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Cypen & Cypen
July 12, 2012

Stephen H. Cypen, Esq., Editor

1.     FUNDED STATUS OF U.S. PENSIONS REBOUNDS:     Funded status of the typical U.S. corporate pension plan rebounded 1.8 percentage points to 71.6 percent in June after slides in April and May, according to the BNY Mellon Pension Summary Report for June 2012.  BNY Mellon credits the June improvement to strong equity markets in the U.S., which rose 3.9 percent, and in developed international markets, which increased 7.0 percent.  These strong performances resulted in a 2.7 percent gain in assets at the typical U.S. corporate pension plan.  Liabilities for the typical corporate plan rose 0.1 percent in June. 
2.      FEDERAL HIGHWAY BILL LOADED WITH GOODIES:     On July 6, 2012 the President signed the federal highway bill, which makes critical infrastructure investments across the country and supports or creates more than a million jobs.  The law also contains some seemingly-unrelated provisions: 
Pension Interest Rate Stabilization.  For pension funding purposes, plan liabilities are calculated by discounting future payments to a present value by using legally-required interest rates based on corporate bonds:  the lower the rate, the greater the liability.  These rates have been abnormally low for a significant period of time.  As a result of the current interest rate climate, contributions for 2012 will be much greater than for prior years.  Under this provision, plan liabilities would continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years.  However, beginning in 2012 for purposes of the minimum funding rules, any segment rate must be within ten percent (increasing to 30 percent in 2016 and thereafter) of the average of such segment rates for the 25-year period preceding the current year.  This provision would stabilize fluctuation of interest rates from year to year, resulting in fewer sharp declines and fewer sharp increases in interest rates.  Thus, because there is an inverse relationship between the level of interest rates and the level of required contributions, as compared to current law, higher contributions will be made during periods of abnormally high interest rates and lower contributions will be made during periods of abnormally low interest rates.  The provision would not apply with respect to participant disclosures.  Participants will be informed of the funded status of their plan using current law interest rate assumptions and this change for three years. 
PBGC Premiums.  Under current law, employers that sponsor plans are required to pay insurance premiums to the Pension Benefit Guaranty Corporation.  Employers pay a fixed-rate premium equal to $35 per participant per year (indexed for inflation) and a variable rate premium equal to $9 per $1,000 in underfunding (not indexed for inflation).  There is no limit on the variable rate premium.  Multiemployer plans must pay premiums equal to $9 per participant, indexed for inflation.  The law will (a) adjust the variable premium for inflation beginning in 2013, (b) set a maximum variable premium of $400 beginning in 2013, (c) increase the variable premium by $4 in 2014 and by an additional $5 in 2015, (d) increase the fixed rate premium by $6 in 2013 and by an additional $7 in 2014, and (e) increase the multiemployer premiums by $2 beginning in 2013. 
Phased Retirement Authority.  Under existing law, a federal employee cannot begin receiving retirement benefits without terminating employment.  This situation results in loss of experienced workers who might want to work on a part-time basis if they were able to supplement their compensation with retirement benefits.  Under the proposal, which was included in the Administration’s 2013 budget, employees who are otherwise eligible for retirement benefits could continue working on a reduced schedule and collect a corresponding percentage of their retirement benefits.  For example, an employee could continue working half time and be entitled to receive half of his retirement benefit.  The results are lower outlays by the federal retirement fund and lower contributions by federal agencies to the fund. 
3.      WHY CHIEF JUSTICE ROBERTS DARED NOT INVALIDATE OBAMACARE:      For many U.S. Supreme Court watchers, it was clear that Chief Justice John Roberts dared not overturn President Obama’s Affordable Care Act, and, of course, he did not.  To the contrary, writes former White House counsel John Dean, Roberts left his conservative brethren behind and joined the progressive side of the High Court in upholding the ACA.  The ruling (see C&C Newsletter for July 3, 2012, Item 1), is a complex and often nuanced collection of holdings, which will be analyzed in the coming months and years, as Court observers fully come to appreciate its implications.  Dean found it nice that a Chief Justice of the United States actually did, in this historic instance, exactly what he said he would do during his confirmation hearings.  While many were surprised by the Chief Justice’s vote to uphold the law and his rationale for doing so, they should not have been.  Not only was Roberts’s word at issue, but so too was the reputation of his Court.  In addition, with this holding, the Chief Justice truly made this court the Roberts Court, rather than Kennedy Court (for Justice Anthony Kennedy had been the controlling swing vote prior to this ruling.)  Informed people understood that this case was a defining moment for the Roberts Court, as did the Chief Justice.  Based on this ruling, if the Roberts Court had overturned this important new law, it would likely have been forever viewed as a court controlled by conservative partisan political activists, rather than a court where, in fact, justice could be done.  The Chief Justice is an intelligent man, with a good political sensibility.  Given the Supreme Court’s highly activist and partisan rulings in recent cases, the fast-declining reputation of the Supreme Court was at a tipping point.  One more high-profile partisan ruling, and the court’s reputation could have been damaged beyond repair.  Fortunately, however, the Chief Justice refused to tank his court.  In his prepared statement, as well as when he was being questioned before the Senate Judiciary Committee during his confirmation hearings to become chief justice, John Roberts repeatedly analogized the role of a justice to that of an umpire.  This analogy would be particularly fitting for a chief justice, who is leader of the court.  More specifically, Roberts testified under oath that “Judges are like umpires.  Umpires don’t make the rules, they apply them.  The role of an umpire and a judge is critical.  They make sure everybody plays by the rules, but it is a limited role.  Nobody ever went to a ball game to see the umpire.”  This statement was a powerful one, a strong declaration against judicial activism.  In short, Roberts’s umpire reference was no fleeting remark.  And in writing the majority opinion for the court on the healthcare law, Chief Justice Roberts stayed true to his confirmation testimony.  Let’s hope that, throughout his tenure on the bench, Justice Roberts continues to be, properly and laudably, an umpire.  Yerrrrr safe. 
4.      SUPREME COURT INVALIDATES THE STOLEN VALOR ACT:       When on June 28, 2012 the United States Supreme Court decided the Obamacare case (see C&C Newsletter for July 3, 2012, Item 1), another important decision the same day went largely unnoticed.  The Stolen Valor Act makes it a crime falsely to claim receipt of military decorations or medals, and provides an enhanced penalty if the Congressional Medal of Honor is involved.  Alvarez pleaded guilty to a charge of falsely claiming that he had received the Medal of Honor, but reserved his right to appeal his claim that the Act is unconstitutional.  The Ninth Circuit Court of Appeals reversed, finding the Act invalid under the First Amendment.  On certiorari to the Ninth Circuit, the U.S. Supreme Court affirmed.  Content-based restrictions on speech have been permitted only for a few historic categories of speech, including incitement, obscenity, defamation, speech integral to criminal conduct, so-called “fighting words,” child pornography, fraud, true threats and speech presenting some grave and imminent threat the Government has the power to prevent.  Absent from these categories is any general exception for false statements.  Even when considering some instances of defamation or fraud, the Court has instructed that falsity alone may not suffice to bring the speech outside the First Amendment; the statement must be a knowing and reckless falsehood.  Criminal prohibition of a false statement made to Government officials in communications concerning official matters does not lead to the broader proposition that false statements are unprotected when made to any person, at any time, in any context.  The Act seeks to control and suppress all false statements on this one subject in almost limitless times and settings without regard to whether the lie was made for the purpose of material gain.  Permitting the Government to decree this speech to be a criminal offense would endorse government authority to compile a list of subjects about which false statements are punishable.  That governmental power has no clear limiting principle.  The Court applies the “most exacting scrutiny” in assessing content-based restrictions on protected speech.  The Act does not satisfy that scrutiny.  United Statesv. Alvarez, Case No. 11–210 (U.S. June 28, 2012).  (Note:  the Chief Justice joined the liberal majority.) 
5.      ENFORCEMENT OF ORDINANCE BLOCKING PENSION FUND FROM SUING CITY BLOCKED:       A circuit judge in St. Louis has temporarily sided with trustees of the Firemen’s Retirement System, blocking a law that would have barred the system from suing the city over firefighter benefit levels.  The real question at this stage, wrote, is whether the trustees must be disabled from paying fees out of retirement system funds.  A new city law put the system trustees in an impossible position:  either they had to terminate their suit or pay for it out of their own pockets.  The City at this stage cannot be permitted to condition continuance of the litigation on plaintiffs’ willingness to advance costs out of their own pockets.  The petition raises serious and substantial questions concerning authority of the City to control administration of the retirement system.  The Court was doubtful that the City may disable the system trustees from seeking judicial relief if an ordinance pertaining to the retirement system is invalid as exceeding the City’s powers.  The judge concluded that at least part of the city law is “probably invalid.  Enough said. 
6.      PHILADELPHIA HAS TO PAY FIREFIGHTERS THREE YEARS OF RAISES:     Philadelphia firefighters have won three years of 3 percent raises from a panel of arbitrators, who largely let stand an initial award from October of 2010.  The three-member panel also denied the city the right to furlough its 2,100 firefighters and medics.  The wage and benefit increases are expected to cost Philadelphia as much as $66 Million over the four years of the contract, which expires June 30, 2013.  The award is the result of about 20 months of legal wrangling following the initial arbitration award.  Contracts for firefighters and police are generally resolved through arbitration.  Contracts for other municipal employees expired in June 2009, and are still being negotiated.  The award continues to require firefighters to live in the city.  In their last arbitration, Philadelphia police won the right to live outside the city.  This story appeared in The PhiladelphiaInquirer
7.      STATE AND LOCAL GOVERNMENTS EXPERIENCE HIRING BOOST:       State and local governments are hiring at their fastest pace since start of the Great Recession, according to a USA Todayanalysis of a government survey.  Reported in, the survey shows more public workers were hired in the first four months of 2012 than any other year period since 2008.  The 828,000 new hires are filling positions that were left open to save money during the recession.  The hiring boost indicates that state budget problems have relaxed and that public-sector job growth could be imminent.  It takes at least six months for a hiring boost to create a larger workforce.  The public sector is not alone in its hiring jump.  Private companies are also hiring more, albeit more slowly than state and local governments.  Private-sector hiring is up 4 percent in the first four months of 2012 from this time last year. 
8.      PENSION LEGISLATION IS WIN-WIN FOR U.S.:      As executives at corporate defined benefit plans figure out whether they gained more than they lost in pension legislation approved by Congress (see Item 2 above), one clear winner emerges:  Uncle Sam (President Obama signed the Moving Ahead for Progress in the 21st Century Act on July 6, 2012.)  According to pionline, if plan executives take advantage of the bill’s longer-term interest rates for calculating pension funding obligations, giving them a chance to save on contributions in the short term, the federal government could see tax revenue increase by more than $9 Billion over 10 years, as tax-exempt contributions dip.  Another $9 Billion will flow to Pension Benefit Guaranty Corp. through increased premiums.  The government wins both ways.  As for pension funds, some employers really see no benefit, while there will be others, especially those struggling to make minimum required payments, who think the near term cash benefit is significant.  For corporate plans the biggest positive change was interest rate stabilization.  Since the Pension Protection Act of 2006, most plan sponsors have had to use discount rates based on a two-year average of corporate bond index rates to calculate their pension liabilities, and figure out their funding obligations each year.  The rates were further broken down depending on the maturity of the plan and when payments were due.  In the current low-rate environment, the first segment rate for valuing liabilities due in the next five years is a rock-bottom 1.98%, while the highest rate is 6.19%.   But under the new law, sponsors can take a 25-year historic average of corporate bond rates to determine a rate within a 10% range, or corridor, of the two-year rate.  Using the higher rates could reduce liabilities by 10% to 20%:  the effective rate used now averages 5.3%, while the new discount rate will average 6.7%.  For some plans, it could make their entire underfunding problem disappear – at least for a while. 
9.      WATCH OUT FOR THOSE PISTOL-PACKIN’ MAMAS:     In one of his ballads, Jim Croce warned that there are four things that you just don’t do:  “You don’t tug on Superman’s cape/ You don’t spit into the wind/ You don’t pull the mask off that old Lone Ranger/ And you don’t mess around with Jim.”  He could have added a fifth warning to that list:  “And you don’t let a pistol-packing mother catch you naked in her daughter’s closet.”  Those words were penned in a recent U.S. Eleventh Circuit Court case opinion by Judge Edward Carnes.  (The judge is 62 years old, and has served on the Eleventh Circuit for 20 years, having been appointed by George H.W. Bush.)  The rest of what follows also comes from the same opinion.  Nineteen-year-old Uzuri Collier called Larry Butler, who was of a similar age, and invited him to her house. Butler responded to the invitation the way most young men over the age of consent would have -- he went.  Once Butler was at Uzuri’s house, he and she consented to watch television for a while.  Then they consented to do what young couples alone in a house have been consenting to do since the memory of man (and woman) runneth not to the contrary.  The record does not disclose how long these two young people had known each other in the dictionary sense, but that afternoon in Uzuri’s bedroom they also knew each other in the biblical sense.  While doing so, and while clothed in the manner that is customary in such matters, which is to say not at all, they heard someone coming into the house.  It may have been that the two young people simply lost track of time, which would be understandable given the circumstances.  Or it may be that Uzuri’s mother, Dorethea Collier, left work early that day.  However it happened, Collier came close to catching the couple coupling -- so close that when they heard her, Butler had only enough time to dash into the bedroom closet wearing nothing but a look of surprise.  The elder Collier was a corrections officer at a boot-camp facility for minors run by the Palm Beach County, Florida, Sheriffs Office.  She was wearing her uniform and gun belt with pistol and upon entering the room, she began demanding that Uzuri explain why she was undressed and what she was doing.  Then Collier discovered Butler stark naked in her daughter’s closet.  She yelled at him and punched him one time.  She told Butler that if he moved or did not follow her commands, she would shoot him.  She handcuffed the still-naked Butler, and made him get down on his knees.  Eventually Butler was allowed to get dressed and leave, although Collier kept the gun pointed at him while he was dressing.  She told Butler that if he reported what had happened, she would submit a report to discredit him and would engage in some “creative writing” if necessary to justify the filing of charges against him for trespassing on the property.  Despite those threats, Butler did report the incident to law enforcement.  There is no allegation that Collier responded by submitting a report of her own or by filing trespassing charges against Butler.  Butler filed a lawsuit in Florida state court against Collier, individually, and in her official capacity as a corrections officer with the Palm Beach County Sheriffs Office, and against the Sheriff in his official capacity only.  Butler’s complaint claimed that Collier had violated 42 U.S.C. § 1983 by using plainly excessive and disproportionate force on Butler to effect an unlawful and unreasonable search and seizure.  His complaint also included a state law claim of battery/excessive force against Collier and state law claims against her for false imprisonment and for intentional and negligent infliction of emotional distress.  Collier and the Sheriff removed the case to federal district court, based on federal question jurisdiction, which was premised on the § 1983 claims.  Butler filed an amended complaint, asserting the same claims, except for the negligent infliction of emotional distress claims.  Defendants moved to dismiss on the ground that the allegations still did not show Collier had acted under color of law.  The district court concluded that the allegations in the amended complaint showed no more than Collier acting as a private individual because nothing she allegedly did to Butler relied on or invoked her authority as a law enforcement officer. For that reason, the court once again dismissed Butler’s § 1983 claims.  Because Butler had been unable to state a federal claim despite being given an opportunity to amend the complaint, the court concluded that any further attempts to amend would be futile and made the dismissal with prejudice.  The court declined to exercise supplemental jurisdiction over Butler’s state law claims, remanding them to state court.  In affirming, the Eleventh Circuit recognized that Section 1983 does not federalize all torts or other deprivations of rights committed by a person who is a law enforcement officer or other government agent.  Instead, the statute covers only those deprivations committed under color of any statute, ordinance, regulation, custom or usage, of any State or Territory or the District of Columbia.  That requirement is more concisely referred to as the “acting under color of state law” element.  It was Collier’s house and she walked in just like any private individual returning home from work.  Her discovery of a naked man in her daughter’s closet was not the result of an official search by a law enforcement officer.  When Collier punched Butler, she was acting as an enraged parent; she was not purporting to exercise her official authority to subdue a criminal for purposes of an arrest.  When she handcuffed and detained Butler, Collier did not purport to be exercising her authority to arrest a criminal.  Although Collier did use the pistol that she wore as an officer, any adult without a felony record can lawfully possess a firearm (and tens of millions do).  A law enforcement officer who gets into an after-hours dispute with her domestic partner that tragically escalates into a shooting does not act under color of law merely because the weapon used is the firearm the officer carries on duty.  To quote Judge Carnes again: 
The amended complaint and Butler’s briefs leave no doubt that he feels mistreated, and with what appears to be some justification.  If the allegations are true, Collier’s treatment of Butler was badder than old King Kong and meaner than a junkyard dog.  She might even have acted like the meanest hunk of woman anybody had ever seen. Still, the fact that the mistreatment was mean does not mean that the mistreatment was under color of law.  Because the alleged mistreatment of Butler was not inflicted under color of law, the district court correctly dismissed his § 1983 claims.  Butler will have to seek his remedies under state law and in state court. 
We wonder if she owned a custom Continental and an Eldorado too. Butlerv. Sheriff of Palm Beach County, Case No. 11-13933 (U.S. 11th Cir. July 6, 2012). 
10.    LARGE PUBLIC EMPLOYEE RETIREMENT SYSTEMS SHOW RECORD EARNINGS:     For the 100 largest public-employee retirement systems in the country, earnings on investments totaled $179.2 Billion, showing the largest earnings on investments since the survey began collecting these data items in the third quarter of 1974.  According to the U.S. Census Bureau Quarterly Survey of Public Pensions for 2Q for 2012:Q1, total holdings and investments increased 5.6 percent, from $2.6 Trillion last quarter to $2.8 Trillion in the first quarter of 2012.  There was a year-to-year increase of 0.7 percent from $2.7 Trillion in the first quarter of 2011.  Total holdings and investments reached the second highest level since the market downturn of 2008.  Corporate stocks quarter-to-quarter increased 17.6 percent, from $822.4 Billion to $967.2 billion in the first quarter of 2012.  Corporate stocks year-to-year were up 5.6 percent from $916.3 Billion in the first quarter of 2011.  Corporate stocks made up 35.1 percent of the total cash and security holdings of major public pension systems for the current quarter.  Corporate bonds fell to the lowest level since the first quarter of 2006.  There was a quarter-to-quarter decrease of 6.9 percent from $399.6 Billion to $371.9 Billion in the first quarter of 2012.  Corporate bonds year-to-year decreased 15.0 percent from $437.3 Billion in the first quarter 2011.  Corporate bonds composed 13.5 percent of the total cash and security holdings of major public pension systems for the current quarter.  International securities reached the highest level since the survey began collecting these data items in the third quarter of 2000.  There was a quarter-to-quarter increase of 16.3 percent, from $472.8 Billion to $550.0 Billion in the first quarter of 2012.  International securities year-to-year increased 7.4 percent from $512.3 Billion in the first quarter 2011. International securities accounted for 19.9 percent of the total cash and security holdings of major public pension systems for the current quarter.  Since the second quarter of 2001, federal government securities have reached the highest level in over 10 years with a quarter-to-quarter increase of 25.0 percent, from $178.8 Billion to $223.5 Billion in the first quarter of 2012.  Federal government securities year-to-year increased 29.8 percent from $172.1 Billion in the first quarter 2011.  Federal government securities came to 8.1 percent of the total cash and security holdings of major public pension systems for the current quarter.  Government contributions reached the highest level since the survey began collecting these data items in the third quarter of 1974.  There was a quarter-to-quarter increase of 12.7 percent, from $21.5 Billion to $24.2 Billion in the first quarter of 2012 and a year-to-year increase of 14.5 percent from $21.1 Billion in the first quarter of 2011.  Employee contributions quarter-to-quarter increased 1.5 percent, from $9.2 Billion to $9.3 Billion in the first quarter of 2012.  There was a year-to-year increase of 7.9 percent from $8.6 Billion in the first quarter of 2011.   Caveat:  some changes were made in asset classification and there were shifts in distribution of assets from corporate bonds to federal government securities and from other securities to corporate stocks.  Thus, any data comparisons within the first quarter of 2012 and great and prior quarters should be exercised with caution. 
11.    GOLDMAN’S FIRST TAKE ON PENSION HIGHLIGHTS, CHALLENGES AND CHANGES FOR 2012:       Corporate defined benefit pension plans are facing challenges from multiple angles. While funded levels began to recover in early 2012 given the rise in equity markets and long-term interest rates, they started the year at depths as low as those seen in late 2008 during the height of the financial crisis.  Low funded levels are pressuring some plan sponsors from a balance sheet, income statement and cash flow perspective, increasing the attention paid to pension issues from investors, bond holders, rating agencies, and, of course, plan sponsors themselves.  In response, some sponsors are proactively changing plan design, contribution policies and financial reporting, while fiduciaries are reconsidering investment strategy and asset allocation.  Goldman Sachs Asset Management highlights seven themes it believes will be prevalent throughout the US corporate pension community during 2012: 

  • Long-term theme of de-risking and LDI remains in place for many corporate DB plans.  Despite the fall in funded levels for many DB plans last year, as well as persistently low long-term interest rates, GSAM believes the long-term theme of de-risking and moving to LDI-type strategies remains in place for many plans.  While this long-term theme of de-risking is still evident, in the short-term, however, many plans may be hesitant to implement such strategies, given recent declines in funded levels and historically low interest rates.  
  • Definitions of “success” in terms of plan performance continue to evolve.  Historically, many plans evaluated themselves based on their plan asset returns versus returns for a peer group or against asset benchmarks such as the S&P 500 or the MSCI All Country World Index.  But as more and more corporate plans have moved to LDI strategies, or are contemplating such a move, measuring performance and “success” becomes much different than in the past. If a plan’s focus has shifted to measuring asset performance against liability performance, then surplus volatility becomes a more relevant metric rather than purely asset returns.  However, this situation requires a change in the thought process throughout the organization regarding how to monitor, assess and communicate performance.
  • Return assumptions should remain under pressure, leading to multiple ramifications for plan sponsors.  Long-term expected return on plan asset assumptions has been steadily declining in the corporate space for several years.  This assumption has declined from an average rate of 9.0% in 2002 to 7.9% in 2010.  Lowering this assumption has important ramifications for financial reporting of these plans.  On the corporate side, using a lower expected return assumption directly increases the amount of pension expense recognized by the sponsor.  On the public side, since the discount rate for the plan liabilities is tied to this assumption, a lower expected return assumption results in a higher reported gross pension liability.  It also has important ramifications for plan design and contribution policy.  To the extent that actual asset returns are expected to be lower in the future, it may enlighten plan design, benefit policies and contribution policies. 
  • Contribution activity will be robust in 2012 and beyond.  Several corporate plan sponsors have disclosed notable contributions they expect to make in 2012.  GSAM expects to hear more U.S. companies announce large contributions this year, and again in 2013.  A combination of low funded levels, mechanics of mandatory contribution requirement calculations and, in some cases, large cash balances on corporate balance sheets have created a confluence of events that GSAM believes will lead to a significant rise in contributions over the next few years.  (If only public funds would do the same.) 
  • More corporate sponsors are likely to contemplate financial reporting changes, given pension deficits and large unrecognized losses.  Trend of moving more towards a mark-to-market type of accounting and financial reporting framework will likely continue.  First, these changes make performance of the plan and its impact on the plan sponsor more transparent and easier to understand; second, these changes move the financial reporting construct closer to international accounting financial reporting standards; third, the growing amount of unrecognized losses that many companies have been accumulating related to their defined benefit pension plan (and retiree healthcare plans) will result in rising pension expense in future years, as a portion of these losses are recognized through the income statement; and, finally, these financial reporting changes do not affect the gross size of the pension obligation, funded status of the plan or cash flow requirements.  
  • Changes to regulatory and accounting standards will contribute to uncertainty for plan sponsors.  GSAM believes potential funding relief for corporate DB plans as well as continued debate around financial reporting changes for corporate and public plans will highlight regulatory activity in 2012.  Already this year there has been activity, as a provision attached to the Senate’s highway bill allows plan sponsors to use discount rates based on a 25-year average of long-term interest rates within a 10% band (see Item 2).  On the public side, the Governmental Accounting Standards Board has adopted several changes to improve accountability, transparency and usefulness of information (see C&C Newsletter for June 28, 2012, Item 5).  
  • Pensions will remain the focus, but retiree health care will continue to gain attention as a growing issue in the retirement space.  While corporate and governmental pension plan sponsors have their hands full with pension-related issues, the “other” retirement liability issue, retiree health care benefits, has been gaining increased attention in recent years.  Retiree health care liabilities, commonly referred to as other post-employment benefits (OPEB) are smaller, in aggregate, than DB pension liabilities.  However, lack of funding requirements for these plans, for both corporate and governmental employers, means that many have little or no assets set aside to pay for these benefits. Consequently, unfunded liabilities for retiree health care generally exceed those for defined benefit pensions.  

The last several years have been a trying time for sponsors of corporate DB pension plans.  Among the contributing factors are a shifting regulatory environment, increased market volatility across a number of different asset classes and, of course, persistently low long-term interest rates.  The summary is that plan sponsors may face a much broader array of challenges to deal with than in the past.  So, what else is new? 
:      U.S. Securities and Exchange Commissioner Luis  Aguilar recently gave the Keynote Address at the 25th Anniversary Legal Education Conference of National Association of Public Pension Attorneys in Philadelphia.  In his keynote address, entitled “Pension Funds as Owners and Investors:  A Voice for Working Families,” Commissioner Aguilar highlighted the critical role public pension plans have in our economy.  As they often do, statistics tell the story:  state and local pension plans serve about 14.4 million active employees, and pay benefits to about 7.5 million current beneficiaries.  In 2010, public pensions paid an average benefit of just under $26,000 per year.  That regular income provides security, stability and peace of mind that individual savings and defined contribution plans alone cannot ensure for most workers.  Pension plans may also help reduce the disparity in retirement incomes between men and women, as well as the wide income gulf between white and non-white households in retirement.  A report by the National Institute on Retirement Security found that, while older households headed by women, and those headed by people of color, were significantly more likely to be classified as poor than their male or white counterparts, that disparity is substantially reduced among households receiving pension income.  State and local government employee retirement funds had total financial assets of $2.8 Trillion at the end of 2011.  This immense pool of capital is funded by employee contributions, employer contributions and investment earnings.  A majority of such funds is invested in stocks and bonds of U.S. corporate issuers, with substantial investments also made in venture capital and private equity funds and other asset classes.  These investments make public pension funds a significant source of capital for American business.  Importantly, another benefit of pension fund capital is that pension funds typically invest with a long-term perspective.  This “patient capital” is essential for true capital formation and an important contribution to stability in a capital markets environment that is often all too focused on quarterly returns.  The benefits paid by pension plans also are a strong driver of economic activity.  Retirement income security is not only essential for seniors; there is also evidence that it may enhance the economic health of our communities as well.  Seniors with pension income are significantly less likely to receive public assistance.  Pension plans also support the economy by providing a stable source of income that retirees can rely on to meet day-to-day needs.  Thus, when beneficiaries spend their paychecks, they support local business owners and other segments of the economy, providing, in effect, a stimulus to business revenues and helping to generate economic demand and employment.  This powerful economic impact has a “multiplier effect,” as the business revenues supported by retiree spending can, in turn, be invested by the recipient to purchase inventory, hire workers or fund growth.  A recent study calculates that multiplier as 2.37 to 1, or $2.37 in total economic output supported by each dollar paid out in pension benefits.  Accordingly, through America’s public pension plans, teachers, first responders and other government workers are a significant source of capital to American businesses.  That being said, public pension funds still face significant challenges in the current economic and political environment.  A series of burst bubbles, culminating in the most severe financial crisis since the Great Depression, has reduced investment returns over the past dozen years for pension funds, as well as other investors, while at the same time putting increased fiscal pressure on state and local governments that fund employer contributions for public workers.  Although annualized investment returns for public pension funds remain strong over the long-term, averaging 8.3% for the 25-year period ending December 31, 2011, the 10-year returns were below forecast at 5.7%.  In addition, over the years, some governmental bodies have failed to make adequate plan contributions or granted unfunded benefit increases.  As a result, although most large state and local government pension plans have assets on hand sufficient to cover benefit payments to retirees for a decade or more, the gap between asset values and projected liabilities has widened, leading to long-term concerns about sustainability.  At the same time, near-record low interest rates and inflation projections have led some plan administrators prudently to reduce long-term investment return assumptions, which has the effect of increasing actuarially-required contribution rates.  To address these challenges, state and local governments have responded with legislation to reduce pension fund costs by increasing employee contributions, raising retirement age and years of service requirements and changing formulas for calculating benefits.  Commissioner Aguilar concluded his remarks where he started, by acknowledging the important role of public pension funds.  As significant investors, public pension funds are a needed voice in the ongoing public dialogue involving issues facing investors today, including corporate governance and audit quality.  As fiduciaries, public pension plans can be a powerful voice on behalf of their beneficiaries, working men and women whose voices are often drowned out.  They have a direct stake in the results.  Speak out on behalf of investors, and hold SEC accountable to act on behalf of investors.  Commissioner Aguilar looks forward to hearing what you have to say.  We hope so. 
13.    WISCONSIN RETIREMENT SYSTEM AIN’T BROKE (SO DON’T TRY TO FIX IT):     The recently-released Wisconsin Retirement System Study demonstrates that the Wisconsin Retirement System remains a strong, viable retirement system.  WRS is designed to balance interests of taxpayers, governmental employers, public employees and retirees, and to provide reasonable retirement benefits in an efficient, sustainable way.  The system’s continued growth is a credit to those policymakers who have ensured that the benefit program is carefully designed and who have maintained funding discipline over the years.  In addition, the system has benefited greatly from vigorous oversight.  That oversight includes independent audits and regular actuarial reviews to maintain proper funding, careful study of any proposed changes to the system and a professionally-managed investment program overseen by the State of Wisconsin Investment Board.  While all pension plans face challenges due to the global economic climate, Wisconsin taxpayers do not face those challenges alone.  Under the unique design of WRS, public employees and retirees assist in meeting those challenges through higher contributions and reduced pension payments.  The solid foundation upon which WRS has been built means that it is well-positioned to fulfill its intended purposes long into the future.  WRS is an efficient and sustainable retirement system. WRS is insulated from large swings in annual contribution rates or funding levels due to the plan’s cost-sharing and risk-sharing features.  As a result, WRS has been able to weather much of the financial storm.  Here are some key findings: 

  • Stable and Highly Funded:  WRS funding has remained steady over the last 20 years.  WRS’s funding ratio has consistently remained above 90%, during the last 20 years, and has been nearly 100% since 2004. 
  • Low Variation in Contribution Rates over the Long Term:The contribution rate for general classification employees has been between 10% and 12% of covered payroll for the last 20 years.  The rate dipped below 10% in the late 1990s and early 2000s. 
  • Cost to Taxpayers has Decreased: Between 2002 and 2010, an average of 11% of WRS pension revenue came from taxpayer-funded employer contributions, 13% from employee contributions (which at that time were usually paid by employers on behalf of employees as a part of negotiated compensation) and 76% from investment earnings.  
  • Low Risk to Taxpayers: WRS members bear approximately 75% of the risk associated with the Core Fund.  Taxpayers bear 25% of the risk for the Core Fund.  
  • Benefit Levels are Lower than Most Major Public Plans: The formula multiplier for general employees is 1.6%, which is lower than the average 1.95% multiplier reported in a recent comparative study of major public employee retirement systems. 

On the two major study points, the recommendation is, given the current financial health and unique risk-sharing features of WRS, neither an optional DC plan nor an opt-out of employee contributions should be implemented in Wisconsin at this time.  Analysis included in this study from actuaries, legal experts, financial experts and information from similar studies conducted in other states show that there are significant issues for both study items in terms of actual benefit provided and potential for negative effects on administrative costs, funding, long term investment strategy, contribution rates and individual benefits.  The 68-page Study is available at
     The financially strapped city of Harrisburg, Pennsylvania, will have to wait until at least November 30 before it can file for bankruptcy – that is the decision from the state legislature and Governor Tom Corbett.  Harrisburg is currently under receivership from the state, and faces more than $300 Million in debt largely as a result of a ruinous trash incinerator project.  Some city officials want to deal with the problem by declaring bankruptcy.  The 2012-13 state budget signed by Corbett makes bankruptcy impossible for at least the next five months.  According to Stateline, the delay was an idea spawned by the legislature, but the Governor did not disagree with it.  The ban was met with frustration from the city council and state-appointed receiver.  Adding to frustration over the delay, the receivership itself is still under fire from a faction of angry city officials.  Five city council members, the Controller and Treasurer filed a lawsuit in federal court challenging the state takeover and seeking to stop the work of the receiver.  They argue that because the legislature handed the power to choose and appoint the receiver to the Governor, the move is a violation of due process. 
15.    GEOGRAPHIC DIFFERENCES AND TRENDS IN EMPLOYMENT-BASED RETIREMENT PLAN PARTICIPATION:       An Issue Brief from the Employee Benefit Research Institute examines the level of participation by workers in public- and private-sector employment-based pension or retirement plans, for year-end 2010, the most recent data currently available.  Among all working-age (21–64) wage and salary employees, 54.2 percent worked for an employer or union that sponsored a retirement plan in 2010.  Among full-time, full-year wage and salary workers ages 21–64 (those with the strongest connection to the work force), 61.6 percent worked for an employer or union that sponsors a plan.  Among full-time, full-year wage and salary workers ages 21–64, 54.5 percent participated in a retirement plan.  The trend is virtually unchanged from 54.4 percent in 2009.  Participation trends increased significantly in the late 1990s, and decreased in 2001 and 2002.  In 2003 and 2004, the participation trend flattened out.  The retirement plan participation level subsequently declined in 2005 and 2006, before a significant increase in 2007.  Slight declines occurred in 2008 and 2009, followed by a flattening out of the trend in 2010.  Participation increased with age (61.4 percent for wage and salary workers ages 55–64, compared with 29.2 percent for those ages 21–24).  Among wage and salary workers ages 21-64, men had a higher participation level than women, but among full-time, full-year workers, women had a higher percentage participating than men (55.5 percent for women, compared with 53.8 percent for men).  Female workers’ lower probability of participation among wage and salary workers results from their overall lower earnings and lower rates of full-time work in comparison with males.  Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan.  The gap between percentages of black and white plan participants that exists overall narrows when compared across earnings levels.  Wage and salary workers in the South and West had the lowest participation levels (Florida had the lowest percentage, at 43.7 percent), while the upper Midwest, Mid-Atlantic and Northeast had the highest levels (West Virginia had the highest participation level, at 64.2 percent).  Finally, white, more highly educated, higher-income, and married workers are more likely to participate than their counterparts.  EBRI Issue Brief #363 (October 2011) 
16.    GOLF WISDOMS:     Every time a golfer makes a birdie, he must subsequently make two triple bogeys to restore the fundamental equilibrium of the universe.     
17.    PUNOGRAPHICS:     They told me I had type-A blood, but it was a Type-O.            
18.    QUOTE OF THE WEEK:   “The act of leadership is saying no, not saying yes.  It is very easy to say yes.”  Tony Blair  
19.    ON THIS DAY IN HISTORY:  In 1933, a minimum wage of 40 cents an hour was established in the U.S.  
20.    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. 
21.    PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you.




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