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Cypen & Cypen
July 25, 2013

Stephen H. Cypen, Esq., Editor

1.  FLORIDA APPELLATE COURT DEFINES “FINANCIAL URGENCY” IN LABOR CONTEXT: The union sought review of a final order of the Public Employee Relations Commission dismissing the union’s unfair labor practice charge against the City of Miami.  The union argued that (1) PERC erred in determining that the City was facing a “financial urgency” that required modification of the parties collective bargaining agreement, pursuant to Section 447.4095, Florida Statutes, and (2) PERC erred in construing Section 447.4095, Florida Statutes, to allow the City to implement changes to the CBA prior to completion of the impasse resolution process set forth in that Section.  The Florida district court of appeal concluded that PERC properly interpreted and applied Section 447.4095, and affirmed. Section 447.4095, Florida Statutes, provides:
Financial urgency. -- In the event of a financial urgency requiring modification of an agreement, the chief executive officer or his or her representative and the bargaining agent or its representative shall meet as soon as possible to negotiate the impact of the financial urgency. If after a reasonable period of negotiation which shall not exceed 14 days, a dispute exists between the public employer and the bargaining agent, an impasse shall be deemed to have occurred, and one of the parties shall so declare in writing to the other party and to the commission. The parties shall then proceed pursuant to the provisions of s. 447.403. An unfair labor practice charge shall not be filed during the 14 days during which negotiations are occurring pursuant to this section.
The term “financial urgency” is not defined in Section 447.4095, Florida Statutes, or elsewhere in Chapter 447, Florida Statutes.  The Legislature's use of the word “urgency” implies a financial condition requiring immediate action. The fact there are other statutes that apply when a local government is facing a financial emergency or bankruptcy implies that a financial urgency is something less dire than those conditions. Thus, consistent with PERC’s definition, the court concluded that a financial urgency is a dire financial condition requiring immediate attention and demanding prompt and decisive action, but not necessarily a financial emergency or bankruptcy. Nevertheless, Section 447.0495, Florida Statutes, may only be invoked if the financial condition requires modification of the agreement. Thus, if the financial condition can be adequately addressed by other reasonable means, then modification of the agreement is not “required.” If the other reasonable alternatives available are not adequate to address the financial condition, then Section 447.4095, Florida Statutes, permits the local government unilaterally to modify the CBA. The fact that it is politically more expedient for the local government to modify the CBA than to implement other cost-saving or revenue-raising measures is insufficient, standing alone, demonstrate that modifications of the CBA was required. [Right.] Nonetheless, in a proceeding under Section 447.4095, Florida Statutes, the local government is not required to demonstrate that funds are unavailable from any other possible source to preserve the agreement; instead, the local government must only show that other potential cost-saving measures and alternative funding sources are unreasonable or inadequate to address the dire financial condition facing the local government. On PERC’s review of a local government’s determination that a financial urgency exists, the ultimate factual issues to be determined by the hearing officer are
(1) whether the local government was facing a “financial urgency,” as defined above, and, if so, (2) whether the financial situation facing the local government required the modifications imposed by the local government. In making these determinations, the hearing officer will need to (a) undertake a close examination of the local government's complete financial picture, including the circumstances that led to the declaration of the financial urgency; (b) consider whether, absent the modifications, the local government would have been able to continue to meet its financial obligations to its employees as well as its other obligations; (c) consider the other actions taken by the local government to address its financial condition before proceeding under section 447.4095; and (d) evaluate whether there were other reasonable alternatives considered by the local government or proposed by the party challenging the modifications that would have adequately addressed the financial situation facing the local government.
On the second issue of whether PERC erred in construing Section 447.4095, Florida Statutes, to allow the city unilaterally to modify the CBA without first proceeding through the impasse resolution process set forth therein, the court also affirmed.  It is reasonable to infer that the Legislature intended the phrase “negotiate the impact” in Section 447.4095, Florida Statutes, to be a reference to “impact bargaining.” The declaration of the financial urgency and the 14-day negotiating period is the notice and reasonable opportunity to negotiate that is required in the context of “impact bargaining.” The court recognized that allowing the local government immediately to impose unilateral changes to the agreement upon the conclusion of the 14-day impact bargaining period will change the status quo between the parties.  But if it is later determined that no financial urgency existed or that the changes were not required to address the financial urgency, PERC has broad authority to remedy the Unfair Labor Practice.  Walter E. Headley, Jr., Miami Lodge No. 20, Fraternal Order of Police, Inc. v. City of Miami, Florida, 38 FLW D1559 (Fla. 1st DCA July 19, 2013).
2. THE DETROIT BANKRUPTCY PICTURE: The Wall Street Journalreports that the federal judge handling Detroit’s bankruptcy case gave a preliminary victory to the city’s emergency manager, ruling that municipal unions and others could not litigate in state court their grievances with the city’s bid to shed its retiree obligations. However, federal bankruptcy judge Steven Rhodes said municipal unions and pension funds could still argue that Detroit’s July 18, 2013 Chapter 9 bankruptcy filing was improper and violated Michigan’s constitution. Unlike Chapter 11 corporate restructurings, the city will have to prove that it satisfied requirements for Chapter 9 bankruptcy, which include proving that the city is insolvent, that the state authorized it to file and that it filed the petition in what is ambiguously called “good faith.” The last test -- called eligibility -- has often lead municipal bankruptcy cases to fail.
3.  A NEW GROUND FOR PENSION FORFEITURE -- STUPIDITY:  Former Hamilton Township, New Jersey police officer Joseph Derrico has lost his tax-free disability pension following an examination by doctors who found him no longer permanently disabled, according to The state Police and Firemen’s Retirement System board of trustees unanimously found that Derrico’s was no longer disabled, and suspended his $5,800 monthly payments. Derrico had applied for and received the $70,000 per year disability retirement, but when video of him running after a monster truck and wrestling on a reality TV show surfaced, PFRS ordered an investigation. Generally, the vote would have cleared Derrico to go back to work, but he resigned first. Therefore, the Board did not have to take him back, and he does not receive a pension.
4.  THE CONFIDENTIAL WITNESS IN SECURITIES LITIGATION: The D & O Diary has an interesting piece on the confidential witness problems in securities litigation. Largely as a result of the pre-dismissal motion discovery bar and the heighted pleading standard Congress and the courts have imposed, plaintiffs in these cases increasingly have come to rely on the statements of confidential witnesses in attempting to plead securities fraud cases. In an unusual post-settlement order in City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corporation, United States District Judge Jed Rakoff examined the role of confidential witness-based allegations, both in the case itself and in securities cases in general. Judge Rakoff’s order makes clear that a plaintiffs’ reliance on confidential witness testimony to try to meet heightened pleading standards presents a problem for plaintiffs, defendants and the courts. A copy of Judge Rakoff’s July 9, 2013 order is available at Shareholder/plaintiffs filed a securities class action against Lockheed Martin and certain of its officers and directors. Plaintiffs alleged that the defendants had misrepresented the company’s prospects and financial results. In support of their allegations, plaintiffs’ complaint relied in part on the supposed testimony of certain confidential witnesses, who were current or former company employees, and who provided testimony substantiating that the individual defendants were aware of certain facts or had knowledge of certain issues. The court denied defendants’ motion to dismiss, partly in reliance on statements attributable to the confidential witnesses. Thereafter, defense counsel obtained names of the confidential witnesses, took their depositions and learned that the confidential witnesses had recanted their testimony or denied having made statements attributable to them. Defendants then filed a motion for partial summary judgment, to which plaintiffs countered that the witnesses had changed their stories because of financial or other pressure Lockheed had brought to bear on them, but that their investigator’s notes largely confirmed what had been attributed to the witnesses in the complaint. Judge Rakoff ordered five of the confidential witnesses and plaintiffs’ investigator to appear in court. The same day Judge Rakoff issued an order denying defendants’ motion for partial summary judgment, the parties announced a settlement. Although Judge Rakoff approved the settlement, he issued his July 9, 2013 memorandum, because, he noted, a few comments may be helpful in light of certain issues presented by the partial summary judgment motion that are likely to recur in future cases. Judge Rakoff found that some, but not all, of the confidential witnesses had been lured by the investigator in to stating as facts what were often mere surmises, but then, when their indiscretions were revealed, felt pressured into denying outright statements they had actually made. With respect to three of the witnesses who had backpedaled rather too far from what they had told plaintiffs’ investigator, the Judge said that while the court was not unsympathetic to the difficult position in which these witnesses found themselves, their disrespect for the obligation to tell the truth hardly redounded to their credit. Judge Rakoff contrasted these witnesses with two others who provided welcome evidence that some witnesses can still place the value of truth above their self-interest.  With respect to plaintiffs’ investigator, his report of findings to plaintiff’s counsel was accurate in all material respects. The Judge explained that the sole purpose of his memorandum was to focus attention on the way in which the Private Securities Litigation Reform Act and certain court decisions have led plaintiffs’ counsel to rely heavily on private inquiries of confidential witnesses, and the problems this approach tends to generate for both plaintiffs and defendants. It seems highly unlikely that Congress or the Supreme Court, in demanding a fair amount of evidentiary detail in securities class action complaints, intended to turn plaintiffs’ counsel into corporate “private eyes,” who would entice naive or disgruntled employees into gossip sessions that might help support a federal lawsuit. Our summary: if you can’t recall…recant.
5.  AMERICAN BENEFITS COUNCIL: American Benefits Council has written to heads of Department of the Treasury, Department of Health & Human Services, Department of Labor and Internal Revenue Service, in light of the United States Supreme Court’s June 2013 decision in the Unites States v. Windsor (See C & C Special Newsletter Supplement for June 28, 2013).  The decision, which held that Section 3 of the Defense of Marriage Act is unconstitutional, raises many compliance questions for pension and retirement plans, as well as health and welfare arrangements. One very important threshold issue is which same-sex spouses must or may be treated by an employer or plan as a “spouse” for purposes of administering benefits. Without such guidance, plans and employers will be left in an untenable position in administering benefits in compliance with the Supreme Court decision. If the employer or plan used the incorrect definition, the employer or plan might have to readminister benefits at a material cost to the employer or plan, or face penalties or increased litigation risk for failing to comply with applicable federal laws. Here are some specifics: 

  • Possible Retroactive Impact of Windsor: The Court’s decision that Section 3 of DOMA is unconstitutional raises the issue of whether lawfully married same-sex couples who were adversely impacted by DOMA in the past may have some claim for retroactive relief.  
  • Prospective Implementation in Light of Windsor: Plans need time to come in to compliance with their new obligations. Plan documents and policies will need to be amended, and communications will need to be sent to newly covered beneficiaries, advising them of their rights.  
  • Imputation of Income Related to Employer-Provided Health Coverage in 2013: Previously, for federal income tax purposes, employers generally needed to treat the value of employer-paid coverage for an employee’s same-sex spouse as imputed income for that employee. Now, in reaction to Windsor, some employers are considering changing, or already have changed, their payroll practices based on their understanding that the cost of such coverage should no longer be treated as imputed income.  
  • Claims for Tax RefundsWindsor was brought in the context of an estate tax refund that the plaintiff sought from the IRS. Since that refund request apparently will be honored, many employees and employers may have questions regarding whether they are entitled to a refund with respect to federal income and payroll taxes paid as a result of employer-sponsored health coverage received for a same-sex spouse.

The Council is a public policy organization principally representing Fortune 500 companies and other organizations that assist employers of all size and providing federal benefits to employees. 
6. PRENUPTIAL AGREEMENT INEFFECTIVE TO WAIVE SPOUSE’S RIGHT TO FUNDS IN PARTICIPANT SPOUSE’S 401(k) PLAN: While unmarried, Michael designated his parents as beneficiaries of his of his MidAmerican Energy Corporation 401(k) plan. Michael and Kathy later executed a prenuptial agreement before marrying.  (For some reason, they also re-executed the same agreement after the marriage.) The prenuptial provided that each party specifically waived and released any and all rights and claims of every kind, nature and description that he or she may have, or to which he or she may be entitled with respect to any of the separate property of the other party in the event of the termination of the marriage by either death or operation of law, including but not limited to rights of inheritance, spousal allowance, property division, rights of dower/curtesy and other inchoate marital rights. The MEC 401(k) plan is listed among Michael’s assets on exhibit “A” to the agreement. In several places, the agreement provides that the property on exhibit “A” shall be the sole and separate property, and that Kathy disclaims any and all rights to any of the property on exhibit “A.” Kathy also consented to the change in Michael’s beneficiary without her further consent.  She also agreed to complete any consent or waiver, upon request, currently or any time in the future. Michael filed a petition for dissolution of marriage, making reference to the prenuptial agreement, and requesting a division of assets and debts in accordance with it. Unfortunately, Michael died about 10 days later, before his divorce from Kathy had been finalized.  Michael’s parents and Kathy disputed who was to receive the 401(k) plan funds, which MEC believed belonged to Michael’s parents. MEC filed an interpleader action against Kathy and the parents, seeking a determination of the proper recipient of the funds.  The district court granted summary judgment in favor of Kathy, determining that the prenuptial agreement was not effective to waive her rights to the 401(k) plan because of a lack of acknowledgement. The Employee Retirement Income Security Act, as amended, governs distribution of funds in the 401(k) plan.  Under ERISA, a participant may elect at any time to waive the qualified pre-retirement survivor annuity form of benefit. But, such an election takes affect only if (1) the spouse consents in writing such election; (2) such election designates a beneficiary who may not be changed without spousal consent; and (3) a spouse’s consent acknowledges the effect of such election and is witnessed by a plan representative or notary public. Here, Kathy’s consent did not satisfy the acknowledgement requirement of ERISA.  Accordingly, the appellate court affirmed that Michael’s designation of his parents as beneficiaries of the 401(k) plan must yield to Kathy’s rights as surviving spouse. We feel bad for Michael’s lawyer; he did virtually everything humanly possible to carry out the intent of the parties, and now he must put his malpractice carrier on notice. This case truly exults form over substance. MidAmerican Pension and Employee Benefits Plans Administrative Committee v. Cox, Case No. 12-3563 (U.S. 8th Cir. July 12, 2013). 
7. DISMISSAL IN LEHMAN EMPLOYEE STOCK-DROP LAWSUIT AFFIRMED:  Former employees of Lehman Brothers Holdings, Inc. initiated an action under the Employee Retirement Income Security Act against members of Lehman’s Employee Benefit Plans Committee. The employees claimed that the committee breached its fiduciary duty prudently to manage the company’s employee stock ownership plan by failing to eliminate or curtail investment in Lehman stock during the class period. They also claimed that these committee members breached their fiduciary duty of disclosure, and that members of the committee who were members of Lehman’s Board of Directors breached their fiduciary duties to appoint, monitor and inform the plan managers. The district court dismissed the complaint because the employees did not allege sufficient facts to show that members of the Employee Benefit Plans Committee knew or should have known that continued investment in Lehman stock was imprudent. On appeal, the Second Circuit Court of Appeal affirmed.  Lehman’s demise was attributable to a number of identifiable causes that become apparent through the lens of hindsight. However, the employees did not adequately plead that Lehman was in a dire situation that the Plan fiduciaries could or should have recognized during the class period. ERISA puts those fiduciaries in an unfortunately difficult position -- on the proverbial razor’s edge -- in attempting to meet their fiduciary duty of prudence while simultaneously offering an undiversified investment option to employees trying to save for retirement. The employees have not adequately alleged that the committee fell off of that edge.  Rinehart v. Akers, Case No. 11-4232 (U.S. 2d Cir. July 15, 2013).
8. RETIREMENT SECURITY CHALLENGES AND PROSPECTS FOR EMPLOYEES OF SMALL BUSINESSES:  The United States Government Accountability Office found that about 42 million workers, approximately about one-third of all private sector employees, work for employers with fewer than 100 employees, and recent federal data suggest many of these workers lack access to work based retirement benefits. In fact, only around 14% of small employers sponsored some type of plan for their employees to save for retirement, and these employers in general even face numerous challenges establishing and maintaining a plan. GAO’s March 2012 report found that many of the small employers who were contacted said they felt overwhelmed by the number of plan options, plan administration requirements and fiduciary responsibilities. For example, some small employers found it challenging to select investment funds for their plans. Small employers also cited other challenges in sponsoring a plan, including lack of financial resources, time and personnel. GAO’s April 2012 review of select 401(k) plans -- the most common type of plan sponsored by small employers -- found that some smaller plan sponsors did not know about or fully understand fees they and their participants were charged, such as fees associated with group annuity contracts. In addition to these fees, participants in small plans often pay higher recordkeeping and investment management fees than participants in larger plans. GAO’s work demonstrates the need for plan sponsors, particularly small sponsors, to understand fees in order to help participants secure adequate retirement savings. Any fees paid by participants, even a seemingly small amount, can significantly reduce retirement savings over time. GAO did not make any new recommendations. GAO-13-748T (July 16, 2013).
9. 10 THINGS NEWSMAN LEARNED REPORTING ON OBAMACARE: Washington Post’s Ezra Klein has spent the last few months interviewing dozens of Obama administration officials, state-level implementers, outside experts, steadfast critics and pretty much anyone else he could think of who is involved in setting up Obamacare. Here are ten takeaways from that reporting: 

  • For the White House, it is all about the marketplaces. The White House believes the line between success and failure is perfectly clear: it is getting enough young and healthy people to sign up for the insurance marketplaces (or “exchanges”) so premiums remain low. If they get it right, the rest of the law, including Medicaid expansion, will more or less fall into place.  
  • It is a lot like the campaign. If you listen to the White House describe the task, it sounds just like the campaign. A majority of these younger, healthier adults are non-white; they skew male. They are being microtargeted and heat-mapped and modeled. But there is one big way in which it is not like the campaign: voting is free. Buying health insurance is not.  
  • Don’t forget IT. The biggest difference between the national conversation over Obamacare and the ground-level conversation over Obamacare is the degree to which the second focuses on the information technology challenge. If a new data hub does not work then someone trying to sign up for Obamacare will be stopped by an error message. And if Obamacare loses too many of those people on the first try, it may not be able to get them back for a second try.  
  • No one knows how to model politics. If you look at the experience of Massachusetts, or you talk to the people who model the way people act when buying insurance, the Affordable Care Act should be fine. Although the numbers work out, no one knows the degree to which the politics around the law will change the way consumers react to it.  
  • But maybe the politics will not really matter. It is always worth remembering that everyone in Washington is really weird. Most of the country does not care much about Obamacare. They do not have particularly strong feelings about it. And they are never going to come into contact with something called “Obamacare,” anyway.  
  • People in Washington experience Obamacare as a political abstraction, and project that view onto the country. That act of projection might be a huge mistake.  
  • There will be glitches. It does not matter how good a job the administration or the states do. Things will go wrong. And when they do go wrong, the media will cover them. No major program has ever rolled out without glitches. Even if 2014 goes well for Obamacare, it is not likely to go easily.  
  • Glitches may not really matter. Months before it launched in 2006, Medicare Part D was less popular than today’s Affordable Care Act: Only 21% of the public viewed it favorably.  [Not bad, considering that Medicare Part D is impossible to comprehend.]  
  • Different states will have wildly different experiences.  California accepted the Medicaid expansion, chose to build its own exchange, and is spending money to promote the law and generally doing everything in its power to make Obamacare work. Texas (big surprise) rejected the Medicaid expansion, left the exchange to the feds, and the state’s key politicians are out there talking down the law. Obamacare may be a success in states like California and a failure in states like Texas. How the politics shake out is anyone’s guess.  
  • No one knows quite what to do in states that are not expanding Medicaid. In those states, the poorest residents will get no help but slightly less-poor residents will get lots of help. How do you tell someone they are too poor to be eligible for subsidies?  Further, no one is really certain what will happen to the hospital systems in those states, as they are losing out on a lot of money they were counting on receiving. Perhaps the economics of participating in Medicaid expansion are so overwhelmingly favorable to the states that they will fall in line.  
  • State regulators are exhausted. When you talk to the Obama administration, you get a serene confidence that Obamacare is going great. When you talk to the critics, you get a serene confidence that the law is collapsing under its own weight. When you talk to the state bureaucrats, technical specialists, and assorted other implementers, you get a harried download on just how much there is to do.

10. MIAMI COPS SUE CITY OVER RETIREMENT CLAIMS: A report from The Miami Herald indicates that 76 Miami police officers enrolled in a Deferred Retirement Option Program filed a federal lawsuit claiming they were misled, prompting them to retire early and lose out on benefits.  Because we will be involved in defending the case, we will hereafter only report official action.
11. WHEN INSULTS HAD CLASS: I did not attend the funeral, but I sent a nice letter saying I approved of it.  Mark Twain
12. PHILOSOPHY OF AMBIGUITY: If man evolved from monkeys and apes, why do we still have monkeys and apes?
13.  TODAY IN HISTORY: In 1956, Italian liner Andrea Doria sinks after colliding with the Stockholm.
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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