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Cypen & Cypen
JULY 8, 2010

Stephen H. Cypen, Esq., Editor

1.            UNFUNDED PENSIONS WILL NOT CAUSE MUNICIPAL INSOLVENCY:  Unfunded public pension liabilities will not result in defaults by municipal bond issuers because the problem is not severe enough to cause financial distress, a report by Herbert J. Sims & Co. says.  Reviewed by, the report finds that state and city retiree funds are not insolvent and forecasts of widespread defaults and municipal bankruptcies are overblown.  A historic review of pension history shows that underfunding has not led to budgetary insolvency and default.  Separately, Standard & Poor’s said in its own report that the funded pension level for state plans fell to 80 percent in 2008 from 83 percent in 2007 and 100 percent in 2000. The funded ratio is the amount of assets available to pay expected future benefits.  S&P said the decline in public pension assets is contributing to significant budget challenges for U.S. states. 

 2.            “RADICAL” FINANCE MANIFESTO CAN INCREASE INVESTMENT RETURNS AND SAVE SOCIETY FROM DESTRUCTIVE MARKETS:  Investment funds should limit their annual turnover to 30 per cent and avoid any dealings with hedge funds or other forms of alternative investment, argues a radical new manifesto aimed at saving dysfunctional markets from future crises.  Published by the London School of Economics and Political Science, the proposals were part of a 10-point manifesto outlined by Dr. Paul Woolley in a lecture at the  School.  A former banker and International Monetary Fund economist, Woolley is founder of Centres for the study of Capital Market Dysfunctionality.  If his policies are adopted, he says, public, pension and charitable funds would boost annual returns for a fund (after inflation) by 25 per cent.  Once widely adopted, they would restore stability to the markets, giving another similarly-sized rise, for an overall gain in long-term returns of 50 per cent or more.  Here’s the entire 10-point manifesto: 

 1.            Adopt long-term investment approach (future dividend flows), rather than momentum (short-run price change).

 2.            Cap annual turnover of portfolios at 30%.

 3.            Understand that all tools now used to manage risk and return are based on the discredited theory of efficient markets.

 4.            Adopt a stable benchmark, such as growth of GDP plus a risk premium.

 5.            Not pay performance fees. 

 6.            Not engage in alternative investments -- Hedge funds, Private equity,  Commodities.

 7.            Insist on total transparency of agents' strategies. 

 8.            Ensure everything in the portfolio is traded on a public exchange.

 9.            Secure full transparency of banking service costs incurred by companies  invested in. 

10.            Provide full disclosure of compliance with these policies. 
True, Dr Woolley was talking about the world’s largest funds, but we see no reason why the advice isn’t equally as sound across the spectrum.  Compare this article with the one indicating public plans intend to increase alternative investments (see C&C Newsletter for July 1, 2010, Item 8).  For what it’s worth, our money is on Dr. Woolley. 

 3.            SEC ADOPTS NEW MEASURES TO CURTAIL PAY-TO-PLAY PRACTICES BY INVESTMENT ADVISERS:  On  June 30, 2010  the Securities and Exchange Commission voted unanimously to approve new rules significantly to curtail the corrupting influence of "pay-to-play" practices by investment advisers.  Pay-to-play is the practice of making campaign contributions and related payments to elected officials in order to influence awarding of lucrative contracts for  management of public pension plan assets and similar government investment accounts. The SEC rule includes prohibitions intended to capture not only direct political contributions by investment advisers, but also other ways that advisers may engage in pay-to-play arrangements.  The new SEC rule has three key elements: 

  • It prohibits an investment adviser from providing advisory services for compensation -- either directly or through a pooled investment vehicle -- for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence  selection of the adviser. 
  • It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others -- a practice referred to as "bundling" -- for an elected official who is in a position to influence the selection of the adviser.  It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business. 
  • It prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay-to-play restrictions.

The new rule becomes effective 60 days after publication in the Federal Register. Compliance with the rule's provisions generally will be required within six months of the effective date.  Compliance with the third-party ban and those provisions applicable to advisers to registered investment companies subject to the rule will be required one year after the effective date.  (Release 2010-116)

 4. ARRESTING DEVELOPMENTS:  If it were not for the word “police,” the Los Angeles Police Department's Hollenbeck Station could be mistaken for a modern museum.  When Central Division station first opened in 1977, Los Angeles police officers dubbed it "Fort Davis," with heavy irony.  Under former Chief of Police Ed Davis, officers were supposed to be building relationships with their neighborhoods.  But instead, the department built a bunker -- a massive, block-long structure in the heart of Skid Row.  With no exterior windows and an inaccessible rooftop parking deck, Central Division was designed not so much to protect the surrounding community as it was to protect the police, according to  Three decades later and six blocks north, a very different model of police-community interaction is on display.  At the corner of Main and West First streets, across the street from the futuristic California Department of Transportation building, an angular office tower stands, sheathed by a 10-story glass wall that reflects Los Angeles's ziggurat-shaped City Hall in the distance.  At one corner of the complex, workers are finishing renovations on what will soon be a restaurant.  At another, a crew is shooting a film on the facility's immaculate lawn, tastefully landscaped with desert succulents.  In a north side reflection garden, a detective in LAPD's Cold Case Unit enjoys a moment of quiet.  The structure behind him is the department's new home.  The recently-completed $437 Million police administration building is not alone.  For the last eight years, LAPD has been on a spending spree, thanks to a $600 Million construction bond approved by voters in 2002.  To date, nearly half of the department's 21 stations have been replaced or built from scratch.  In doing so, LAPD has not sought to simply upgrade facilities:  it set out to build stations that embody its hopes for a new relationship with local communities -- one of transparency and cooperation.  The result has been a profusion of architecturally avant-garde police stations unlike anything else in the country.  But to some, the new buildings come with a cost, disappearance of the police station as a distinct and recognizable part of urban neighborhoods.  As striking as architecture of LAPD's new stations is, some department members miss the civic presence that the old stations had.  Early LAPD station houses were clearly recognizable as just that -- a place where police assistance is rendered.  In contrast, the new stations, though absolutely striking and operationally superior, often look like buildings that could just as easily be filled with attorneys or accountants instead of L.A.'s finest.  Take a visual tour of several new LAPD stations at

 5. HEIGHTENED PLEADING STANDARD NOT APPLICABLE TO FIRST AMENDMENT RETALIATION CLAIM:  Randall served as Chief of Staff for Scott, who held the elected position of district attorney.  After Randall had a dispute with Scott's husband, Scott fired Randall.  Following his termination, Randall was unable to find permanent employment in law enforcement, and lost wages.  Randall brought suit, asserting a First Amendment retaliation claim pursuant to 42 U.S.C. § 1983 against Scott, in her individual and official capacities, and a tortious interference claim against her husband.  Scott filed a motion to dismiss, in which she argued that Randall's complaint failed to state a First Amendment violation and alternatively that she was immune from suit.  The district court granted her motion to dismiss, concluding that in light of the heightened pleading standard applicable in § 1983 cases, the mere fact that Randall decided to run for political office (the source of the dispute with Scott’s husband) was not enough to trigger First Amendment protection.  ”  Alternatively, even if the allegations in the complaint were sufficient to establish a First Amendment violation, the court concluded that Scott was entitled to qualified immunity because she did not violate clearly established law.  On Randall’s appeal, the United States Eleventh Circuit Court of Appeals rejected the district court’s application of a heightened pleading standard and its determination that Randall failed to allege a First Amendment violation.  The Court agreed, however, with the district court’s determination that Scott enjoyed qualified immunity protection for her actions.  Accordingly, it affirmed the district court’s grant of Scott's motion to dismiss Randall’s individual capacity claim and reversed its dismissal of Randall’s official capacity claim.  One, after the United States Supreme Court’s 2009 decision in Iqbal, it is clear that there is no heightened pleading standard as relates to civil rights complaints  Two, the right to run for office had not theretofore been clearly established.  Randall v. Scott, Case No. 09-12862 (U.S. 11th Cir., June 30, 2010). 

 6. CALIFORNIA CAN PAY EMPLOYEES FEDERAL MINIMUM WAGE WHEN STATE LEGISLATURE FAILS TO ENACT TIMELY BUDGET:  California Department of Personnel Administration sought declaratory and other relief against the State Controller.  Despite "technical mootness" of the lawsuit after the Legislature passed the budget for fiscal year 2008-09, the trial court issued a declaratory judgment concluding DPA acted within its authority.  The Controller appealed.  The main issue on appeal was whether DPA had authority to direct the Controller temporarily to defer paying state employees’ salaries (except for federally-mandated minimum wages) when appropriations are unavailable due to the state  Legislature’s failure to enact a timely state budget.  The court of appeal concluded the trial court did not erroneously grant declaratory relief in a moot case.   It also concluded DPA had authority to direct the Controller to defer  salary payments in excess of federally-mandated minimum wages when appropriations for salaries are lacking due to a budget impasse, because the Legislature created DPA to manage the nonmerit aspects of the state's personnel system and vested DPA with jurisdiction with respect to the administration of salaries and other personnel-related matters.  If the Controller disagrees with the directive's specifics, the Controller may seek judicial resolution, but may not simply disregard the DPA directive.  The state constitutional contract provision does not afford state employees the right to obtain actual payment of salary from the treasury prior to enactment of an applicable appropriation.  Nevertheless, under the federal supremacy clause, the State is obligated during a budget impasse to comply with the Fair Labor Standards Act, which generally applies to state employees, and requires the State timely to pay the federally-mandated minimum wage rate to nonexempt employees who do not work overtime and timely pay full salary plus overtime to nonexempt employees who do work overtime.  (The Controller’s end-run attempt to require payment of state minimum wages was also unavailing.)  Gilb v. Chiang, Case No. C061947 (Cal. App. 3d, July 2, 2010).  

 7. CHICAGO CITY COUNCIL PASSES TOUGH GUN LAW:  The Chicago City Council approved what city officials say is the strictest handgun ordinance in the United States, report from The Associated Press says.  The 45-to-0 vote came just four days after a U.S. Supreme Court ruling made it almost certain that the city’s existing ban on handguns would be overturned (see C&C Special Supplement for July 2, 2010, Item 1). That decision held that Americans have a right to own a gun for self-defense. The new ordinance bans gun stores in Chicago, and prohibits gun owners from stepping outside their homes, even onto their porches, with a handgun. The law is scheduled to take effect July 12, 2010.  Stay tuned for almost-certain challenges. 

 8. SON RESPONSIBLE FOR MEDICAID OVERPAYMENTS TO FATHER:  The State of Pennsylvania may seek repayment of a Medicaid overpayment from the son of a Medicaid recipient, rather than from the Medicaid recipient’s estate.   As guardian for his father, the son transferred one-half of the father’s property to himself, and placed two mortgages on the property.  Upon discovery of the transactions, the state determined that the father was no longer eligible for Medicaid benefits, and that he had been overpaid.  After the father died, the state sought repayment from the son, who argued that repayment should be made from the father’s estate, not from him.  The statute governing this situation provided that when undisclosed property makes a recipient ineligible for Medicaid benefits, leading to overpayment, repayment of the overpayment shall be sought from the recipient, the person receiving or holding such property, the recipient's estate or survivors benefitting from receiving such property.  The Administrative Law Judge determined the state could seek repayment from the son, and he appealed.  The Pennsylvania Commonwealth Court affirmed:  not only is collection of repayment from the son expressly authorized, but it seems entirely appropriate, given that it was his actions that led to the overpayment.  Maloy v. Department of Public Welfare, Case No. 1575 C.D. 2009 (Pa. Comm., June 10, 2010). 

 9. ALL PUNS INTENDED:  Two peanuts walk into a bar, and one was a salted. 

10. OXYMORON:  Why is "phonics" not spelled the way it sounds? 

11. FABULOUS RANDOM THOUGHTS:  I hate when I just miss a call by the last ring (Hello? Hello? Darnit!), but when I immediately call back, it rings nine times and goes to voicemail.  What did you do after I didn't answer?  Drop the phone and run away? 
12. QUOTE OF THE WEEK:   “Parents are not interested in justice; they are interested in quiet.”  Bill Cosby 

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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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