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Cypen & Cypen
JULY 27, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The Florida Attorney General was recently asked two questions, the first of which is "Are city firefighters or police officers who have entered the city's deferred retirement option plan or who have actually retired eligible to serve on their respective pension board as one of the two fulltime firefighter or police officer appointees pursuant to Section 175.061 or Section 185.05, Florida Statutes?" The Attorney General first made reference to Section 175.061(1)(a), Florida Statutes, providing that two members of the board of trustees shall be full-time firefighters as defined in Section 175.032(8)(a), Florida Statutes. (We will not deal with the parallel analysis of the question as related to police officers.) The latter section requires a certified firefighter to be employed by a fire department. A firefighter who has entered the DROP, while considered retired for purposes of pension fund benefits, is still employed by the fire department. Thus, a firefighter who has entered the DROP but still meets the definition of "firefighter," is qualified to serve as the firefighters' representative on the pension board. A firefighter, however, who has actually retired and is no longer employed by the city's fire department would not meet the definition in Section 175.032(8)(a), Florida Statutes, and thus would not qualify as a member of the firefighters' pension board as one of the two firefighters' representatives. (Of course, the subject inquiry was limited to firefighters' and police officers' appointees on their respective boards, and does not concern service of a DROP or retired firefighter or police officer to fill seats on the board as legal residents of the city or as the fifth member appointed by the other board members.) The Attorney General also addressed a question that has been bugging us for years: "If a police officer is no longer entitled to serve on the pension board as one of the two police officer appointees pursuant to section 185.05, Florida Statutes, how is the vacancy to be filled?" Section 185.05(1)(a), Florida Statutes, provides that in such circumstance "the legislative body of the municipality shall choose a successor in the same manner as an original appointment." The problem is that the original appointment was not made by the municipality. (The language in question was adopted in 1986, prior to which the legislative body appointed police officers upon recommendation of a majority of the police officers.) The Attorney General recited the fundamental rule of statutory construction that a statute is to be read in such a manner as to give effect to the intent of the legislature. While the language may have been a drafting error, the Attorney General has no authority to remove or add language to a statute or to assume that the statutory language is mere surplusage. Thus, while the legislative body of the city may appoint the successor to fill a vacancy in the police officers' representative on the pension board, such action is ministerial with selection of the successor being made by a majority of the active police officers who are members of the pension plan. The Attorney General invites the legislature to "clarify its intent on this issue." Note, there is no problem with the corresponding section in Chapter 175, which does not refer to the legislative body. AGO 2006-32 (July 20, 2006). We have brought this important AGO to the attention of Trish Shoemaker. It remains to be seen as to whether the Division of Retirement will apply the rationale in the AGO to local law plans, and if so, how.


The Pension Benefit Guaranty Corporation protects the pensions of 44.1 million workers and retirees in 30,336 private defined benefit pension plans, including 34.2 million people covered by 28,769 single-employer plans and 9.9 million people covered by 1,567 multiemployer plans. These pension plans provide a specified monthly benefit at retirement, usually based on salary or a stated dollar amount and years of service. The PBGC guarantees these benefits subject to the limits set by the Employee Retirement Income Security Act, which established PBGC as a federal corporation in 1974. The PBGC operates under the guidance of its Board of Directors, which consists of the Secretaries of Labor, Commerce and the Treasury. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC and recoveries from companies formerly responsible for the plans. Here are some highlights from PBGC's 2005 Annual Report:

  • While the single-employer program's financial condition improved by $529 Million, due largely to the effect of a change in interest rates and to investment gains offsetting new probable losses, the program still reported a deficit of $22.8 Billion and an increased exposure to loss from underfunded plans.
  • The multiemployer program reported a net loss of $99 Million and a year-end deficit of $335 Million, largely due to an increased provision for probable losses from expected future financial assistance to troubled plans.
  • The PBGC's future exposure to new probable terminations remains high with approximately $108 Billion in underfunding exposure to plan sponsors, classified as reasonably possible, whose credit ratings are below investment grade or meet one or more financial distress criteria.
  • Events subsequent to September 30, 2005 would have reflected a decrease of $2.9 Billion in PBGC's net income and a decrease in the net position in the same amount had these conditions occurred prior to year end.
  • PBGC continued to provide high quality service to its customers even as its workload grew in 2005. It paid nearly $3.7 Billion in benefits to almost 683,000 people and issued 178,000 final benefit terminations.
  • At year-end, PBGC was responsible for pensions of nearly 1.3 million people. In addition to the 683,000 already receiving benefits, these include 510,000 people who will begin to receive benefits from PBGC when they retire in the future and 103,000 who are receiving or will receive benefits through PBGC's financial assistance to multiemployer plans.

Total assets grew to over $57 Billion, a more than 40% increase from the prior year's $40 Billion. Total liabilities amounted to $80.7 Billion, up from $63 Billion in 2004. Thus the $23.1 Billion overall loss as of September 30, 2005 is an "improvement" over 2004's $23.5 Billion loss.


Internal Revenue Service has announced the release of the Spring 2006 issue of the Statistics of Income Bulletin. The Spring Bulletin includes information about high-income individual income tax returns for Tax Year 2003, S corporation returns for Tax Year 2003, accumulation and distribution of Individual Retirement Arrangements for Tax Years 2001-2002 and, for the first time, a detailed look at individual noncash charitable contributions. Of the 130,423,626 individual income tax returns filed for Tax Year 2003, there were 2,536,439 returns reporting adjusted gross income of $200,000 or more and 2,573,133 with expanded income of $200,000 or more. IR-2006-113 (July 18, 2006).


A city received a large public records request for documents relating to the mayor. Due to the massive quantity of documents required, the city's information technology team set up a static web page for viewing the documents. The cost of collecting and posting the documents was $360.00, substantially less than the cost of producing and copying the requested documents on paper. The requesting party was provided an access code to the static web page after paying the $360.00. The requesting party had no objection to having access to the records provided in this manner. The mayor, however, questioned propriety of complying with the public records request in this manner, since the static web page is not available to the public at large. Section 119.07(1)(a), Florida Statutes, provides that every person who has custody of a public record shall permit the record to be inspected and copied by any person desiring to do so, at any reasonable time, under reasonable conditions, and under supervision by the custodian of the public records. The general purpose of the Public Records Act is to open public records so that Florida's citizens can discover the actions of their government; thus, the Public Records Act is to be construed liberally in favor of openness. The city, while not required to provide access in this manner, has complied with a request for a large number of records through establishment of a static website that the requestor may access. Both the city and the requestor have agreed to this innovative method of providing public records. It has relieved the city of duplicating thousands of pages of public records while allowing the requestor to obtain these records without incurring substantially greater costs. In response to a question from the city attorney, the Florida Attorney General held that the plan would appear consistent with the intent and purpose of the Public Records Law. Nothing in the law precludes the city from providing access in this manner, provided both the city and the requestor agree. In sum, a municipality may respond to a public records request requiring production of thousands of documents by composing a static web page where the responsive public documents are posted for viewing if the requesting party agrees to the procedure and agrees to pay administrative costs, in lieu of copying the documents at a much greater cost. In our judgment, this opinion would apply to a municipal pension board, as well. AGO 2006-30 (July 20, 2006).


New York Governor George Pataki vetoed a bill that would have allowed teachers and other government workers with 25 years of experience to retire at age 55 (see C&C Newsletter for July 6, 2006, Item 5). Benefits are now payable at age 62 with 30 years of service, according to Pataki said the measure, passed overwhelmingly by the legislature, would have cost state taxpayers $195 Million over the next 17 years in higher pension costs, and also would have led to loss of critical public workers. The bill would have allowed public workers who met eligibility requirements to retire next year or in 2008 with the added benefits. At press time, it was not clear whether New York State lawmakers would try to override the veto.


Our readers know that Senator Grassley and Senator Baucus have recently written to the Government Accountability Office requesting a study of the funding status of public pension plans (see C&C Newsletter for July 20, 2006, Item 1). Now, the National Association of State Retirement Administrators and the National Council on Teacher Retirement -- whose membership collectively administers state, territorial, local, university and statewide public pension systems that hold over $2.1 Trillion in trust for over 18 million public employees, retirees and their beneficiaries -- has written to those senators, expressing concern about some statements made in their letter to GAO. Because of its importance, the letter is excerpted in detail below:

We appreciate your interest in the general financial health of State and local government defined benefit (DB) plans. We are concerned, however, about some of the statements made in the letter to the GAO, particularly those that could be misleading or are factually inaccurate regarding the governance, protections and financial condition of public employee retirement systems. ...We welcome the opportunity to work closely with you and the GAO as you examine the areas outlined in your letter, and hope the factual points noted below and future discussions will better ensure a balanced study.

For example, when discussing pensions in the private sector, the letter may be correct in stating that "retirees and workers who 'play by the rules' all their careers now find themselves with far lower actual or future retirement income on which they had counted." However, that statement definitely does not apply to participants (both active employees and retirees) in the public pension plans represented by our two associations. Public DB pension plan promises made are promises kept. Accordingly, we do not understand the basis for the letter's suggestion that public employees need "help" in "avoid[ing] the benefit losses and reduced accruals experienced by their private sector counterparts." We know of no participant in our members' plans who has or may ever lose any part of his or her existing retirement benefit.

Indeed, unlike the private sector in which only the participant's accrued benefit to date is protected, in the State and local DB plan world the benefit formula itself is typically protected from such cutbacks by state constitutions, statutes, or case law that prohibit the elimination or diminution of a retirement benefit once it is granted. Thus, State and local DB plans typically guarantee not only the participant's accrued level of benefit but also protect future benefit accruals from being cut back. The implication that lack of coverage by the Pension Benefit Guaranty Corporation (PBGC) renders government employees at greater risk is a misnomer, and only serves to unduly alarm the participants in our members' systems. Even though public plans may not have the PBGC as a "back-up source for guaranteed benefit payments," the full faith and credit of State and local governments has provided insurance far greater than what is provided by the PBGC. In fact, public employees may actually find increased comfort in knowing that there is no "escape hatch" from pension obligations once they are promised in the public sector. It is a misconception that PBGC coverage will provide any added value to the benefit protections already in place for State and local government employees.

We also wish to take exception to the statement in the letter to GAO that "many" public sector DB plans are "even more poorly funded" than their private sector counterparts, and the implication that an untenable burden will fall on taxpayers and public employees. As a group, public pension plans have funded 86 percent of their liabilities, a figure that is expected to begin rising in the near future as investment gains since March 2003 are more fully incorporated into funding calculations. This figure is also reflective of the funding levels of plans covering the substantial majority of public pension participants. Unlike private sector plans that must rely on uneven employer contributions, State and local DB plans receive a steady stream of both employer and employee contributions that typically is mandated by statute. In addition, State and local government DB plans are long-term investors, whose portfolios are professionally-managed and designed to withstand short-term market fluctuations while still providing optimal growth potential. When placed in context, required contributions to public pension plans continue to be well within State and local governments' budgetary means, and even represent historically low amounts as a percentage of total state and local government spending and payroll.

NASRA and NCTR express their appreciation for the Senators' strong record of support they have maintained for State and local government employee retirement programs. The organizations share the Senators' interest in keeping commitments to providing a secure retirement for American workers, particularly those who spend a career delivering vital services to the public and whose retirement security the members of the organizations guarantee. They welcome the opportunity to work closely with the Senators and the GAO, and hope future discussions and consultation will provide an objective and factually accurate study. Stay tuned.


International Foundation of Employee Benefit Plans' August 2006 Benefits & Compensation Digest contains a scholarly article on securities lending transactions and repurchase agreements in context of employee benefit plans. Employee benefit plans often lend their securities to third parties through securities custodians. The loan is accomplished by means of a security lending authorization agreement between the plan (lender) and the custodian (agent) in which the lender authorizes the agent to lend its securities to one or more third parties (borrowers) selected by the agent. Plans also engage in repurchase agreements, whereby they sell securities to another party (buyer) in exchange for cash and at the same time agree to reacquire those securities at a later date for an amount that is equal to the cash received plus an interest amount. Whether securities lending transactions and repurchase agreements are accounted for as secured borrowings or as sales depends on the plan's control over the securities transferred. If the plan controls future economic benefits in the securities transferred and the collateral received to the extent that it can benefit from these assets and can deny or limit access to that benefit by others, for instance, by obtaining interest from investment of the cash collateral, then these assets must be recognized in the books of the plan. The securities lending transactions and repurchase agreements must be accounted for as secured borrowings. When the plan surrenders control over the assets transferred, then the plan must account for the securities lending transactions and repurchase agreements as sales. Securities lending authorization agreements often are structured in a manner that permits the plan to maintain control over the securities transferred; however, repurchase agreements may take a variety of forms. It is important to read the security lending authorization agreements and repurchase agreements to discern if control over the securities has been transferred by the plan. Warning to trustees: do not expect completely to understand this article. Do discuss the matter with your auditors.


Another beauty from indicates a bank robber sent his accomplice to hold up a bank, but the accomplice drew attention as he suited up with a black bandana, big red motorcycle helmet, blue rain jacket and gardening gloves. He hopped on a bicycle, rode a short distance to the bank, dropped the bike, went in, brandished a gun, jumped the counter, pushed the teller aside, filled a black bag with cash, climbed back over the counter, dropped his gun (which turned out to be a toy), and hopped back on his bike with the bag. Unfortunately for him, red smoke from the dye pack was billowing from the bag. He rode the short distance to the getaway car, but his actions drew attention of a nearby garbage truck driver, who lowered his front dump attachment on top of the passenger's side of the car, crushing its fender and flattening its front right tire. Meanwhile, as the car continued to try to get away, it began backing up and jerking forward, putting at risk the car of a cook in a nearby restaurant. The cook, seeing his vehicle at risk, ran out to stop the two miscreants. Armed with a 2-foot long rolling pin, the cook banged on the getaway car, which, despite a flat tire and being blocked by the garbage truck, actually managed to escape! However, the cash, the bike and the helmet were left at the scene. We’re exhausted just writing about it.


In a recent interview, General Norman Schwartzkopf was asked if he thought there was room for forgiveness toward the people who have harbored and abetted the terrorists who perpetrated the 9/11 attacks on America. His answer was classic Schwartzkopf: "I believe that forgiving them is God's function. Our job is to arrange the meeting."


Your Editor will be on a short vacation next week, so there will be no Newsletter. Look for the next issue the week of August 7. Hope you miss us.

Copyright, 1996-2006, all rights reserved.

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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