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Cypen & Cypen
June 20, 2019

Stephen H. Cypen, Esq., Editor

There’s good news in the proposed $45.4 million City of Manteca, Calif. general fund budget for the fiscal year starting July 1: Property taxes--the No. 1 source of revenue to fund day-to-day municipal services--is expected to increase by $1,013,160. The bad news: The general fund’s share of increased pension costs will devour more than 90 percent of the increase in property tax revenue or $969,970. It illustrates how the city’s unfunded liability estimated at $108 million for all employees covered by the general fund as well as enterprise accounts such as solid waste, water and wastewater treatment poses a long-term concern. Had the discount rate the California Public Employees Retirement System (CalPERs) has announced it expect to impose on cities in fiscal year starting on July 1. 2020 been used for the upcoming budget it would have consumed all of the gain in property taxes and then some. When all of the city employees covered by the general fund and enterprise accounts are lumped together Manteca in the upcoming budget will be paying $12.4 million into CalPERS. That’s 18 percent of $1.9 million more than in the current budget year. It is the third straight year of significant increases in what the city must pay CalPERS. The current budget year obligation of $10.5 million was an increase of $1.7 million over the 2017-2018 budget. The discount rate--that reflects projected earnings on CalPERs investments to reduce payment liability--has been steadily dropping each year. Whenever that rate goes down the city’s costs go up. The discount rate this year was pegged at 7.357%, while the rate for the fiscal year starting July 1 is 7.25 percent. As things stand now, CalPERS plans to set the discount rate at 7.00 percent for the fiscal year that starts July 1, 2020. That is double the decrease the city is now dealing with. If everything held constant and no new employees were hired that qualify for pensions or a city retiree doesn’t die, the city’s overall CalPERs payment could go up close to $16 million annually two years from now. During a December 2017 council meeting when strategies were discussed to reduce long-term pension liability, staff indicated Manteca has a $112.2 million shortfall in unfunded accrued liability (UAL). It represents the amount of retirement owed to employees in future years that exceeds the current CalPERS assets. That was up from $89 million in 2016, when the CalPERS discount rate was lowered from 7.5 percent to 7.375 percent. The reason for the increase in city liability is simple. The less CalPERS expects to earn on investments the more local jurisdictions such as Manteca as well as the state will have to contribute to cover pensions. Over a decade ago, CalPERS was “super funded” at 106 percent of its outstanding pension liability. The Investment returns went from 13.2 percent in 2013 up to a peak of 18.4 percent in 2014 and plummeted to 2.4 percent in 2015 and bottomed out at 0.60 percent in 2016 before rebounding to 11.2 percent in 2017. A combination of factors sent CalPERS into a tailspin. There were multiple years when investments paid significantly less that was projected. CalPERS failed to respond quickly enough to investment losses made worse by a rolling 30-year amortization and asset smoothing. There are more retirees that are living longer. Agencies adopted enhanced benefit employees that used all future and prior service without charging the increased cost to employees. Virtually every city in the state faces the same challenges Manteca does. Dennis Wyatt, Manteca (Calif) Bulletin, June 5, 2019.
Oregon lawmakers have approved a controversial bill meant to bolster the financial health of the state’s underfunded pension system for state and local government employees. Public worker unions have criticized the legislation as unfair and potentially illegal under state law and are indicating that they’ll fight it in court. The bill calls on state and local employees to take on some of the burden of paying down the state’s pension funding shortfall. Legislators moved ahead with the measure amid concerns about rising pension costs for schools and other public employers. Oregon is far from the worst off state when it comes to pension funding difficulties. But the legislation is one of the latest examples of how state and local policy makers around the U.S. are straining to fund promised retirement benefits, without cutting into other spending priorities. The House approved the bill on a 31-29 vote. It cleared the Senate earlier. Some lawmakers described  it as one of the tougher votes they’ve had to take. Gov. Kate Brown, a Democrat, pushed for changes akin to those in the bill and is expected to sign it. Brown cautioned that the state’s retirement system “is ill-prepared for the next inevitable economic downturn, which will put both public sector budgets--and the retirement security of our valued employees--in serious jeopardy.” Oregon’s retirement benefit system for public employees is a hybrid of sorts, involving both a 401(k)-style, or “defined contribution” account, and a traditional “defined benefit” pension. Following state policy changes adopted in 2003, public employees there have 6% of their salary placed into a defined contribution account under what’s known as the Individual Account Program . But employers cover the entire contribution for the defined benefit plan. One of the more contentious provisions in the legislation would redirect a portion of employee contributions that now go to the 401(k)-style account toward the pension side of the program, with the aim of boosting its funding level. The legislation makes a number of other changes as well. It would extend the timeframe for paying down a large share of the state’s current unfunded pension liability, pushing out the estimated date when it would be paid off to 2041, from 2035. “Re-amortization” maneuvers  like this typically promise lower near-term annual costs for employers, while raising overall expenses to pay down pension debt in the long-run. Estimates  presented at an Oregon Public Employees Retirement System board meeting suggest that switching the amortization period in the way proposed in the bill could raise the overall cost of paying off the pension system’s funding gap by about $3.8 billion. The bill also calls for dedicating future state revenue from sports betting--which has not yet been approved by the state’s lottery commission--toward the pension system. This revenue would go to an “Employer Incentive Fund.” Established under a law enacted last year, that fund program provides state matching dollars to go along with money that public employers in Oregon set aside to cover their pension obligations. The new measure also provides a one-time $100 million allotment to the incentive fund, which an analysis  of the bill says could generate at least $400 million in employer matching funds. Lawmakers estimate  the legislation should lower the overall pension contributions employers are making by $1.2 billion to $1.8 billion per two-year budget cycle, between 2021 and 2035. But the re-amortization component of the plan is one of the key factors driving the savings. Alex Pulaski, communications director for the Oregon School Boards Association, called the legislation’s approval a win for schools. “In a perfect world the bill would have gone further to cut PERS-related costs without relying so heavily on delaying payments,” he said. “In effect we have pushed our mortgage payment years down the road.” But he said the bill means schools should save an estimated $200 million annually in pension payments starting in 2021. “We are grateful that legislators were able to make progress, and these savings allow schools to put more resources in the classroom,” he added. Employees would begin seeing some of their Individual Account Program contributions redirected beginning in July 2020. The amount would depend on which benefit plan people are a part of, which varies depending on when they were hired. People earning $2,500 per month or more in two plans that cover workers who were hired before Aug. 29, 2003, would see 2.5% of their 6% Individual Account Program contribution redirected to a “pension stability account.” For those hired later, the figure is 0.75%. After the House passed the bill, the governor’s office said in a statement that going forward, Brown will not look to public employees for further contributions to reduce pension liabilities. About 56,000 active employees are part of the plans targeted for the 2.5% redirect and roughly 119,000 are covered by the plan that will be subject to the 0.75% contribution shift. The Oregon Public Employees Retirement System had about 176,000 working members and around 145,000 retired beneficiaries as of last June. Its defined benefit pension program had about $69.3 billion of net assets at that time, according to its most recent financial report. As of December 2017, its unfunded actuarial liability--a measure of the gap between projected benefits owed in the years ahead and the anticipated money that will be available to pay them--was pegged at around $16.7 billion, leaving the plan about 80 percent funded. By comparison, in Illinois, a state with some of the worst-funded  pension systems in the country, the funded ratio for the state employees retirement system was just 35 percent as of 2017. Following last week’s vote, a coalition of unions chided lawmakers saying the House “turned its back on public employees.” But they also said the bill had excluded more “draconian” cuts that the governor had previously proposed. “In a state that pays their educators 22% less than they would earn in the private sector, cutting compensation even further is unconscionable,” John Larson, president of the Oregon Education Association, said in a statement. “We will continue this fight in court.” A description of the legislation distributed by public labor groups warns that it will send the state into an “expensive and lengthy battle at the Oregon Supreme Court,” similar to an earlier lawsuit workers brought over changes to their benefits that were approved in 2013. That dispute ended with the state Supreme Court overturning reduced cost of living adjustments, a ruling the unions say left the state owing about $5 billion in added benefits. Unions that have opposed the legislation include the teachers union, SEIU, the Oregon State Firefighters Council, Oregon Nurses Association, Oregon AFSCME, Oregon State Police Officers Association, and the Association of Oregon Corrections Employees, among others. Oregon’s defined benefit pension system was fully funded  as recently as 2008, when the funding level was around 112%. But in the wake of the recession the ratio declined into the 80% range and has only gotten up above 90% in two years since. This has created a situation where state and local employers have had to increase contributions. Brown earlier this year cited the Hillsboro school district as an example. Contribution rates for the 2019-21 biennium for the district are set at just over 28% of payroll. But the school district’s rates were projected to jump in the 2021-23 biennium by 5 percentage points to over 33%. For the district, according to the governor, that would mean an additional $1.9 million in costs. Public sector unions have floated some of their own alternative ideas for shoring up the pension fund. One recommendation they have is to tap a surplus of over $1 billion held by a workers compensation insurance fund in the state. Another is trying to cash in on underused state real estate holdings, and a third is looking at expanded lottery offerings to generate new revenues. Bill Lucia, Senior Reporter, Route Fifty, June 4, 2019.
The plaintiffs in a previously dismissed lawsuit  against Georgetown University alleging excessive fees in two of its retirement plans have been denied their motion for leave to file an amended complaint. District Judge Rosemary Collyer with the U.S. District Court for the District of Columbia said the motion was filed two days too late under Federal Rules of Civil Procedure. According to Collyer’s opinion , Federal Rule of Civil Procedure 59(e) requires plaintiffs to file a motion for reconsideration within 28 days of the dismissal. However, the plaintiffs argue that a “final, appealable judgment” was not entered January 8, 2019, or at any time since, so they filed their motion under Federal Rule of Civil Procedure 15(a). The opinion points out that Rule 15(a)(1) allows parties to amend their pleadings once as a matter of right if they do so within specified timeframes. Rule 15(a)(2) provides that, once the time for amendment as a matter of right has lapsed, “a party may amend its pleading only with the opposing party’s written consent or the court’s leave.” Ordinarily, courts “should freely give leave when justice so requires,” so long as certain factors are not present such as “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of [the] amendment.” However, after a final judgment is entered, a district court must first set aside that judgment pursuant to Rule 59(e) or 60(b) before considering a motion to amend under Rule 15(a)(2). The opinion further explains that a motion under Rule 60(b) may be filed “within a reasonable time,” but may only provide for relief for one of the six reasons cited in the rule, including that the plaintiffs have newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b); and the judgment has been satisfied, released or discharged, is based on an earlier judgment that has been reversed or vacated, or applying it prospectively is no longer equitable. “The preliminary issue is whether the court terminated the case pursuant to its January 8 order,” Collyer wrote. She noted that the order dismissed the complaint and the action, and the docket entry accompanying the order stated: “This case is closed.” Collyer said that while the plaintiffs are correct that the order did not explicitly state “[t]his is a final, appealable order,” the D.C. Circuit has found that the words “final and appealable” are not dispositive of whether a case is closed. Since the January 8 order terminated the case, the plaintiffs were required to move for reconsideration under Rules 59(e) or 60(b) as either a precursor or an accompaniment to a motion to file an amended complaint under Rule 15(a)(2). Under Rule 59(e) to accomplish this purpose. After dismissal was granted and the case closed on January 8, the plaintiffs had a period of 28 days to ask to alter or amend the judgment under Rule 59(e) and, perhaps contemporaneously, to file a motion and an amended complaint under Rule 15(a). The 28-day period expired on February 5, 2019, but the plaintiffs’ motion to file the proposed First Amended Complaint was filed on February 7. Considering Rule 60(b), Collyer found that the plaintiffs have not stated that any of the facts in the proposed Amended Complaint were newly discovered or otherwise not known to them previously. As for Rule 60(b)(5), the plaintiffs argue that the January 8 opinion cited a case that was later reversed, in part, on appeal --Sweda v. University of Pennsylvania. But, Collyer said, “Sweda involved a different university and a different retirement plan than those at issue in this case. The Memorandum Opinion cited the district court decision in Sweda only for the proposition that ‘ERISA does not provide a cause of action for underperforming funds.’ Moreover, the Third Circuit’s partial reversal is not binding on this Court. Sweda is not a prior judgment that reversed or vacated this Court’s Memorandum Opinion or that compels the Court to alter or amend its judgment under Rule 60(b)(5).” Rebecca Moore, Planadviser, May 31, 2019.
The IRS issued Revenue Procedure 2019-25, which provides the 2019 inflation-adjusted amounts for health savings accounts (HSAs) as determined under Section 223 of the Internal Revenue Code (IRC). For calendar year 2020, the annual limitation on deductions under IRC Section 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,550. For calendar year 2020, the annual limitation on deductions under Section 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $7,100. These are increases of $50 and $100, respectively, from 2019 contribution limits. For calendar year 2020, a high deductible health plan (HDHP) is defined under Section 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,900 for self-only coverage or $13,800 for family coverage. Plansponsor, May 29, 2019. Text of Internal Revenue Procedure 2019-25 may be found in Internal Revenue Bulletin: 2019-22 .
More education leads to higher earnings but the gender pay gap is wider among men and women with a bachelor’s degree than among those without. Among workers with a bachelor’s degree, women earn 74 cents for every dollar men make, which is less than the 78 cents for workers without the college degree. While workers with a bachelor’s degree earn about double that of their co-workers without a college education, the difference between men’s and women’s earnings widens with more education. Age and job choice can affect the size of the pay gap.

Women workers with a bachelor’s degree are younger on average and many are years away from the earnings peak usually reached by people in their 50s. Higher pay reflects years of work experience and pay raises. The earnings differences between men and women also peak in their 50s, although men on average earn more at every age than their female counterparts. Among workers with a bachelor’s degree, women are considerably younger, on average, than men (median ages of 42 vs. 45). This results in a larger pay gap, as women have had less time to accumulate experience and pay raises. In contrast, working women without a bachelor’s degree are, on average, older than male workers without a bachelor’s (median ages of 47 vs. 45), which tends to narrow the pay gap.
At all ages in both education groups, men outnumber women except for the youngest age group (25-29) with a bachelor’s degree. The influx in recent decades of college-educated women has driven their numbers to record levels. In fact, the number of women working full time, year-round with a bachelor’s degree is almost equal to men’s (18 million women and 21 million men). Women are more likely to have a bachelor’s degree than men (41.7% compared with 36.2%) among full-time, year-round workers. This is particularly true for workers under age 60. As older educated male workers age out of the labor force, this pattern of the college-educated workforce dominated by women may continue. Of note, male workers without a bachelor’s degree make up the largest group by far.
In some occupations, the earnings gap virtually disappears. The mixture of the jobs men and women hold, and the earnings differences among these occupations, also contribute to the overall earnings gap. This interactive visualization  illustrates these relationships for about 400 occupations. It provides easy comparisons of median earnings differences by median age for men and women workers by occupation. Among the highlights:

  • In many occupations, the earnings gap doesn’t exist: phlebotomists, electricians, and social workers. This is particularly noticeable when accounting for educational attainment.
  • Women and men workers concentrate in different occupations. 

Among full-time, year-round workers, some of the largest occupations for women are secretaries and administrative assistants, registered nurses, and elementary and middle school teachers. For men, the list includes driver/sales workers and truck drivers, first-line supervisors of retail sales workers, janitor and building cleaners, and construction laborers.

  • All of the largest occupations with over 1 million full-time workers (large circles on the graph) show some degree of earnings gap between men and women. This pattern remains for most of these occupations even when accounting for educational attainment.
  • Occupations in which men are, on average, older than women have higher earnings on average, compared with occupations in which women are older.
  • Selecting between the two educational attainment options shows a significant effect of more education on earnings for most occupations, for both men and women. It also displays a noticeable shift to a younger labor force, particularly for women. 

Jennifer Cheeseman Day, United States Census Bureau, May 29, 2019. Statistics from the Detailed Occupation and Education Table Package  and an analysis of 2017 data from the American Community Survey .
There are around 48.6 million children enrolled in public elementary and secondary education in the United States. But how much are we spending on their education? The nation spent a total of $694.3 billion on public school systems in fiscal year 2017, up 4.4% from FY 2016, according to Census Bureau statistics  released today. It was the largest yearly increase in total expenditure since 2008. The increase in public school spending is happening at a time when the gross domestic product (GDP) reached an all-time high in 2017, according to the U.S. Bureau of Economic Analysis . The five states that had the highest percentage increases in total expenditure from FY 2016 to FY 2017 are the District of Columbia (13.7%), Nevada (9.5%), Texas (7.6%), Idaho (7.6%) and Tennessee (6.9%). While total expenditure increased by 4.4%, total revenue increased by 3.4% compared to 2016. The total expenditure for elementary and secondary education included 88.0% in current spending ($610.9 billion), and 9.0% in capital outlay ($62.2 billion). Current spending is comprised of expenses for day-to-day activities, including salaries for teachers and most other school system employees. School systems are spending more on teachers. Instructional salaries was the largest overall expenditure category: $229.2 billion in FY 2017, accounting for 33.0% of total spending. Overall, per pupil expenditure in the United States is up 3.8% from 2016, to $12,214 per student. Spending on instructional activities made up 60.6% ($370.5 billion) and support services made up 34.3% ($209.4 billion). These statistics come from the 2017 Census of Governments: Finance--Annual Survey of School System Finances . Education finance data include revenues, expenditures, debt and assets (cash and security holdings) of elementary and secondary (prekindergarten through 12th grade) public school systems. Statistics cover school systems in all states, and include the District of Columbia. These statistics are not adjusted for cost-of-living differences between geographic areas. The Census Bureau is exploring the possibility of a data product that would use the newly released Comparable Wage Index for Teachers  from the National Center for Education Statistics. The index adjusts school system financial data for cost-of-living differences. Erika Chen, Census Bureau, May 21, 2019.
Organizations across the country are reporting a rise in mental health and substance abuse issues among workers. While employers are challenged with measuring the prevalence of mental health and substance abuse, they are aware of the impact these issues play on worker performance and health care costs and are responding by providing a range of preventive and treatment options. The International Foundation’s Mental Health and Substance Abuse Benefits: 2018 Survey Results report examines the current state of mental health and substance abuse in the workplace and how employers are taking action. Sixty percent of U.S. and Canadian organizations are noticing an uptick in mental illness and substance abuse compared to two years ago. Forty percent of organizations report their participants are very or extremely stressed, and almost 40% say stress levels are higher now compared with two years ago.
Download the Report
Top 10 Mental Health Conditions Employers Are Covering
International Foundation of Employee Benefit Plans, 2018 Survey Results.

Joint Release
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency

The federal banking agencies proposed a rule to limit the interconnectedness of large banking organizations and reduce the impact from failure of the largest banking organizations. The proposal would complement other measures that the banking agencies have taken to limit interconnectedness among large banking organizations. Global systemically important bank holding companies, or GSIBs, are the largest and most complex banking organizations and are required to issue debt with certain features under the Board's "total loss-absorbing capacity," or TLAC, rule. That debt would be used to recapitalize the holding company during bankruptcy or resolution if it were to fail. To discourage GSIBs and "advanced approaches" banking organizations--generally, firms that have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure--from purchasing large amounts of TLAC debt, the proposal would require such banking organizations to hold additional capital against substantial holdings of TLAC debt. This would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure. The proposal from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency would also require the holding companies of GSIBs to report publicly their TLAC debt outstanding. Comments will be accepted for 60 days following publication in the Federal Register.
Notice of Proposed Rulemaking
Media Contacts:
Federal Reserve Board           Eric Kollig                                (202) 452.2955
FDIC                                        Julianne Fisher Breitbeil          (202) 898.6895
OCC                                         Bryan Hubbard                        (202) 649.6870
FDIC: PR-30-2019
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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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