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Cypen & Cypen
NEWSLETTER
for
AUGUST 17, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. SPOUSE’S DROP ACCOUNT MARITAL ASSET SUBJECT TO EQUITABLE DISTRIBUTION:

The former wife appealed one part of a final judgment that dissolved her 32-year marriage to the former husband. She challenged the following ruling by the trial court:

The Husband became eligible to receive retirement benefits July 1, 2003 and enrolled in the 60 month State Deferred Retirement Option Program (DROP). The Wife is not entitled to any of the Husband’s DROP benefits. The Husband’s DROP benefits are non-marital.

After the trial court issued its final judgment in this case, the appellate court issued a decision in a different case, which compelled reversal of that part of the final judgment designating the former husband’s DROP benefits as a non-marital asset not subject to equitable distribution (see C&C Newsletter for April 20, 2006, Item 1). Thus, the appellate court reversed the quoted portion of the final judgment, and remanded for further proceedings. Williams v. Williams, 31 Fla. L. Weekly D2013 (Fla. 1st DCA, July 31, 2006.

2. LAW ENFORCEMENT OFFICERS’ BILL OF RIGHTS PROVIDES EXCLUSIVE MANNER FOR INVESTIGATIONS:

Part VI, Chapter 112, Florida Statutes, commonly known as “The Police Officers’ Bill of Rights” or “The Law Enforcement Officers’ Bill of Rights,” was enacted to ensure certain rights for law enforcement and correctional officers subject to disciplinary action by their employing agencies. When a law enforcement officer or correctional officer is subject to interrogation by members of his employing agency for any reason that could lead to disciplinary action, demotion or dismissal, the interrogation must be conducted under the conditions prescribed by the statute. Every law enforcement agency and correctional agency shall establish and put into operation a system for the receipt, investigation and determination of complaints received by such agency from any person, which shall be the procedure for investigating a complaint against a law enforcement and correctional officer and for determining whether to proceed with disciplinary action or to file disciplinary charges, notwithstanding any other law or ordinance to the contrary. The plain language of the statute makes the procedures established thereunder the exclusive means by an employing agency to investigate complaints against law enforcement officers and correctional officers and for determining whether to proceed with disciplinary action, regardless of other laws or ordinances to the contrary. Thus, the Florida Attorney General opined that as the employing law enforcement agency of a Miami-Dade Police officer, the Miami-Dade Police Department is the exclusive agency responsible for receipt, investigation and determination of complaints received by Miami-Dade pursuant to Section 112.533, Florida Statutes. We presume Miami-Dade County must have some other procedure on the books; otherwise, there would have been no reason to request an opinion. AGO 2006-35 (August 3, 2006).

3. IRS RULES ON EMPLOYER “PICK-UPS”:

Internal Revenue Service was recently asked what actions are required in order for a state or political subdivision to “pick up” employee contributions to a qualified plan so that contributions are treated as employer contributions pursuant to IRC Section 414(h)(2). IRS ruled that a contribution to a qualified government plan will not be treated as picked up by the employing unit under IRC Section 414(h)(2) unless the employing unit specifies that the contributions, although designated as employee contributions, are being paid by the employer. For this purpose, the employing unit must take formal action to provide that the contributions on behalf of a specified class of employees of the employing unit, although designated as employee contributions, will be paid by the employing unit in lieu of employee contributions. A person duly authorized to take such action with respect to the employing unit must take such action. The action must apply only prospectively and be evidenced by a contemporaneous written document (for example, minutes of a meeting, a resolution or an ordinance). The employing unit must not permit a participating employee from and after the date of the “pick-up” to have a cash or deferred election with respect to designated employee contributions. Thus, for example, participating employees must not be permitted to opt out of the “pick-up” or to receive the contributed amounts directly instead of having them paid by the employing unit to the plan. In what appears to be a rather generous gesture, IRS also adopted a transition rule and will not treat any plan that on or before August 28, 2006 includes designated employee contributions that were intended to be picked up as employer contributions pursuant to IRC Section 414(h)(2) as failing to meet requirements of such section prior to January 1, 2009, solely on account of failure to satisfy the requirement that “pick-up” be pursuant to formal action, provided the employing unit has taken contemporaneous action evidencing an intent to establish a “pick-up,” has operated the plan accordingly and takes formal action in writing prior to January 1, 2009. Rev. Rul. 2006-43, 2006-35 IRB (August 8, 2006).

4. TWENTY SIX NATIONAL ORGANIZATIONS JOIN IN NASRA’S AND NCTR’S CONCERNS ABOUT PROPOSED GAO STUDY:

Our readers know that Senator Charles Grassley, Chairman of the Committee on Finance, and Senator Max Baucus, Ranking Member, have asked the Government Accountability Office to study the funding status of public pension plans, citing concern that many such plans are poorly funded and have no back-up source for guaranteed benefit payments, as due private pension plans (see C&C Newsletter for July 20, 2006, Item 1). Our readers also know that the National Association of State Retirement Administrators and the National Council on Teacher Retirement have written to those Senators, expressing concern about some statements made in their letter to GAO (see C&C Newsletter for July 27, 2006, Item 6). Now, on August 6, 2006, 26 national organizations have joined with NASRA and NCTR in a letter to Senator Grassley, Senator Baucus and GAO. Together, the 28 organizations represent state and local governments and officials, public employee unions, public retirement systems and over 20 million state and local government employees, retirees and their beneficiaries. Although interests of the numerous organizations may be widely diverse, they share in the desire to ensure that the proposed study is done accurately and results in a balanced report. To begin with, there are fundamental differences between governments and businesses that result in critical distinctions between plans in each sector and the way in which they are accounted for and measured. A factual study into the health of public plans must ensure appropriate metrics are used and must not employ a private plan yardstick to measure government retirement systems. Public plans are in sound financial condition and state and local governments take seriously their responsibility for paying promised benefits to their employees and retirees. Comprehensive state and local laws and significant public accountability and scrutiny provide rigorous and transparent regulation of public plans, and have resulted in strong funding rules and levels. Public plans are backed by the full faith and credit of state and local governments. Additionally, a public plan participant’s accrued level of benefits and future accruals typically are protected by state constitutions, statutes or case law that prohibits elimination or diminution of a retirement benefit -- providing far greater protections than what is provided by ERISA and the PBGC. A greater understanding of the protections put in place by the governments ultimately responsible for funding these plans may serve to build support for these arrangements and address the erosion of confidence in retirement security in general. The writers were pleased to share the following current facts about state and local plans, hoping the Senators and the GAO will keep them in mind as work progresses:

  • Public pension plans are in good financial condition. As a group, public pension plans have funded 86 percent of their liabilities, a figure that is projected to begin rising in the near future as the three-year market shock earlier this decade is more fully offset by strong investment gains. Unlike contribution volatility that may exist in a private plan setting, State and local
    plans receive a steady stream of both employer and employee contributions that typically is mandated by law.
  • The bulk of public pension funding is not shouldered by taxpayers. That statement bears repeating: The bulk of public pension funding is not shouldered by taxpayers. When placed in context, required contributions to public pension plans continue to be well within State and local governments' budgetary means, and even represent historically low amounts as a percentage of total state and local government spending and payroll. The reason is because the vast majority of public plan funding comes from investment income. Employer (taxpayer) contributions to state and local pension
    systems over the last two decades have made up only one-fourth of total public pension revenue. In 2004, investment earnings accounted for 77 percent of all public pension revenue; employer contributions were only 15 percent.
  • State and local retirement plan assets are professionally-managed and provide valuable long-term capital for the nation's financial markets. The $2.8 trillion held in plan portfolios are an important source of stability for the marketplace and are designed to withstand short-term fluctuations while still providing optimal growth potential.
  • State and local pension plans fuel national, state and local economies. Public plans distribute more than $130 billion annually (an amount greater than the total economic output of 22 states) in benefits to over 6 million retirees and beneficiaries, with an average annual pension benefit of roughly $19,500. These payments are steady, continuous, in great part adjusted for inflation and provide a strong economic stimulus to local economies throughout the nation.
  • Public plans are subject to comprehensive oversight. While private sector plans are subject solely to federal regulation, state and local government plans are creatures of state constitutional, statutory and case law, and must comply with a vast landscape of state and local requirements, as well as industry accounting standards. These plans are accountable to the legislative and executive branches of the state; independent boards of trustees that include employee representatives and publicly-elected officials; and ultimately, the taxpaying public.
  • Public retirement plans attract and retain the workforce that provides essential public services. Active public employees make up more than 10 percent of the nation's workforce, and two-thirds are employed in education, public safety, corrections or the judiciary. Retention of experienced and trained personnel in these and other positions is critical to the continuous and reliable delivery of taxpayer services.

The writers welcome the opportunity to work closely with the Committee and GAO as they examine state and local government defined benefit plans, hoping that they will consult with the writers as the study moves forward.

5. PAYING FOR TOMORROW -- PRACTICAL STRATEGIES FOR TACKLING THE PUBLIC PENSION CRISIS:

A new study from Deloitte Research examines how governments got into this pension funding predicament, what options they have for managing their current situation and suggests steps they can take on the road to recovery. The report says funding public pension systems represents one of the greatest financial challenges for state and local governments today. The report posits that about 84% of state pension systems are underfunded, with enough assets to cover only 80% of their future pension commitments. The unsustainable growth in pension funding requirements could easily crowd out opportunities for governments to invest in education, economic development and health care. Unfortunately, there is no “silver bullet” for solving the public pension crisis. Most jurisdictions will require a mix of cost cutting and revenue-enhancing changes to bring their pension systems back into balance. See the next item for NCPERS’ response.
6. NCPERS RESPONDS TO DELOITTE’S PUBLIC EMPLOYEE PENSION STUDY:

NCPERS, the nation’s leading advocate for public employee pension plans, has called into question results of a study by Deloitte on public pensions. NCPERS’ analysis of the study reveals that Deloitte provides little in the way of well-researched facts on public pension plans, instead relying on misleading information and commonly perpetuated myths to create the impression that public pension plans are in bad condition. While some public retirement systems have been challenged with regard to plan funding, the vast majority are well funded and prepared to meet all obligations now and in the future. The report fails to mention the prime reasons that some funds, including ones highlighted in the report, are facing funding shortfalls: returns on equity investment over the last few years and politicians/legislatures’ refusal to budget for or contribute to the plans. Purporting to present solutions to a so-called “public pension crisis,” the report cherry-picks information from publicly available surveys in order to manufacture a crisis. The Deloitte report also suggests that private companies are abandoning traditional defined benefit pensions in favor of defined contribution plans, and that it might be the right thing to do for public plans as well. NCPERS research shows that nearly 350 of the Fortune 500 companies offer defined benefit plans to their employees. In closing, NCPERS expresses surprise that a reputable firm like Deloitte would misrepresent the true state of pensions and would do so “without insuring that its own pension plan is adequately funded!” Touché, Deloitte.

7. QUOTE OF THE WEEK:

“Be thankful we’re not getting all the government we’re paying for.” Will Rogers

Copyright, 1996-2006, all rights reserved.

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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