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Cypen & Cypen
June 27, 2013

Stephen H. Cypen, Esq., Editor

1.  MAY, 2013, SHOWS $95 BILLION DOLLAR IMPROVEMENT IN PENSION FUNDED STATUS: The funded status of the 100 largest corporate defined benefit pension plans improved by $95 billion during May, 2013, as measured by the Milliman 100 Pension Funding Index. The deficit dropped to $226 billion from $321 billion at the end of April, as a sell-off in bonds caused a rise in the benchmark corporate bond interest rates used to value pension liabilities. However, since the pension assets of these plans have transformed to a more risk-managed (and risk adverse,) investment management strategy, with a higher exposure to fixed income investments, there was a corresponding but not completely correlated reduction in plan assets during May.  Plan sponsors are likely to welcome a PFI funded ratio that has surged to 86.0%, up from 81.2% at the end of April. This monthly improvement of 4.8% is the highest since the 4.9% improvement in October 2010. The projected benefit obligation (PBO), or pension liabilities, decreased by $101 billion during May, lowering the Milliman 100 PFI value to $1.610 trillion from $1.711 trillion at the end of April. The change resulted from an increase of 43 basis points in the monthly discount rate to 4.41% for May, from 3.98% for April.    

2.   WHY EMPLOYERS SHOULD INTERVENE TO SECURE RETIREMENT INCOMES FOR EMPLOYEES:  Mercer has issued a paper Securing Retirement Outcomes For The Employee -- Why The Employer Should Intervene.  The paper outlines ways for employers to develop, design and implement a retirement income strategy that aligns with both the needs of their workforce and their business philosophy.  Employers who proactively develop a retirement income strategy for their employees during their retirement phase will reap benefits.  By implementing such a strategy, employers may enjoy increased alignment between retirement and workforce management, as well as enhanced employee engagement and loyalty. The paper explores the rationale for employers to take an active role in addressing the retirement income challenges, and proposes practical steps to enable employers to take action toward designing and implementing a strategy.  Two interesting conclusions: 

  • Retirees relying on defined contribution savings face numerous challenges and risks many of which are difficult to comprehend. 
  • The need to use scarce retirement resources to generate sustainable income for retirees has become even more important, given the challenging environment, and it is no wonder participants are looking for help tailored to their individual circumstances.

3.  DOL CREATES ONLINE RETIREMENT TOOLKIT: The U.S. Department of Labor has announced launch of an online toolkit to help workers identify key issues related to retirement planning. The department's Employee Benefits Security Administration developed the toolkit in cooperation with the Social Security Administration and the Centers for Medicare and Medicaid Services to help workers understand important decisions related to employment-based plans, Social Security and Medicare. The toolkit will provide workers with essential tools and information. By working together, the three agencies were able to create a comprehensive source for a diverse collection of resources that will help America's workers make informed decisions that are vital to their financial security throughout retirement. The toolkit includes a timeline illustrating key decisions to be made about retirement benefits, Social Security and Medicare; general guidance; and a list of publications and interactive tools to assist with planning. The retirement toolkit is available EBSA News Release Number 13-1104-NAT (06/05/13).
4. SEC CHARGES CITY OF HARRISBURG, PA, FOR FRAUDULENT PUBLIC STATEMENTS: The Securities and Exchange Commission has charged the City of Harrisburg, PA, with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated. An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements and the State of the City address. The charges mark the first time that the SEC has gone after a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges. SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s fiscal situation was publicly available elsewhere. Information that was accessible on the city’s website either misstated or failed to disclose critical information about Harrisburg’s financial condition and credit ratings. SEC Release 2013-82 (May 6, 2013).
5.   BUT DID SEC “DO RIGHT” IN HARRISBURG MATTER?: Apropos of Item 4 above, reports it is not news that SEC is cracking down on issuers of municipal bonds. Stepped-up enforcement has come in one wave after another since at least 1996, when the Orange County, California, bankruptcy spurred SEC to target issuers suspected of violating municipal securities laws. However, the recent case brought against Harrisburg, which the Pennsylvania capital city settled with federal regulators, represents something significantly new and different.  There were clearly misstatements in Harrisburg's 2009 budget, which reported the city's credit as being rated Aaa by Moody's Investors Service, when in fact by December 2008 Moody's had downgraded Harrisburg's general obligation credit rating to Baa1. But SEC also cited statements by then-mayor Stephen Reed in his 2009 state-of-the-city address about debt owed by a city authority for upgrades to its resource recovery facility. SEC noted that Reed's address simply referred to the authority's debt as an issue that can be resolved, but failed to mention that Harrisburg had already made $1.8 million in guarantee payments on the resource recovery facility bond debt. The city was already having to step up to meet debt payments on the troubled facility. There are at least three aspects of this case which should have generated significant discussion, but seem to have not: 

  • First, SEC's press release about the case notes that the city had not released audited financial statements from January 2009 through March 2011. As noted, investors had to seek out Harrisburg's other public statements in order to obtain current information about the city's finances but very little information about the city's fiscal situation was publicly available elsewhere. You think it would be obvious to potential investors that if there is not much current information available about a city's finances they might want to think twice about buying its securities. But investors do not always exercise proper diligence, and it would not have hurt for the SEC to have driven home that point.   
  • Second, the city, as an organization, was charged with fraud based, in part on the statements of a single individual, Mayor Reed. The city issues disclosure documents and should have complex processes in place to assure that those documents meet the equally complex requirements of securities law. Investors are buying securities issued by the city, as a legal entity, and not by the mayor, as a single political player. (Plus, we are betting that at least a dozen times the documents say oral statements cannot be relied upon in connection with the offering.)  
  • Third, in seeking to regulate the speech of the mayor (or any other public official), SEC is bringing itself into conflict with the First Amendment, which prohibits a governmental entity from regulating political speech except when there is a compelling state interest. No such interest exists here. A state-of-the-city address is pure political speech. The best of these speeches are truly moving. The worst will bore you to tears. But in no case will a state-of-the-city speech be improved by having it written by bond counsel and financial advisers.

6.   WHEN INSULTS HAD CLASS: He is not only dull himself; he is the cause of dullness in others.  Samuel Johnson

7.   PHILOSOPHY OF AMBIGUITY: How is it possible to have a civil war?
8.   ON THIS DAY IN HISTORY: In 1967, the world’s first ATM is installed in Enfield, London.
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. 
10. 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


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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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