Cypen & Cypen
JULY 30, 2009
Stephen H. Cypen, Esq., Editor
1. FUTURE COMPENSATION OF THE STATE AND LOCAL WORKFORCE:
A new paper from The Public Manager asks if compensation and benefit packages are ready to address occupational needs of the next decade. The U.S. Bureau of Labor Statistics projects that by 2016, more than 24 million people will be employed by the U.S. private sector, and that the state and local government workforce will increase to about 21 million. These increases come at a time when the large baby boomer cohort is beginning to retire, and retirement/separation rates for state and local government and private sectors are ranging from 2.5 percent to 3 percent annually. Although the sluggish U.S. economy of 2009 (and possibly beyond) is a wildcard, the article attempts to answer several important questions:
Public administrators across the country will need to address these questions if the public is to continue to receive quality service from trained and competent public servants. The next decade will pose many challenges to state and local government leaders. The economy, an aging infrastructure, changing demographics and other issues increase the need for well-trained, dedicated professionals in the public service. Certain aspects of the comparison between the state and local governments in competition for talent with private firms are difficult to evaluate. But for some essential jobs, state and local governments appear to be in advantageous competitive positions, while for others, they are not. One sector does not appear consistently to offer better compensation packages than the other for key positions, but knowing the balance and composition of the packages offered is important, especially to the public sector. Such composition may determine staffing and effectiveness of the public sector in dealing with the important issues of 2009 and beyond.
2. SEC PROPOSES MEASURES TO CURTAIL “PAY TO PLAY” PRACTICES:
The U.S. Securities and Exchange Commission has voted unanimously to propose measures intended to curtail “pay to play” practices by investment advisers seeking to manage money for state and local governments. The measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials. The proposals relate to money managed by state and local governments under important public programs. Such programs include public pension plans that pay retirement benefits to government employees, retirement plans in which teachers and other government employees invest money for their retirement and 529 plans that allow families to invest money for college. To help manage this money, state and local governments often hire outside investment advisers who may directly manage this money and provide advice about investments which they should make. In return for their advice, investment advisers typically charge fees that come out of the assets of the pension funds to which the advice is provided. If advisers manage mutual funds or other investments that are options in a plan, advisers receive fees from the money in those investments. Investment advisers are often selected by one or more trustees who are appointed by elected officials. While such election process is common, fairness can be undermined if advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process. The proposed rule includes prohibitions intended to capture not only direct political contributions by advisers, but other ways advisers may engage in pay to play arrangements. Under the proposed rule, an investment adviser who makes a political contribution to an elected official in a position to influence selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund. The rule would apply to the investment adviser as well as certain executives and employees of the adviser. In addition, the proposed rule would prohibit an adviser and certain of its executives and employees from paying a third party, such as a solicitor or a placement agent, to solicit a government client on behalf of the investment adviser (see C&C Newsletter for April 30, 2009, Item 8, C&C Newsletter for May 14, 2009, Item 5, C&C Newsletter for May 21, 2009, Item 11 and C&C Newsletter for June 25, 2009, Item 2). Public comments on the rule must be received by the Commission within sixty days after publication in the Federal Register (which should occur shortly). The full text of the proposed rule will be posted to the SEC website http://www.sec.gov as soon as possible. Release 2009-168 (July 22, 2009).
3. FLORIDA STATE BOARD TO ALLOCATE TO ALTERNATIVES:
Major investment changes are brewing at the Florida State Board of Administration, according to pionline.com. The Tallahassee-based board, which oversees $102 Billion in assets (including the Florida Retirement System), is planning to make major allocations to alternative investments, including its first move into hedge funds, infrastructure, timberland and corporate governance activism funds, plus investing in a general partnership management company. Other areas under consideration are real estate debt funds and debtor-in-possession investment portfolios. SBA continues to research new opportunistic alternative investments that have an attractive risk-adjusted return profile, as well as sticking to its discipline of maintaining a relatively even year-to-year pace for private equity fund commitments to avoid vintage year risk. Considering SBA’s recent sterling performance with traditional investments, we wonder what we can expect in the future.
4. SHOULD YOU CARRY A MORTGAGE INTO RETIREMENT?:
Although it remains the goal of many households to repay their mortgage by retirement, an increasing proportion now enters retirement with a mortgage, according to a new Issue in Brief from Center for Retirement Research at Boston College. At the same time, households are increasingly likely to hold substantial amounts of financial assets, as a result of growth of 401(k) and similar plans. Among households aged 60-69 in 2007, 41% had a mortgage. Of these, 51% had sufficient assets to repay the mortgage. These households could, if they wanted, be mortgage-free simply by selling some of their investments and mailing a check to the lender. The paper considers whether households should use retirement or non-retirement wealth to pay down mortgages. It first shows that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills and Treasury bonds that will exceed the cost of their mortgage. Liquidity considerations aside, households holding such assets will generally be better off using them to pay down their mortgage. It then considers and (for most households) rejects the argument that households should retain their mortgage because they can earn a higher expected return in stocks and other risky assets. The paper concludes with practical advice for most households. One argument that is sometimes cited in favor of not repaying a mortgage is that retaining one increases the household’s liquidity, and enables it better to cope with sudden unexpected expenses. But households that retain a mortgage need to consider what they would do if the bad event actually happened -- that is, how they would maintain their mortgage payments once their financial assets have been spent. No. 9-15 (July, 2009).
5. SEC SEEKS RETURN OF BONUSES AND PROFITS FROM FORMER CEO:
The U.S. Securities and Exchange Commission has asked a court to order the former chief executive officer of CSK Auto Corporation to reimburse the company and its shareholders more than $4 Million that he received in bonuses and stock sale profits while CSK was committing accounting fraud. SEC’s enforcement action charges the ex-CEO with violations of the Sarbanes-Oxley Act. It is the first action seeking reimbursement under the SOX “clawback” provision (Section 304) from an individual who is not alleged to have otherwise violated securities laws. The SOX clawback provision deprives corporate executives of money that they earned while their companies were misleading investors. The personal compensation received by CEOs while the companies they serve engage in wrongdoing can be clawed back according to SEC. The cost of such misconduct need not be borne by shareholders alone. The former CEO made over $2 Million in bonuses and a like amount in company stock sales. SEC Release 2009-167 (July 22, 2009).
6. L.A. RETIREMENT FUND ENACTS CAMPAIGN DISCLOSURE RULES:
Responding to investigations into pension systems and actions elsewhere (see C&C Newsletter for April 30, 2009, Item 8, C&C Newsletter for May 14, 2009, Item 5, C&C Newsletter for May 21, 2009, Item 11, C&C Newsletter for June 25, 2009, Item 2 and Item 2 above), Los Angeles Fire and Police Pensions Board voted to require any company seeking business with the board to disclose campaign contributions it has made to city political candidates. The policy requires quarterly statements that spell out political donations made by such companies, as well as their paid representatives, their employees and their employees’ family members. The policy will go into effect immediately, according to the Los Angeles Times.
In a recent U.S. Tax Court case the issues for decision were whether: (1) the loan proceeds received from Billups’s qualified employer plan were taxable distributions under IRC Section 72(p) and (2) Billups was subject to the 10-percent additional tax under IRC Section 72(t). As an employee of the New York City Transit Authority, Billups participated in the New York City Employees’ Retirement System, a qualified employer plan. Billups replaced a prior loan with a new loan and received cash proceeds of $12,630 from NYCERS. The replacement loan was to be amortized over five years and repaid in biweekly installments. When Billups received the proceeds, the replaced loan had an outstanding balance of $27,012 (which thereupon increased to $39,748). At the time of the replacement loan Billups’s account balance was $52,863. On the loan application form for the replacement loan, Billups selected the “refinance” option. Petitioner received a Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.) for 2005, reporting a gross distribution of over $29,467. On the bottom of the form was the word “LOAN” and a distribution code “L1.” Billups reported a pension annuity distribution of that amount on his Form 1040, but designated it as a “rollover.” No computation of the 10-percent additional tax on early distributions was reported. Generally, loans from qualified employer plans are treated as distributions from the plan. However, there is an exception: a loan will not give rise to a deemed distribution to the extent that the loan (when added to the outstanding balance of all other loans from the plan) does not exceed the lesser of: (a) $50,000 (reduced by the excess, if any, of the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which the loan was made, over the outstanding balance of loans from the plan on the date on which the loan was made) or (b) the greater of one-half of the present value of the participant’s “nonforfeitable accrued benefit” under the plan or $10,000. But the exception does not apply unless: (1) the loan, by its terms, is required to be repaid within five years and (2) substantially level amortization of such loan (with payments not less frequently than quarterly) is required over term of the loan. For Billups to avoid having his loan proceeds treated as a taxable distribution, his $39,748 loan (when added to the outstanding balance of all other loans from the plan, $27,012) could not exceed the lesser of $50,000 (reduced by the excess, if any, of the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which the loan was made, over the outstanding balance of loans from the plan on the date on which the loan was made) or the greater of $26,431 or $10,000. The Tax Court could not determine the exact amount by which the $50,000 ceiling was reduced because neither party provided evidence on the issue. Nevertheless, the court could determine with reasonable certainty that the lesser of the reduced $50,000 ceiling limitation and one-half of the present value of Billups’s nonforfeitable accrued benefit is the latter. Therefore, NYCERS used the appropriate amount available to Billups, the greater of one-half of the present value of his nonforfeitable accrued benefit under the plan, $26,431, or $10,000. Consequently, Billups is taxable on any amount in excess of one-half of the present value of his nonforfeitable accrued benefit, $26,431. The sum of the new loan and the loan it replaced ($39,643 plus $27,012) is $66,655, exceeding the applicable limitation of $26,431 by $39,748. That finding is enough to conclude that Billups had a taxable distribution, notwithstanding that each loan provided for repayment terms of five years or less and substantially low amortization. Section 72(t)(1) imposes an additional tax on an early distribution from a qualified retirement plan equal to 10 percent of the portion of the amount that is includable in gross income. The 10-percent additional tax does not apply, among other things, to distributions to an employee age 59-1/2 or older. When petitioner received the loan proceeds, he had not attained that age (and did not allege or show that he came within any of the other exceptions under 72(t)). Accordingly, the Tax Court entered judgment for the government with respect to the deficiency assessed. Billups v. Commissioner of Internal Revenue, Case No. 17470-07S (U.S. Tax Court, June 1, 2009) T.C. Summary Opinion 2009-86. Pursuant to Section 7463(b) of the Internal Revenue Code, the decision is not reviewable by any other court and shall not be treated as precedent for any other case.
8. FEDERAL MINIMUM WAGE RISES TO $7.25:
The U.S. Department of Labor’s Wage and Hour Division reminds employers and employees that the federal minimum wage increased to $7.25 on July 24, 2009. With this change, employees who are covered by the federal Fair Labor Standards Act will be entitled to be paid no less than $7.25 per hour. This increase is the last of three provided by enactment of the Fair Minimum Wage Act of 2007. Every employer of employees subject to FLSA’s minimum wage provisions must post, and keep posted, a notice explaining the Act in a conspicuous place in all of their establishments so as to permit employees readily to read it. A revised federal minimum wage poster is available for viewing, downloading and posting at http://www.dol.gov/esa/whd/regs/compliance/posters/flsa.htm. Because federal law requires employers to pay the higher minimum wage between federal and state figures, Florida’s minimum wage increased from $7.21 an hour to $7.25 an hour on the same date. Florida law requires the Agency for Workforce Innovation to calculate a new minimum wage each year on September 30, based upon the Consumer Price Index. If higher than the federal rate, the revised state rate would take effect the following January.
9. NERA REPORT LESS DIRE ON SECURITIES CLASS ACTION FILINGS:
NERA Economic Consulting came out with a new report entitled “Recent Trends in Securities Class Action Litigation: 2009 Midyear Update,” which is a lot more upbeat than Stanford’s (see C&C Newsletter for July 23, 2009, Item 8). NERA acknowledges new filings fell in June to 14, the lowest number since the 10 filed in February, 2008. However, that drop could turn out to be as momentary as a dip in new filings last June and July. (NERA counted Ponzi scheme cases in its total, which may have put a rosier tint on this year’s numbers than the Stanford report.) The NERA study also bears out that audit firms are increasingly likely to be named as co-defendants: audit firms were named in 17.3% of new filings, compared to 5.8% in 2008. Two other revelations in the NERA report are good news for defense lawyers and bad news for plaintiffs’ bar: (1) despite the spike in filings in 2007 and 2008, median settlement amounts have stayed significantly below $10 Million, where they have been since passage of securities litigation reforms (the average amount in both 2008 and 2009 was $43 Million, down from a peak of $80 Million in 2006); and (2) for the first time since the U.S. Supreme Court’s decision in Dura Pharmaceutical, NERA is presenting data on dismissals, finding a slightly higher percentage of cases dismissed after Dura and before.
10. MORNINGSTAR’S RETIREMENT PLAN SERVICE DIRECTORY:
Morningstar has announced its Retirement Plan Service Directory, a single source to identify service providers in your area. The advanced search feature aggregates data from thousands of pages of government filings, to deliver a comprehensive list of local and national service providers. Firm profiles summarize information about service providers such as actuaries, auditor/accountants, consultant/advisers, custodians, investment managers, record keepers and trustees. Free registration is available through http://rps.morningstar.com/default.
11. LANGUAGE TO EASE REHIRING OF RETIREES MAKES IT INTO DEFENSE AUTHORIZATION:
Although lawmakers withdrew several federal workforce reforms from the Senate’s 2010 Defense Authorization bill, a provision to make it easier to rehire annuitants survived in the budget legislation. The Senate approved an amendment that would allow agency heads to waive the requirement for retirees who are rehired part time to take a cut in their annuity checks. Under current Office of Personnel Management regulations, federal retirees can return to work for government part time, and in most cases their annuities are reduced by the amount that they earn on the job, unless they receive a waiver from OPM. Agencies say this makes it harder to bring back experienced staff, especially if they are needed on short notice, according to govexec.com. And remember, folks, working for pay while receiving a pension previously-earned is not double-dipping.
12. RETIREMENT BOOT CAMP:
Two women, partners in a financial advisory practice, run what they call a retirement boot camp, aimed at making sure their investment clients who are contemplating retirement know exactly what they are getting into. But the women also make sure that clients understand what retirement feels like, according to the New York Times. They point out that retirees suddenly have no place to be each day, which may not be as blissful as it seemed beforehand. The paychecks stop coming, and after years of dutifully putting money into savings, retirees have to get used to watching their accounts dwindle. The boot camp -- an extended version of its military namesake -- is generally aimed at people a year or two from retirement. While the exercises may be especially rigorous, they offer broad lessons for those who think they may be ready to stop working. The two advisers require pre-retirees to complete a checklist of exercises, including taking a hard look at where there money is going and making sure they are on track, for instance to pay off the mortgage, which is a nonnegotiable, must-do before retirement. (See Item 4 above.) Naturally, participants cannot just quit their day jobs, but they are required to save a disproportionate amount of money in tax-deferred accounts like 401(k)s, which helps mimic what retirement will feel like: the increased savings lower the amount of money that pre-retirees have to live on, while also reducing the taxes they pay. Since they are saving so much, the participants need to draw on their regular cash savings accounts to supplement their living expenses. The exercise also gives pre-retirees a convenient excuse to turn down expensive obligations. Here is a general outline of the program:
13. DOES SIZE MATTER IN AUSTRALIA?:
In a scholarly paper from the University of Sydney and Australian National University, the authors estimate the relationship between hourly wages and two aspects of body size: height and body mass index (BMI). They observed a height premium, with an additional four inches of height being associated with a 3% increase in hourly wages for men. However, workers with higher BMI scores do not seem to earn lower wages. The results are largely unaffected by controlling for physical health, or (in the case of BMI) instrumenting with the BMI of biological family members. From a theoretical standpoint, why should body size affect wages? One possibility is that for particular jobs, body size has a direct productive payoff. For example, a taller shop assistant may be able to reach the top shelf without needing a ladder, while a slimmer construction worker may be able to move more rapidly around the building site. It is also possible that body size has an indirect impact on productivity. For example, tall and slimmer workers might exude greater confidence in dealing with customers and co-workers, perhaps because others have treated them more favorably in the past. The final possibility is that shorter and more overweight workers might be subject to discrimination from customers, co-workers or employers. G’day.
14. FIVE MORE LESSONS ON LIFE BY REGINA BRETT:
Here are the next 5 out of 50 lessons on life from the columnist:
15. DISORDER IN THE AMERICAN COURTS:
16. CREATIVE PUNS FOR “EDUCATED MINDS”:
Atheism is a non-prophet organization.
17. QUOTE OF THE WEEK:
“No pessimist ever discovered the secret of the stars, or sailed to an uncharted land, or opened a new doorway for the human spirit.” Helen Keller
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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.