabilities. Underfunding in states like Illinois, New Jersey, California and Pennsylvania partly results from past failures to make regular and adequate annual contributions. Other states, including many with traditionally well-funded systems, have also seen large increases in their unfunded liabilities and annual required contributions, but their problems are less severe and stem from sharp declines in the value of pension fund investments during the recent recession.  
  • There are persistent fiscal and demographic challenges in most states. The public sector workforce is aging as the baby boom cohort moves towards and into traditional retirement ages. Budgetary pressures at the state and local level make it difficult to increase plan funding and maintain the size of the public sector workforce.  
  • While financial stress has led many states and localities to change their employee pension plans, governments must consider other values and issues in the process if they hope to devise lasting and effective reforms. One essential consideration is retirement security, about which many public employees are uncertain and uneasy. This lack of retirement confidence reflects more than potential concern regarding the status of their retirement plan; reflects in part a widespread problem -- lack of financial education and informed retirement planning among U.S. workers, including, but not limited to, public sector employees.   
  • Pension reform can take different directions. Most recent changes have been marginal and focused on cost and risk reduction for governments. Examples include proposals to require employees to contribute more toward current retirement benefits or accept lower benefit levels.  
  • Public sector pension reform should also consider the context of federal programs, particularly Social Security and Medicare, given their large role in ensuring retirement security for covered individuals. Benefit cuts or payroll tax increases or both are inevitable, as the federal government addresses long-term fiscal deficits.  
  • Funding challenges are long term and based on calculations and assumptions that can be hard to understand or disputed.  

2.  FEDERAL APPELLATE COURT UPHOLDS CLEVELAND’S MANDATORY RETIREMENT FOR POLICE OFFICERS AT SIXTY-FIVE:  City of Cleveland retired police officers sued the city in federal district court. They alleged that the city violated the Age Discrimination in Employment Act, Ohio's age discrimination statute and the Equal Protection Clause of the Fourteenth Amendment when it forced them into retirement pursuant to a city ordinance that mandates retirement of all police officers who have reached the age of sixty-five. The City moved for summary judgment, arguing that its application of the ordinance to the retirees (1) did not violate either the Act or the Ohio statute because the city acted pursuant to a permissible retirement plan as described in the Act and (2) did not violate the Equal Protection Clause because it was rationally related to the police department's budget concerns. The district court granted the motion, and the retirees appealed.  On review, the Sixth Circuit Court of Appeals affirmed. The City of Cleveland has had a mandatory retirement provision pertaining to police and fire department personnel since 1960. However, anyone subject to mandatory retirement, upon written request of the chief of police or fire, shall continue on active duty on a year-to-year basis, subject to approval of the director of public safety following an independent medical examination.  The chief of police, issued a notice to the department explaining that those subject to mandatory retirement could submit to him a form requesting an extension of service.  The department had never before refused a request, provided that the person making the request passed the independent medical examination. However, the City faced a $60 million deficit in 2009, and it cut the department's budget.  As a result, the department laid off sixty-seven patrol officers, and demoted twenty-eight.  In turn, the police chief decided to deny all requests for extensions in 2010. The fire chief continued to grant requests for extensions to all firefighters who passed the independent medical examination. The plaintiffs were long-standing members of the police department who submitted requests for extension, which were denied, forcing them into mandatory retirement. Although the Age Discrimination in Employment Act makes it unlawful for employers to discharge any individual on the basis of age, the Act has an exception that allows state and local governments to set mandatory retirement ages for firefighters and law enforcement officers. The exception applies if the firefighter or law enforcement officer is over fifty-five years old, and is discharged pursuant to a retirement plan that is not a subterfuge to evade purposes of the Act. The court did not to determine which party has the burden of proof on the issue of subterfuge. The city’s retirement plan, which has existed in some form since 1960, explicitly provided that it exists in the interest of the police department's efficiency. The police chief’s decision to deny all requests was in furtherance of the stated purpose of the retirement plan -- the efficiency of the department -- and the retirees did not put forth any evidence suggesting that the plan existed for some reason other than its stated purpose. In addition, with reference to rights under the Fourteenth Amendment, where no suspect class or fundamental right is implicated, the court applies rational-basis test, and will sustain the government action in question unless the varying treatment of different groups or persons is so unrelated to the achievement of any combination of legitimate purposes that the court can only conclude that the government's actions were irrational. The police department’s decision not to extend service of its officers over sixty-five years old was rationally related to the legitimate purpose of addressing budget concerns. Sadie v. City of Cleveland, Case Nos. 12-3142/3143  (U.S. 6th Cir. June 11, 2013).
3.  ARE RETIREMENT RULES REALLY MYTHS?:  Rules, says, are made to be broken. Yet, as financial planning has grown, collective thinking has coalesced around a few solid pieces of advice. A panel recently set out to debunk some of those rules, and establish new guidelines. Here are a few of the biggest myths they tackled: 

  • Myth 1: Stick to a firm 4% withdrawal rule. Most panelists seemed to agree that a 4% withdrawal rule was still a good starting point, but they emphasized the need for constant evaluation. For example, in case of a market plunge, advisors might want to skip the annual withdrawal for up to five years, giving clients a longer time period to adjust their expenses.  
  • Myth 2: End-of-life costs are too uncertain to plan around. Get insurance for clients wherever you can.  If possible, allocate more to premiums -- especially longevity insurance, Medigap and long-term care.  
  • Myth 3: Roths do not make sense for wealthy clients.  Roth conversions can make sense at any age.  In particular, clients whose annual income fluctuates may find a hidden opportunity.  
  • Myth 4: Wait as long as possible to claim Social Security.  In general, panelists agreed that clients should wait as long as possible. But, the decision is very much client-by-client.  If you have someone who is not in good health, that person might want to claim earlier.  
  • Myth 5: During a decumulation period, withdraw first from taxable accounts, then tax-deferred, then Roths. Research shows that you never want to deplete the taxable account. Charitably inclined clients who are contributing to donor-advised funds may want to have appreciated securities to give, while elderly clients may want to be able to use the step-up in basis for their legacy planning.  
  • Myth 6: When retirement rolls around, clients who have saved regularly will be all set.  Do not discount a significant adjustment period.  Encourage clients to try living a practice retirement. In other words, when they are in their 60s, start doing some of the things they planned to do in retirement, travel more, relocate to a warmer climate, but also keep working, pay off debt and get that emotional adjustment in place.

As we always say, “a myth is as good as a mile.” 
4.  HEALTHIEST STATES FOR SENIORS: says seniors in the following states are among the healthiest in the United States:
•         Minnesota
•         Vermont
•         New Hampshire
•         Massachusetts
•         Iowa
•         Hawaii
•         Connecticut
•         Colorado
•         Utah
•         Maryland
United Heath Foundation’s 2013 survey provided a snapshot of how healthy seniors are and what types of health care resources they have available.  The report tracked thirty-four different measures of individual and community health, including rates of obesity, physical activity, smoking, chronic diseases and death rate among seniors per state and access to food, health care products, providers and prescription drug coverage. 
5.  FPPTA 29TH ANNUAL CONFERENCE: The Florida Public Pension Trustees Association’s 29th Annual Conference will take place on June 23-26, 2013 at the Omni Orlando Resort at ChampionsGate.  A link on FPPTA’s web site,, will take you to the Omni Orlando Resort at ChampionsGate site to make your room reservations.  You may access information and updates about the conference at FPPTA’s website.  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 Conference. 
6.  WHEN INSULTS HAD CLASS: I have had a perfectly wonderful evening. But this was not it.  Groucho Marx.

7.  PHILOSOPHY OF AMBIGUITY: Can an atheist get insurance against acts of God?  
8.  ON THIS DAY IN HISTORY: In 1840, Samuel Morse patents his telegraph.
9.  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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