Cypen & Cypen
AUGUST 10, 2006
Stephen H. Cypen, Esq., Editor
1. CONGRESS PASSES MAMMOTH PENSION REFORM BILL:
On August 3, 2006, the Senate passed H.R. 4, the “Pension Protection Act of 2006,” by a 93-5 vote. This vote came after the House approved the Bill 279-130 last week. Among other things, the Bill eliminates the 10% penalty for public safety employees for withdrawing money from a DROP account prior to age 59 1/2. Now, there will be a penalty for withdrawal prior to age 50. The Bill also includes the “Healthcare Enhancement for Local Public Safety (HELPS) Retirees Act,” (see C&C Newsletter for December 22, 2005, Item 1). After the Bill is signed into law by the President as expected, we will do a more detailed analysis.
2. LEGISLATURE SETS FLORIDA RETIREMENT SYSTEM CONTRIBUTION RATES:
The Florida Legislature has enacted Chapter 2006-35, effective July 1, 2006. The law establishes required employer retirement contribution rates for each membership class and subclass of the Florida Retirement System as follows:
As usual, the Legislature found that a proper and legitimate state purpose is served when employees and retirees of the state and its political subdivisions, and the dependents, survivors and beneficiaries of such employees and retirees are extended the basic protections afforded by governmental retirement systems. These persons must be provided benefits that are fair and adequate and that are managed, administered and funded in an actuarial sound manner, as required by Section 14, Article X of the State Constitution, and Part VII of Chapter 112, Florida Statutes. Therefore, the Legislature has determined and declared that the Act fulfills an important state interest.
3. WILL WE HAVE TO WORK FOREVER?:
Today, the average retirement age is 63. If people continue to retire at 63, they are going to face a severe decline in living standards at retirement for a number of reasons. First, at any given retirement age, Social Security benefits will replace less of pre-retirement savings as the Normal Retirement Age rises from 65 to 67. Second, Medicare premiums, which are deducted before the Social Security check goes in the mail, are slated to rise dramatically. Third, taxes on Social Security benefits will rise. In addition, pension coverage in the private sector has shifted from defined benefit plans, where workers receive a life annuity based on years of service and final salary, to 401(k) plans, where individuals are responsible for their own saving and the median balance for individuals approaching retirement is only $60,000.00. One powerful antidote to reductions in retirement income is to work longer. Working directly increases people’s current incomes; it avoids the actuarial reduction in Social Security benefits; it allows their 401(k) plans to grow; and it postpones the day when they start drawing down their pension accumulations or other retirement saving. The question is how much longer will people need to work. A new Issue in Brief from Center for Retirement Research at Boston College examines the effect of working longer on replacement rates and finds that delaying retirement by about two years can have a major impact on retirement security for those with significant 401(k) assets; households that depend solely on Social Security, however, would have to extend their work lives by more than three and a half years to achieve similar gains.
4. WIFE’S BACK PAINS SUPPORT BATTALION CHIEF’S FMLA ABSENCE:
What began as a routine disciplinary effort to ensure work attendance during the run-up to “Y2K” ended in discharge of a 22-year veteran of the City of Arlington, Texas, Fire Department. He filed suit challenging the discharge as a violation of the Family and Medical Leave Act. He prevailed at trial and the City appealed. The court of appeals affirmed on liability, but reversed the damage award for further proceedings. Lubke was a Battalion Chief in the City of Arlington’s Fire Department, in charge of 8 fire stations and 40-50 employees. In preparation for the Year 2000, the City’s critical departments, including the Fire Department, developed contingency plans in the event widespread electronic problems should arise. Lubke was scheduled to work from December 31, 1999 through January 1, 2000. On December 30, 1999, Lubke telephoned a call box and left a message stating that he would not be at work during the Y2K weekend because he needed to stay home to care for his sick wife, who was also a City employee. Lubke was discharged for dereliction of duty, unauthorized absence and insubordination. The court held that Lubke’s wife’s condition qualified as a “serious health condition,” as she had for years from time to time seen doctors about her back pain. The fact that Lubke did not come up with written medical substantiation until well after he returned to work is not significant because the City failed properly to request or require Lubke to provide medical certification as required under FMLA regulation. However, the correct measure of damages for lost insurance benefits in FMLA cases is either actual replacement cost for the insurance or expenses actually incurred that would have been covered under a former insurance plan. The loss “value” of benefits, absent actual cost to Lubke, is not recoverable. Also, an offset should have been allowed for the City’s portion of Lubke’s retirement plan payout at his termination. Lubke v. City of Arlington, Case No. 04-11213 (U.S. 5th Cir., June 30, 2006).
5. SEC HEAD SAYS HEDGE FUND REGULATION INADEQUATE:
Bloomberg News reports that U.S. Securities and Exchange Commission Chairman Christopher Cox said hedge fund regulation is inadequate, and Congress may have to regulate more oversight of the $1.2 Trillion industry. SEC’s efforts to keep tighter tabs on the industry were stymied last month, when a federal appeals court struck down the agency’s rule requiring hedge fund managers to register and submit to random inspections. Regulators are becoming more concerned about hedge funds because of the power they wield in financial markets and the growing number of fraud cases. As the industry’s assets doubled in the last five years, several funds collapsed, saddling investors with losses. SEC brought more than 60 enforcement cases against hedge funds in the past four and one-half years, up from four in 2001. The Treasury Department has also started an inquiry into the funds and their impacts on financial markets.
6. FEDERAL WORKERS RULE:
Federal workers earned an average of $106,579 in 2005, including benefits, about twice the average private sector compensation of $53,289 with benefits included, according to a Plansponsor.com report. Without benefits, federal employees earned an average salary of $71,114, while their private sector counterparts earned $43,917. Average federal wages rose 5.8% in 2005 compared with an increase of 3.3% in the private sector (though it should be noted that federal payrolls are more likely to be composed of white-collar, professional categories) and a growing trend toward outsourcing government jobs has had the effect of moving some lower-paying positions in the private sector -- which, it should be noted, has been more active in reducing benefits like health care and pensions.
7. NEW YORK TIMES SAYS PUBLIC PLANS FACE BILLIONS IN SHORTAGES:
The New York Times has published the first article in a series that will examine actions of state and local governments that have left taxpayers with large unpaid bills for public employee pensions. The series will focus on ways in which pension funds have been shortchanged by government officials, even as they have sought to enhance benefits for groups of politically influential workers. Subtitled “Taxpayers at Risk,” the article is written by Mary Williams Walsh, who is known for sensational stories of this type. Most people know that San Diego recently revealed that it had been shortchanging its city workers’ pension fund for years, setting off a wave of lawsuits, investigations and criminal indictments. Retirees are still being paid, but a portion of their benefits is in doubt because of continuing legal challenges. Across the nation, a number of states, counties and municipalities have engaged in many of the same maneuvers, with their pension funds that San Diego did, but without the crippling scandal -- at least not yet. It is hard to know the extent of the problems, because there is no central regulator to gather data on public plans. Because accounting for government pension plans is not uniform, comparing one with another can be unreliable. By one estimate, state and local governments owe their current and future retirees roughly $375 Billion more than they have committed to their pension plans. Not all of the shortfall, of course, is the result of actions like those that brought San Diego to its knees. And few governments have been as reckless as San Diego officials in granting pension increases at the same time as they were cutting back on contributions. Still, officials in Trenton have been shortchanging New Jersey’s pension fund for years, much like San Diego. From 1998 to 2005, the state overrode its actuary’s instructions to put a total of $652 Million into the fund for state employees. Instead, it provided a little less than $1 Million. To make up the missing money, New Jersey officials tried an approach similar to the one used in San Diego: they said they would capture the “excess” gains they expected the pension funds’ investments to make and then use them as contributions. It was a doomed approach, leaving New Jersey to struggle with a total pension shortfall that has ballooned to $18 Billion. Its actuary has recommended a contribution of $1.8 Billion for the coming year, but the state has found only $1.1 Billion, so it will fall even farther behind. Illinois also duplicated another mistake in San Diego, which tried to make its municipal pension plan cheaper by stretching its funding schedule over 40 years -- considerably longer than the 30 years that governmental accounting and actuarial standards permit. Illinois is stretching its pension contributions over 50 years. At that rate, many of its retirees will have died by the time the state finishes tapping taxpayers for their benefits. Colorado does not meet the 30-year funding guideline, either. Officials from these states dispute the suggestion that their pension plans are less than sound. And the National Association of State Administrators says it is unrealistic to expect all public plans to be fully funded, because they do not have to pay all the benefits they owe at once. Last month, Senators Charles E. Grassley and Max Baucus, Republican chairman and ranking Democrat on the Finance Committee, asked the Government Accountability Office to investigate the financial condition of the nation’s public pension plans (see C&C Newsletter for July 20, 2006, Item 1). Public plans are not governed by the Employee Retirement Income Security Act that private companies must follow. They are not covered by the Pension Guaranty Corporation, so that if they come up short, they must turn to taxpayers. Municipal plans are generally governed by trustees, who have a fiduciary duty to the plan itself. However, even the most exemplary pension boards can be overruled, in many cases, by politicians whose priorities may be incompatible with sound financial management. We anxiously look forward to responses to this article from NASRA and others.
8. 911 CALLER AVOIDS JAIL TIME:
Lorna Dudash, 45, who called 911 operators hoping to get another look at “the cutest cop I’ve seen in God knows how long,” will not go to jail for misusing the telephone line (see C&C Newsletter for July 20, 2006, Item 8). Instead, Dudash was sentenced to serve two years of probation, devote 100 hours of community service and pay $693 in fines. Come to think of it, wouldn’t she have preferred jail, to be closer to her dream cop?
9. QUOTE OF THE WEEK:
“Plans are nothing; planning is everything.” Dwight Eisenhower
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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.