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Cypen & Cypen
JULY 14, 2011

Stephen H. Cypen, Esq., Editor

1.      GASB PROPOSES MAJOR “IMPROVEMENTS” FOR PENSION REPORTING: Governmental Accounting Standards Board has issued two Exposure Drafts proposing improvements to financial reporting of pensions by state and local governments: Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans. The documents would propose amendments to existing pension standards to “improve” how costs and obligations associated with pensions that governments provide to their employees are calculated and reported.  The first Exposure Draft,Accounting and Financial Reporting for Pensions (Pension Exposure Draft) primarily relates to reporting by governments that provide pensions to their employees.  A second related Exposure Draft, Financial Reporting for Pension Plans (Pension Plan Exposure Draft), addresses reporting by pension plans that administer those benefits. Users of state and local government financial reports have told GASB that current standards do not provide enough information adequately to understand cost and liability for benefits promised to active and retired employees. The proposals are result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators and bond analysts.  These proposals relate to accounting and financial reporting, not to how governments approach funding of their pension plans, which is a policy decision made by government officials. The Pension Exposure Draft proposes that governments be required to report on their statement of financial position a net pension liability, which is the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside in a qualified trust to pay benefits to current employees, retirees and their beneficiaries.  It also proposes significant changes to how a government would calculate its total pension liability and pension expense.  

These changes include:

  • Immediate recognition of more components of pension expense than is currently required, including effect on pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years, which is common for funding purposes. 
  • Use of a discount rate that applies (a) the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments and (b) the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected payments for which plan assets are not expected to be available for long-term investment in a qualified trust. 
  • A single actuarial cost allocation method -- entry age normal -- rather than the current choice among six actuarial cost methods.  
  • Requiring governments in all types of covered pension plans to present more extensive note disclosures and required supplementary information.

The Pension Exposure Draft addresses situations in which another entity contributes to a government’s pension plan on behalf of the employer and it also addresses accounting and financial reporting for employers that provide pensions through defined contribution plans. The Pension Plan Exposure Draft, which addresses financial reporting for plans that are administered through qualified trusts, outlines the basic framework for the separately issued financial reports of defined benefit pension plans. It also details proposed note disclosure requirements for defined contribution pension plans. The Exposure Drafts, including instructions on how to submit written comments (due by September 30, 2011), can be downloaded at and In addition, GASB has released a plain-language supplement Pension Exposure Draft, Pension Accounting and Financial Reporting.  The supplement was prepared for citizens, taxpayers, elected representatives, municipal analysts and other external users of governmental financial information, and contains a minimum of technical terminology. It can be downloaded at The supplement references the Pension Exposure Draft, and should be read in conjunction with it. Query: why not just prepare everything in plain-language? 

2.      NYC PENSION FUNDS RETURN 20 PERCENT: New York City’s Comptroller announced that preliminary numbers indicate the New York City Pension Funds recorded investment returns of more than 20 percent in Fiscal Year 2011, which ended June 30.  This return is the highest the funds have received in 13 years. Preliminary data indicate the funds’ values at approximately $119 Billion, which exceed the $115 Billion pre-2008 crash peak, and the June 30, 2010 values of $97.8 Billion. Estimated returns for FY 2011 follow gains of 14 percent in FY 2010. 

3.      ENSURING INCOME THROUGHOUT RETIREMENT REQUIRES DIFFICULT CHOICES: Government Accountability Office has completed a study entitled “Ensuring Income Throughout Retirement Requires Difficult Choices.” GAO found that financial experts typically recommended that retirees systematically draw down their savings and convert a portion of their savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored defined benefit pension instead of a lump sum withdrawal. Experts also recommended that individuals delay receipt of Social Security benefits until reaching at least full retirement age, and, in some cases, continue to work and save, if possible. For example, for the two middle net-wealth households GAO profiled with about $350,000 to $375,000 in net wealth, experts recommended purchase of annuities with a portion of savings, drawdown of savings at an annual rate, such as 4 percent of the initial balance, use of lifetime income from the DB plan, if applicable, and delay of Social Security. To navigate the difficult choices on income throughout retirement, they noted strategies depend on an individual's circumstances, such as anticipated expenses, income level, health, and each household's tolerance for risks, such as investment and longevity risk. Regarding the choices retirees have made, GAO found that most retirees rely primarily on Social Security and pass up opportunities for additional lifetime retirement income. Taking Social Security benefits when they turned 62, many retirees born in 1943, for example, passed up increases of at least 33 percent in their monthly inflation-adjusted Social Security benefit levels available at full retirement age of 66. Most retirees who left jobs with a DB pension received or deferred lifetime benefits, but only 6 percent of those with a defined contribution plan chose or purchased an annuity at retirement. Those in the middle income group who had savings typically drew down those savings gradually. Nonetheless, an estimated 3.4 million people (9 percent) aged 65 or older in 2009 had incomes (excluding any noncash assistance) below the poverty level. Among people of all ages the poverty rate was 14.3 percent. To help people make these often difficult choices, policy options proposed by various groups concerning income throughout retirement include encouraging the availability of annuities in DC plans and promoting financial literacy. Certain proposed policies seek to increase access to annuities in DC plans, which may be able to provide them at lower cost for some individuals. However, some pension plan sponsors are reluctant to offer annuities for fear that their choice of annuity provider could make them vulnerable to litigation, should problems occur. Other proposed options aim to improve individuals' financial literacy, especially better to understand risks and available choices for managing income throughout retirement, in addition to the current emphasis on saving for retirement. Proposed options include additional federal publications and interactive tools, sponsor notices to plan participants on financial risks and choices they face during retirement, and estimates on lifetime annuity income on participants' benefit statements. GAO 11-400 (June 2011)

4.      CONNECTICUT FIRST STATE TO MANDATE PAID SICK LEAVE: Connecticut will become the first state to mandate paid sick leave when a new law takes effect January 1, 2012, reports the Hartford Courant. Connecticut’s law applies only to companies with 50 or more workers that do not already offer at least five paid days off for full-time workers, and exempts manufacturers, salaried workers, temporary workers and workers at nationally- chartered nonprofits.  Workers qualify after four months on the job. San Francisco passed legislation in 2007 that allowed workers in businesses with fewer than 10 employees to earn up to five paid sick days a year, and workers in larger businesses to earn up to nine paid sick days.  Washington, D.C. passed legislation in 2008 that gave full-time employees at businesses with 24 or fewer workers three days, employees at businesses with 25 to 99 workers five days and employees at businesses with 100 or more workers seven sick days, but exempted most health-care workers, waiters and waitresses, and workers on the job for less than a year. Philadelphia’s Mayor recently vetoed an ordinance that would have mandated paid sick leave for workers in that city. 

5.      RECENT 401(K) LAW SUPPRESSES SAVING FOR RETIREMENT: The Wall Street Journal reports that the Pension Protection Act of 2006, designed to boost employees’ retirement savings, is having the opposite effect for some people. Under the law, companies are allowed automatically to enroll workers in their 401(k) plans, rather than require employees to sign up on their own.  The measure was intended to encourage more people to bulk up their retirement nest eggs -- a key goal in a country where millions of people are not saving enough. An analysis shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily. The problem:  more than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise.  That amount is far below the 5% to 10% rates participants typically elect when left to their own devices. Automatic enrollment is a double-edged sword. On one hand, there is more participation; on the other, many employees are stuck at whatever default rate the employer selects. The total amount being put into 401(k) plans has increased by 13% since 2006, to an estimated $284.5 Billion this year.  The increase is largely because the rule has successfully prodded millions of people who would not have saved a penny for retirement to start saving something. But for the 40% of new workers who would have picked a higher savings rate than the company assigned to them, billions of dollars in potential retirement savings will be left on the table.  Some auto-enrollment programs have “auto-escalation” features that increase employee savings rates by a set amount, typically one percentage point a year, until they reach a certain threshold.  Even this device might not be enough:  depending on their incomes, 54% to 73% of employees would fall short of amassing enough money to retire if they enrolled in their companies’ 401(k) plans at the default contribution rate and were auto-escalated by 1% a year to a maximum of 6%.  The new law has boosted auto-enrollment and participation rates dramatically.  About 57% of large companies now automatically enroll new employees in 401(k) plans, up from 24% in 2006.  While employees are free to opt out, companies report average participation rates above 85%, compared with 67% for those without auto-enrollment. Yet, 401(k) participants’ average savings rates have fallen in recent years.  One large administrator says the average contribution rate declined to 7.3% in 2010, from 7.9% in 2006.  Another says average contribution rates at its plans fell to 6.8%, from 7.3% in 2006.  A third reports that the average for its defined contribution plans decreased to 8.2%, from 8.9%. 

6.      CORPORATE PENSION FUND STATUS IMPROVES BY $25 BILLION: Funded status of the 100 largest corporate defined benefit pension plans improved by $25 Billion during June 2011, as measured by the Milliman 100 Pension Funding Index. June’s funded status amelioration was due primarily to an increase in corporate bond interest rates that are benchmarks used to value pension liabilities. As of June 30, 2011, the funded ratio advanced to 87.0%, up from 85.5% at the end of May 2011.  The funded status deficit decreased to $186 Billion from $211 Billion at the end of May 2011. Pension liabilities (PBO) decreased by $35 Billion during June, moving the Index value to $1.427 Trillion, from $1.462 Trillion at the end of May 2011.  The change resulted from an increase of 19 basis points in the monthly discount rate, to 5.43% for June, from 5.24% for May 2011. 

7.      REP. RYAN TASTES THE GRAPES OF WRATH: Rep. Paul Ryan (R-WI), leading advocate of shrinking entitlement spending and architect of the plan to privatize Medicare, spent the other evening sipping $350 wine with two like-minded conservative economists at the swanky Capitol Hill eatery Bistro Bis. According to, it was the same night reports started trickling out about President Obama’s pressing Congressional leaders to consider changes to Social Security and Medicare in exchange for GOP support for targeted tax increases. The pomp and circumstance surrounding the waiter’s presentation, uncorking and decanting of the pricey Pinot Noir, caught the attention of another diner, who had already recognized Ryan. That diner, an economist and associate business professor at Rutgers, was at Bistro Bis celebrating her birthday that night.  When she saw the label on the bottle Ryan’s table had ordered, she quickly looked it up on the wine list and saw that it sold for art eye-popping $350, the most expensive wine in the house. She was even more appalled when the table ordered a second bottle. She quickly did the math, and figured out that the $700 in wine the trio consumed over the course of 90 minutes amounted to more than the entire weekly income of a couple making minimum wage. (Hey, Lady, you forgot the tax and tip – which might have been enough to support a third minimum-wage-earner.) 

8.      FRAUD, NOT EMPLOYEES, TO BLAME FOR PENSION FUND’S LOSSES: Writing in, Phoenix, Arizona’s Deputy Fire Chief (who is also Chairman of the Board of Trustees of Arizona Public Safety Personnel Retirement System), says now that the rhetoric is finally silent and the dust settled, perhaps people can rationally discuss Arizona’s public pension systems.  Legislation has been passed to help ensure the long-term stability of those systems. The time has come to stop scapegoating public employees as the sole source of pension system ills, and put the responsibility where it belongs -- Wall Street’s fraud and fund mismanagement.  The Arizona Public Safety Personnel Retirement System Trust, which includes public safety officers, corrections officers and elected officials, lost $2.7 Billion during fiscal years 2000-2002 and 2007-2009.  Those losses, about 25% of total assets, roughly equal the total of unfunded liabilities everyone hears and reads so much about. Public employees, who pay their fair share into the systems and are most at risk when the fund loses money, are not the villains here.  Neither are the taxpayers, who also contribute.  Retiree pensions are not breaking the system and future obligations will not, under normal capital markets behavior.  Pension systems are really very large investment funds.  As such, they have to rely on integrity and honesty of those who regulate and run Wall Street.  Of course, any investment carries some level of risk.  Investors accept that legitimate risk, and so did the pension funds.  But the big brokerage firms were not operating above board, and politicians/regulatory agencies were not doing their jobs.  Corrupt and fraudulent practices are not legitimate investment risks anyone could have or should have anticipated.  Three years after the worst financial collapse in a generation, those responsible for the collapse have yet to be held accountable, and the victims are being blamed by politicians, who should know better.  It Is time to stop blaming retirees and current public employees for current economic challenges, and, finally, hold the real culprits personally accountable.  

9.      PRIVATE EQUITY IRR MAY BE TAINTED: EFront has released a white paper providing insight into historic performance of private equity.  The paper, entitled “The Historic Performance of Private Equity – Average versus Top Quartile Returns,” compares the attractiveness of average and top-quartile private equity investments to similar (that is, equally risky) public market investments.  The paper identifies and measures key components of fund-level net returns by a large sample of buy-out-funds, capturing the effects of relevant market performance and additional leverage.  Most importantly, the author quantifies the “Alpha” of these funds, meaning their outperformance relative to equally risky public market investments.  The study compares the long-term Internal Rate of Return on private equity investments to the annualized long-term passive returns from public market indices, and finds that unbiased and risk-adjusted performance measures make it possible to identify Alpha of buyout funds.  Findings from the white paper show the top quartile buyout funds reveal a substantially higher absolute performance, as well as a significant Alpha.  The study highlights how inaccurate the traditional approach is in evaluating private equity performance.  The approach based on performance measured as IRR, compared to long-term stock market returns, is misleading. This review was presented by 

10.    RAMBLINGS: FAA News:  An air traffic controller in Reno, Nevada fell asleep while a medical flight carrying an ill passenger was trying to land.  Ironically, the patient was suffering from insomnia. What are the odds? 

11.    PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):  When men are young, they think of dates. When they get old, they think of prunes. (This particular one came from a reader in Texas.) 

12.    QUOTE OF THE WEEK:  “Our thoughts, deeds and words return to us sooner or later, with astounding accuracy.” Florence Shinn

13.    ON THIS DAY IN HISTORY: In 1789, Bastille Day – French Revolution begins with the fall of Bastille. 

14.    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. 

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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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