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Cypen & Cypen
July 11, 2013

Stephen H. Cypen, Esq., Editor

1. S&P 1500 PENSION PLANS FUNDING LEVELS RISE TO HIGHEST POINT SINCE 2008:  Funding levels of plans sponsored by S&P 1500 companies continued a strong rebound in 2013, with the aggregate deficit decreasing by $47 billion during the month of June, according to Mercer. The funded ratio (assets divided by liabilities) increased from 86% to 88% during June, up 14% since the end of 2012 and reached their highest level since October 2008.  Continued rise in interest rates drove down pension liabilities, which are discounted using high quality, corporate bond rates. Discount rates for a typical pension plan rose 33 to 42 basis points during June, after having already risen 46 basis points during May. However, equity markets stumbled slightly during the month, with the S&P 500 index losing 1.5%.  An estimated 15% of plan sponsors had assets in excess of pension liabilities as of June 30, 2013, compared only to 4% at December 31, 2012. Mercer also estimates that if discount rates rose another 1%, the number of sponsors with fully funded pension obligations could exceed 37%.  The foregoing serves as a reminder of the volatility that pension plans are exposed to and how quickly things can change -- a 14% increase in the funded ratio over just six months! Rising rates have helped reduce funding liabilities, therefore funded status has improved. There could easily be a large increase in fully funded plans if rates were to increase another 50 basis points from current levels.   For this reason (among others), plan sponsors should not rush to judgment, but should stay the course and await reversion to the mean. 
2. STATES ADJUSTED PENSION LIABILITY MEDIANS:  Moody’s Investors Service has released its inaugural report presenting adjusted pension data for the 50 individual states, based on its methodology for analyzing state and local government pension liabilities. The report ranks states based on ratios measuring size of their adjusted net Pension Liabilities relative to several measures of economic capacity: state revenues, GDP and personal income. Additionally, the report identifies medians for each ratio. Highlights of the report include:

  • State pension burdens vary widely. The median value of the ratio of ANPL to governmental revenue is 45.1% for fiscal 2011. Adjusted net pension liabilities for individual states ranged from 6.8% to 241% of governmental revenues in fiscal 2011. (Florida, at about 15%, is 7th lowest among the states.) 
  • The largest accumulated liabilities most often reflect management decisions not to fund contributions at levels reflecting actuarial guidelines. Of the ten states with the largest pension burdens, six have been downgraded in recent years for the magnitude and management of their pension obligations, in part a reflection of persistent underfunding.
  • The level of state contributions to cover pension costs of teachers and other local government employees is a significant factor in the size of state liabilities. The largest pension burdens are also associated with states that directly cover the cost of local school teacher pensions.
  • Allocating reported pension liabilities of cost-sharing plans to participating local governments leads to the greatest difference between adjusted and states’ reported pension liabilities. Other factors contributing to changing relative pension burden are whether a state’s discount rate is above or below the median and to what degree a state smoothes its asset values.

3.  A TIME-TRAP FOR THE UNWARY: The U.S. Second Court of Appeals recently considered an appeal in which lead plaintiff and proposed intervenors alleged misrepresentations and omissions in the offering and sale of certain financial instruments they purchased.  The appeal presented an unsettled question of law: whether the tolling rule set forth by the United States Supreme Court in the 1974 American Pipe case -- that commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action – applies to the three-year statute of repose in Section 13 of the Securities Act of 1933.  The court also had to decide whether non-party members of a putative class can avoid the effect of a statute of repose using the “relation back” doctrine of Federal Rule of Civil Procedure 15(c) to amend the class complaint and intervene in the action as named parties.  The appellate court held that: (1)American Pipe’s tolling rule does not apply to the three-year statute of repose in Section 13 of the Securities Act of 1933 and (2) absent circumstances that would render the newly asserted claims independently timely, neither Rule 24 nor the Rule 15(c) “relation back” doctrine permits members of a putative class, who are not named parties, to intervene in the class action as named parties in order to revive claims that were dismissed from the class complaint for want of jurisdiction. In practical terms, the litigants in these cases mat not circumvent Section 13’s statute of repose by invoking American Pipe or Rule 15(c).  (Although statutes of repose and statutes of limitations are often confused, they are nonetheless distinct and serve distinct purposes.  Statutes of limitations limit availability of remedies, and, accordingly, may be subject to equitable considerations, such as tolling, or a discovery rule.  In contrast, statutes of repose affect the underlying right, not just to remedy, and thus they run without interruption once the necessary triggering event has occurred, even if equitable considerations would warrant tolling or even if plaintiff has not yet, or could not yet have, discovered that he has a cause of action.  A statute of repose is subject only to legislatively created exceptions.) The court held that its ruling was consistent with the structure and purposes of the Private Securities Litigation Reform Act, which provides that a district court should appoint as lead plaintiff the member or members of the purported plaintiff class that are most capable of adequately representing interests of class members.  However, nothing in PSLRA indicates that district courts must choose a lead plaintiff with standing to sue on every available cause of action.  It is inevitable that, in some cases, the lead plaintiff will not have standing to sue on every claim.  It is not necessary that a different lead plaintiff be appointed to bring every single available claim, as such a requirement would contravene the main purpose of having a lead plaintiff – namely, to empower one or several investors with a major stake in the litigation to exercise control over the litigation as a whole.  Rather, there must be a main plaintiff sufficient to establish jurisdiction over each claim advanced.  PSLRA was certainly not intended to excuse sophisticated parties (such as proposed intervenors) from being diligent and keeping abreast of developments in the case, especially when the class is not certified.  The proposed intervenors, through minimal diligence, could have avoided the operation of Section 13 statue of repose simply by making timely motions to intervene in the actions as named plaintiffs, or by filing their own  timely actions, and if prudent, seeking to join their claims under Federal Rule of Civil Procedure 20.  The lesson of the case is that the decisions to pursue direct claims as opposed to remaining a passive class member cannot be delayed until a decision on class certification. Investors must now determine at the onset of the class litigation whether their recovery might be impacted by statutes of repose, in which case they may want to pursue direct litigation.  It looks like a whole new ballgame. Police and Fire Retirement Systems of the City of Detroit v. IndyMac, MBS, Inc. Case Nos. 11-2998 and 11-3036 (U.S. 2d Cir. June 27, 2013).
4.  THE CASE FOR PASSIVE INVESTING: The Maryland Public Policy Institute and the Maryland Tax Education Foundation have examined the investment fees and investment performance of Maryland’s state pension fund. They compared and contrasted these items to those of other state pension funds. State pension funds, including Maryland, have succumbed for years to a popular Wall Street sales pitch: “active money management beats the market.” As a result, almost all state pension funds use outside managers to select, buy and sell investments for the pension funds for a fee. The actual result is that a typical Wall Street manager underperformed relative to passive indexing for the five years ended June 30, 2012. We are pretty confident that active management came out on top for other periods of time.  No. 2013-02 (July 2, 2013).

5. DISABILITY APPLICANT’S SUBJECTIVE COMPLAINTS SHOULD HAVE BEEN CONSIDERED: Under Employee Retirement Income Security Act of 1974, a benefit determination is a fiduciary act, and an administrator owes plan beneficiaries a special duty of loyalty; while this fiduciary obligation does not necessarily favor payment over non-payment, an administrator may not adopt an adversarial approach toward a plan participant in the benefits determination. Miles appealed a federal trial court order dismissing his complaint, and entering judgment for Principal Life Insurance Company.  The court held that Principal’s decision denying Miles’s claim for long term disability benefits was not arbitrary and capricious.  Reviewing the district court’s decision de novo, the U.S. Court of Appeals reversed and remanded with instructions to return the case to the plan administrator to reassess the application free of the errors identified in the opinion. Miles, a partner in a law firm, suffers from bilateral tinnitus accompanied by ear pain, hearing loss, headaches and vertigo. Claiming that these conditions prevented him from performing his job duties, Miles applied for long term disability benefits. When Principal concluded that he was not eligible for benefits, and denied the claim, Miles filed suit. After a bench trial, the district court upheld the plan administrator’s decision. Specifically, the trial court held that Principal did not err by failing expressly to state whether it credited Miles's subjective complaints and reasonably required objective proof of a significant impairment. This appellate circuit has long recognized that subjective complaints of disabling conditions are not merely evidence of a disability, but are an important factors to be considered in determining disability.  Thus, a reviewing court is obliged to determine whether a plan administrator has given sufficient attention to claimant's subjective complaints before determining that they were not supported by objective evidence.  ERISA mandates that the plan administrator provide a claimant with adequate notice in writing setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant.  The appellate court concluded that Principal did not give adequate attention to Miles's subjective complaints, as it failed either to assign any weight to them or to provide specific reasons for its decision to discount them. Evidence that is subjective is not, by itself, a proper basis for rejection.  (Principal failed to mention that a doctor had found these subjective complaints credible, concluding that Miles appears to be with significant tinnitus, hearing loss, and intractable head pain.)  Thus, the appellate court concluded that Principal arbitrarily rejected Miles's subjective evidence of disability.  Principal has to do more than merely point to the subjective nature of the evidence by denying a claim.  It must either assign some weight to the evidence or provide a reason for its decision not to do so.  Miles v. Principal Life Insurance Company, Case No. 12-152 (U.S. 2d Cir. June 26, 2013).

6. GASB RELEASES GUIDE TO IMPLEMENTATION OF STATEMENT 67 ON FINANCIAL REPORTING FOR PENSION PLANS: Governmental Accounting Standards Board has released its Guide to Implementation of GASB Statement 67 on Financial Reporting for Pension Plans.  GASB Statement 67 is effective for financial statements for periods beginning after June 15, 2013.  The implementation guide was developed primarily to assist financial statement preparers and attestors in the implementation and application of the statement. During development of the final statement and since its approval in June 2012, many questions have been posed to the GASB staff regarding application of Statement 67. Because staff responses to individual technical inquiries reach only a small portion of the GASB’s constituents, the GASB uses implementation guides to more broadly to communicate staff guidance.  Guidance is limited to clarifying, explaining, or elaborating on an underlying standard (usually a statement, interpretation or technical bulletin). The topics addressed may include issues raised by constituents in due process or as a result of subsequent application of a standard, as well as issues anticipated by the GASB staff. An implementation guide also may address issues related to the application of a standard to specific industries.  Here are just three of the 99 questions answered:
Q—Does Statement 67 require that stand-alone financial reports be issued for defined benefit pension plans?
A—No. Statement 67 establishes standards that apply to financial reporting for defined benefit plans, including stand-alone financial         reports, when such reports, prepared in conformity with generally accepted accounting principles, are issued.
Q—A city reports to a single-employer defined benefit pension plan as a pension trust fund in its basic financial statements.  The plan issues a stand-alone financial report prepared in conformity with the requirements of Statement 67. Does the city have to apply all the requirements of Statement 67 for the pension trust fund?
A—No. Although, in general, Statement 67 applies to financial reporting of the plan in stand-alone financial statements and in circumstances in which the plan is included as a pension trust fund of another government, for purposes of including the pension plan as a pension trust fund in the city’s financial report, footnotes 9 and 11 of Statement 67 limit the applicability of the note disclosure and required supplementary information requirements of that statement to circumstances in which defined benefit pension plan financial statements are presented solely in the financial report of the city. Therefore, because a stand-alone plan financial report is prepared in accordance with the requirements of Statement 67, that statement does not require the city include the information identified in the detailed disclosure and RSI requirements of Statement 67 as part of its presentation of a pension plan as a pension trust fund in its financial report. Paragraph 106 of Statement no. 34, basic financial statements - and management’s discussion and analysis - for state and local governments, as amended, requires that, in this circumstance, the notes to the financial statements of the city include information about how to obtain the stand-alone plan financial report. However, additional information can be presented in the city’s note disclosures if the information is determined to be essential to the fair presentation of the city’s basic financial statements. 
Q—If a pension plan is administered through a trust that meets the criteria of paragraph 3 of Statement 67, do any of the requirements of Statement No. 25, financial reporting for defined benefit pension plans and note disclosures for defined contribution plans, as amended, or Statement No. 50, pension disclosures, as amended, apply?
A—No. For pension plans within its scope, Statement 67 replaces the requirements of Statements 25 and 50, as amended.
The entire 100 - plus page document is available at

7.  NEW YORK CITY MANDATES PAID SICK LEAVE FOR EMPLOYEES WORKING IN THE CITY: reports that the New York City council again voted to pass the New York City Earned Sick Time Act, which requires most New York City employers to provide mandatory paid and unpaid sick leave to employees working in the city. The city council initially passed the Act on May 8, 2013, but, Mayor Bloomberg vetoed it. The city council then overrode his veto, by a margin of 47-4 (a city council with over 50 members?).  Employers should keep apprised of developments dictating when the law will take effect, as the Act has a complex provision that ties date of implementation to New York City’s economy.  Depending on the level of New York Coincident Economic Index, as of December 16, 2013, the law may take effect as soon as April 1, 2014. Otherwise, the effective date will be delayed until the Index is above the specified level. Here are some key provision of the Act:

  • Mandatory Minimum Sick Leave. The Act sets a mandatory minimum level of sick leave that must be provided by most New York City private sector employers, including households who employ a single domestic worker. For most employees, the leave provided must be paid leave.
  • Employers Covered. Almost all New York City private sector employers are covered under the Act.
  • Employees Covered. With limited exceptions, an employee of a covered employer who is employed for more than eighty hours in a calendar year on a full-time or part-time basis is entitled to sick time under the Act.
  • Paid Leave Threshold. Initially the paid leave provisions apply to covered employers with 20 or more employees (full-time, part-time and temporary employees are also included for purposes of determining coverage). The 20 employee threshold drops to 15 employees eighteen months after the law takes effect. 
  • Unpaid Leave. When the law takes effect, covered private sector employees who are not entitled to paid leave are entitled to job-protected unpaid leave. Thus, small employers with fewer than the number of employees required to trigger the paid leave requirements, will be required to provide unpaid leave to their covered employees.
  • Domestic Employees. Commencing eighteen months after the law takes effect, it will apply to employers of one or more domestic workers. 
  • Accrual. For non-domestic workers, paid and unpaid sick leave under the Act must accrue at a minimum rate of 1 hour for each 30 hours worked, capped at 40 accrued leave hours in a calendar year.
  • Additional Work Hours Instead of Leave. An employee cannot be required to cover hours during which he utilizes sick time, but, upon mutual agreement, may work additional hours without using sick time to make up the missed hours. 
  • Carryover. Employees may carryover unused sick time into the following year, but the Act does not require more than forty hours of paid sick time to be provided to an employee in a calendar year.
  • Payment for Accrued Unused Time. The Act does not require any payment for unused accrued sick time.
  • Comparable Policies. The Act does not require employers to provide additional sick time for their employees if they already provide comparable or better paid leave. 
  • Public Disasters. The mayor may suspend the Act for the duration of any public disaster.
  • Collective Bargaining Agreements.  The Act does not apply to any employee in the construction or grocery industry covered by a valid CBA that expressly waives the Act's provisions. In all other industries, the Act does not apply to any employee covered by a valid CBA that expressly waives the Act's provisions and provides comparable benefits for employees.

8.  MEANWHILE, FLORIDA HEADS IN THE OPPOSITE DIRECTION: Apropos of Item 7 above, Florida has prohibited any county, municipality, department, commission, district, board or other public body whether corporate or otherwise, created by or under state law, from mandating or requiring an employer to require, among other things, paid or unpaid days off for holidays, sick leave, vacation and personal necessity.  CS/HB 655 is effective July 1, 2013.  The new law will presumably kill a paid sick time measure that had been pending in Orange County.
9. REQUIREMENTS AND COSTS ASSOCIATED WITH CUSTODY RULE: Designed to safeguard client assets, the Securities and Exchange Commission’s rule governing advisers’ custody of client assets imposes various requirements, and, in turn, costs on investment advisers. To protect investors, the rule requires advisers that have custody to (1) use qualified custodians (such as banks or broker-dealers) to hold client assets and (2) have a reasonable basis for believing that the custodian sends account statements directly to clients. The rule also requires advisers with custody, unless they qualify for an exception, to hire an independent public accountant to conduct annually a surprise examination to verify custody of client assets. According to accountants whom United States Government Accountability Office interviewed, examination cost depends on an adviser’s number of clients under custody and other factors. These factors vary widely across advisers that currently report undergoing surprise examinations: for example, their reported number of clients under custody ranged from 1 client to over 1 million clients. Thus, the cost of the examination varies widely across the advisers. The rule also requires advisers maintaining client assets or using a qualified custodian that is a related person to obtain an internal control report to assess suitability and effectiveness of controls in place. Cost of these reports varies across custodians, based on their size and services. SEC provided an exception from the surprise examination requirement to, among others, advisers deemed to have custody solely because of their use of related but “operationally independent” custodians. According to SEC, an adviser and custodian under common ownership but having operationally independent management pose relatively lower client custodial risks, because misuse of client assets would tend to require collusion among the firms’ employees. To be considered operationally independent, an adviser and its related custodian must not be under common supervision, not share premises and meet other conditions. About 2 percent of SEC-registered advisers qualify for this exception for at least some of their clients. If the exception were eliminated, the cost of the surprise examination would vary across the advisers because the factors that affect examination cost vary widely across the advisers.  GAO-13-569 (July 2013).

10. WHEN INSULTS HAD CLASS: He had delusions of adequacy.   Walter Kerr

11.  PHILOSOPHY OF AMBIGUITY: What if there were no hypothetical questions?
12.  TODAY IN HISTORY: In 1944, Franklin Delano Roosevelt announces that he will run for a fourth term as President of the United States.
13. 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. 
14. 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



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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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