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Cypen & Cypen
AUGUST 24, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


Treasuries just posted their first weekly loss since June, as the Federal Reserve suggested it may boost interest rates again after refraining from raising borrowing costs for the first time in two years. Yields on benchmark 10-year notes rose the highest since August 1. The Treasury’s sale of $44 Billion in notes and bonds and a report showing retail sales rose more than expected, renewing inflation concerns, also weighed on prices, according to a report from Bloomberg News. Ten-year note yields rose about 8 basis points, to 4.97%. The Fed recently kept the overnight lending rate between banks at 5.25% after 17 successive increases since June, 2004. Interest rate futures show traders see a 27% likelihood the Fed will lift the interest rates to 5.5% on September 20 and a 74% chance they will raise them by year end. Inflation quickened to 2.4% in the year that ended June 30. Prices have not increased faster than that since April of 1995. Concern increased after retail sales climbed 1.4% last month, the biggest gain since January. Economists had expected a .9% rise in July.


Under the Heroes Earned Retirement Opportunities (HERO) Act, signed into law on Memorial Day (see C&C Newsletter for June 1, 2006, Item 5), taxpayers can now count tax-free combat pay when determining whether they qualify to contribute to either a Roth or traditional IRA. Before this change, members of the military whose earnings came entirely from tax-free combat pay were generally barred from using IRAs to save for retirement. In addition, the HERO Act allows military personnel who received tax-free combat pay in either 2004 or 2005 to go back and make IRA contributions for those years. Eligible military members will have extra time, until May 28, 2009, to make these special back-year contributions. For those under the age of 50, the IRA contribution limit was $3,000 for 2004 and $4,000 for 2005. For those 50 and over, the limit was $3,500 for 2004 and $4,500 for 2005. The IRA contribution limit for 2006 is $4,000 for those under age 50 and $5,000 for those 50 and over. IR-2006-129 (August 18, 2006).


Little-known Section 2-11.1(k)(2) of the Miami-Dade County Conflict of Interest and Code of Ethics Ordinance provides:

All full-time County and municipal employees engaged in any outside employment for any person, firm, corporation or entity other than Miami-Dade County, or the respective municipality, or any of their agencies or instrumentalities, shall file, under oath, an annual report indicating the source of the outside employment, the nature of the work being done pursuant to same and any amount or types of money or other consideration received by the employee from said outside employment. Municipal employee reports shall be filed with the clerk of their respective municipalities.

Many municipal employees are engaged in outside employment, out of financial necessity or otherwise. The Code of Ethics makes no distinction between “off duty” employment and “outside employment.” Off duty employment, generally related to police and fire employees, is usually coordinated through the department with, for example, local businesses that require security work. The department designates the rate of compensation and collects a surcharge for use of the uniform, vehicle and other city equipment. All payments are made by check from the employer through the department to the employee. Outside employment consists of any other employment outside the city. Municipal employees who do any work for outside employers are required by the County Code of Ethics to file an annual report thereof with the municipal clerk. Failure to do so could subject such employees to penalties under the County Code of Ethics Ordinance. Comment: We seriously question the validity of a County ordinance purporting to regulate municipal employees in this manner, particularly when Chapter 112, Part III, Florida Statutes, contains a State Code of Ethics for public officers and employees. However, the municipality itself may have a similar requirement, which, of course, could impose a similar reporting requirement.


In a recent Wall Street Journal op-ed, E. J. McMahon, Director of the Empire Center for New York State Policy and a senior fellow at the Manhattan Institute, assails what he calls the “public pension price tag.” He concludes that the overriding concern of public pension reform should be to reduce the taxpayers’ exposure to accounting and financial risk -- now and in the future. He sets out four essential steps toward that goal:

  • Shift to defined contribution plans for all future workers.
  • Immediately recognize and fund the full cost of any benefit increase.
  • Expand financial reports to include alternative funding assumptions.
  • Gradually lower the required rate of return, and invest accordingly.

McMahon says the growing public sector burden fundamentally poses a test of political wills and is fraught with financial complexity. Although benefits for their members are legally untouchable, union leaders derive substantial power from the existing system and will battle any attempt to change it. Today, improved accounting practices can at least force elected officials to face up to the price tag of their rash promises. On the other hand, we continue to believe that shifting to defined contribution plans is not the solution, although defined benefit plans could profit by some adjustments.


In an appeal, the wife challenged several items in the equitable distribution scheme found in the trial court’s final judgment of dissolution of marriage, as well as the overall unequal distribution in favor of the husband. The appellate court found several distributions not supported by evidence in the record, and reversed for reconsideration. We report this case solely because the court made a somewhat important (if obvious) statement: equitable distribution of a pension involves complicated calculations and will generally require expert testimony. A word to the wise. Smith v. Smith, 31 Fla. L. Weekly D2019 (Fla. 2d DCA, August 2, 2006).


A new working paper from Center for Retirement Research at Boston College recognizes that defined benefit pension plans have been a staple of the U.S. pension system for decades, before heading into a persistent and secular decline over the last 30 years. Although defined contribution plans continue to grow faster than the more traditional DB plans, DB plans nevertheless continue to play an important role in the pensions system. Especially when including Social Security, a public defined benefit system, DB plans provide a significant amount of retirement income for many elderly households. Yet the effects of such plans on retirement income are controversial. Benefits from DB plans are tax-preferred; they are typically paid as annuities, making them illiquid; and they are usually unindexed for inflation. These factors, combined with uncertainty about the relative importance of the major motives for saving (retirement, precautionary, down payments, as examples), the differing importance of such motives over the life-cycles, difficulties with measuring DB pension wealth and other issues, have made estimation of the impact of DB plans on wealth a difficult exercise. The paper offers an analysis of how DB pension plans and Social Security affect household wealth with special attention to examining how to interpret estimates of the offset between DB pension wealth and other wealth. The authors obtained several key results. First, “raw” DB pension wealth must be adjusted in a particular way to yield meaningful coefficients in a cross section regression of non-pension wealth on pension wealth. Second, most previous work has not made such adjustments. Third, the adjustments that have been made in the past do show significant changes in the interpretation of how DB pensions affect wealth. Fourth, the Health and Retirement Study data used in the piece show little offset between “raw” pension wealth and non-pension, and making the adjustments to DB pension wealth has relatively modest effects on the estimated overall offset between pension wealth and other wealth. Fifth, the results do show statistically significant differences in offsets among households who have different levels of educational attainment. In short, there is a need to correct for a variety of biases in common econometric constructions, and the need to allow for heterogeneous responses to pensions across households with differing educational status. Phew -- another very scholarly piece from CRR.

“Retirement, we understand, is great if you are busy, rich, and healthy. But then, under those circumstances, work is great too.” William E. Vaughan

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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