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Cypen & Cypen
AUGUST 7, 2008

Stephen H. Cypen, Esq., Editor


The Internal Revenue Service is ready to get better acquainted with public pension funds (see C&C Newsletter for March 13, 2008, Item 7 and C&C Newsletter for May 22, 2008, Item 3), and that makes fund executives nervous, according IRS plans to survey a test group of 25 public plans in September or October, with a follow-up survey going out to about 200 systems in the second or third quarter of 2009. Agency officials have not yet identified which pension funds will receive the questionnaire. A draft questionnaire shared with public pension representatives in April asked for details about composition of boards of trustees, funding levels and benefit accruals. IRS officials say they have modified the survey in response to comments at that meeting, but have declined to provide a copy of the revised questionnaire. Public pension fund officials are concerned about the scope of the survey, claiming IRS is overstepping its bounds in venturing into territory that does not fall under federal purview. Observers fear the review could ultimately lead to audits and increased regulation of public pension funds. In the past five years, IRS has conducted only twelve surveys of public pension plans.


As public rituals go, it was one of Albany’s most predictable, says the New York Times. Every two years, a state law that required public employees to pay their unions’ dues, regardless of whether they joined, would near expiration. And every two years, the Legislature would renew the law. For more than three decades, unions pushed to make it permanent. But lawmakers, mainly Republicans in the State Senate who wanted the Legislature to have some degree of leverage over the state’s powerful public sector unions, blocked those attempts, arguing that a permanent extension of the law would amount to a big giveaway to organized labor. Now, Governor Paterson has given the state’s public-employees their long-desired victory. He has signed a law making union dues mandatory in perpetuity for all public employees who are covered by unions even if they opt not to join. The law affects mostly state workers, as well as county employees, public school teachers and other civil servants. Similar bills had passed the Democrat-controlled Assembly before, only to fail in the Senate. Labor leaders said that making the law permanent guaranteed unions would have money adequately to represent members and nonmembers alike, which they were required to do under the Taylor Law. In other words, although employees have the right not to belong to the union, the union must still represent them.


The United States Court of Appeals for the Eleventh Circuit (which includes Florida) recently faced an issue of first impression in the circuit: whether a complaint for breach of fiduciary duty regarding diminution of value of a defined contribution retirement plan states a claim for benefits under the Employee Retirement Income Security Act of 1974. The plaintiffs, former employees of The Home Depot, Inc., filed a complaint against Home Depot for breach of fiduciary duty in administration of a retirement plan. The former retirees had received their benefit payments, but complained they were less than they should have been. The district court dismissed the complaint with prejudice for lack of subject-matter jurisdiction, on the ground that the complaint was for damages, not benefits, and the former employees did not qualify as “participants” entitled to sue for breach of fiduciary duty. The Court of Appeals disagreed with the district court, concluding that the lower court erred when it treated the threshold issue as one of subject-matter jurisdiction and when it dismissed the former employees’ complaint with prejudice. The higher court concluded that a complaint for breach of fiduciary duty that seeks restitution of the diminished value of a defined contribution plan is for benefits, not damages. In so ruling, the Eleventh Circuit joined the Third, Sixth and Seventh Circuits, rejecting the reasoning of the Fifth Circuit. (See C&C Newsletter for June 21, 2007, Item 2 and C&C Newsletter for August 9, 2007, Item 2.) Lanfear vs. The Home Depot, Inc., Case No. 07-14362 (U.S. 11th Cir., July 31, 2008).


After more than thirty years as a stock person at Kroger, Anderson was diagnosed with lung and brain cancer in July, 2005, and soon thereafter learned that his cancer was inoperable and terminal. Unmarried and with no children, Anderson updated his Last Will and Testament to leave everything that he could to his heirs. Anderson took medical leave, and in so doing, was entitled to six months of disability pay and three months of free health insurance. Anderson then contacted the fund’s administrator, and was informed that he had three options: (1) return to active status with Kroger for two weeks. After two weeks, he could take another leave of absence -- with six more months of disability pay -- and restart the clock for three additional months of free health insurance; (2) retire and receive retiree health insurance. However, the coverage provided was not an attractive option for someone faced with expensive medical treatments on the horizon; (3) retire and continue his health insurance for eighteen months by paying for it through COBRA, at a cost of $755 per month. The administrator did not inform Anderson about another pension option, the ten-year certain option. Anderson told the administrator that he had no intention of retiring, and that he wanted to win his battle with cancer and return to his job at Kroger. The administrator took Anderson to mean he was focused on learning more about insurance options and not about retirement options, although the administrator did recognize that one of Anderson’s concerns was not leaving his parents with the burden of his medical bills. In order to extend his health insurance and disability pay, Anderson returned to active status with Kroger. Tragically, Anderson lost his battle with cancer and passed away three weeks later. The ten-year certain option, which had to be elected before death, would have allowed Anderson’s heirs to collect benefits after his death in an amount significantly greater than the other options. When the fund decided that Anderson’s estate and heirs could not posthumously elect a ten-year certain option because it was available only if a participant retired and received his first month’s pension check before dying, they brought a federal action. In granting summary judgment in favor of Anderson’s estate and heirs, the United States District Court held that an ERISA fiduciary has some duty to disclose and inform beneficiaries of their material circumstances and other beneficial information under the plan. Once an ERISA beneficiary has requested information from an ERISA fiduciary who is aware of the beneficiary’s status and situation, the fiduciary has an obligation to convey complete and accurate information material to the beneficiary’s circumstance, even if that requires conveying information about which the beneficiary did not specifically inquire. Anderson v. Board of Trustees of the Northwest Ohio United Food and Commercial Workers Union and Employers’ Joint Pension Fund, Case No. 3:07 CV 576 (ND Ohio, July 28, 2008).


The inimitable Gary Findlay, Executive Director of the Missouri State Employees’ Retirement System, has a piece in the August PlanSponsor, entitled “Truth vs. Honesty.” The article defends cost of living adjustments for pension plans, and, as is always the case with Findlay’s work, is well-written and cogent. With some frequency, news articles appear that are critical of defined benefit plans for public employees, the common target being provision for some type of cost of living adjustment. Next (and Findlay is spot-on right here), comes something like: COLA benefits are virtually unheard of in the private sector. The implication, of course, is why should public plans have COLAs if corporate plans do not? Findlay asserts the wrong question is being asked; the right question is why don’t corporate plans have COLAs? The answer is that they cost too much. Then, Findlay proceeds to dismantle the arguments allegedly supporting that time-worn answer, using semi-technical methodology. The bottom line is that public-sector DB retirement plans commonly include COLA provisions to help retirees maintain purchasing power of their benefits during retirement years and thus avoid significant declines in their standards of living. A big contributor to financing these COLAs are the inflation-generated investment returns being earned on retirement plan assets. Conceptually, in the public sector, inflation-generated investment earnings are being used to offset what otherwise would be the devastating impact of inflation on benefits. In the corporate world, retirees suffer the devastation of inflation while corporations essentially keep the earnings from inflation. Findlay says it best, when he proposes (somewhat tongue-in-cheek) the following statement that corporate plan sponsors should, in the interest of full disclosure, include in their summary plan descriptions:

In funding your retirement benefits, we are assuming an economic environment in which inflation is running at 3%. Since inflation is one of the drivers of total return on investments, we are, in essence, counting on inflation to increase the amount the retirement plan's investments will earn, which will, in turn, lower the amount the corporation is required to contribute to the plan. It also should be noted that the same inflation that is helping the corporation finance your benefits also will reduce the purchasing power of the dollars you receive in benefits once you retire. For example, if the 3% inflation rate being assumed for financing the plan holds true, you should expect that, after 20 years of retirement, your benefit will have lost about 45% of the purchasing power it had when you retired. Accordingly, it would be wise to build up extra personal savings for use in offsetting the losses in the purchasing power of your retirement benefit if you hope to maintain a reasonably constant standard of living during your retirement years.

‘Nuf said.


The New York Times reports that emergency medical workers can now contact the police directly via radio, using information beamed down from police helicopters. Almost seven years after the lessons of the September 11, 2001 attacks, New York City has improved the ability of its police and fire departments to operate together (see C&C Newsletter for March 28, 2003, Item 2). These advances and others were recently set out before the Federal Communications Commission at a public hearing on improving public safety through better communications among government and emergency agencies. However, there is no uniform frequency regionally or nationally, which could be an issue, for example, if emergency workers from New York had to respond to a national disaster like Hurricane Katrina (see C&C Newsletter for February 7, 2008, Item 3).


Internal Revenue Service has issued proposed amendments to regulations under Section 401(a)(9) of the Internal Revenue Code to permit a governmental plan within the meaning of IRC Section 414(d) to comply with required minimum distribution rules using a reasonable good faith interpretation of Section 401(a)(9). Section 823 of the Pension Protection Act of 2006 directed the Secretary of the Treasury to issue regulations under which a governmental plan is treated as having complied with required minimum distribution rules if the plan complies with a reasonable good faith interpretation of IRC Section 401(a)(9). The regulation would apply to all years to which IRC Section 401(a)(9) is applicable, and would affect a governmental IRC Section 401(a) plan. Before the regs are finalized, IRS requests comments by October 8, 2008. A “governmental plan” means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof or by any agency or instrumentality of any of the foregoing.


The Supreme Court of New Jersey recently addressed sufficiency of a plaintiff’s proofs in a religion-based hostile work environment claim brought under the state Law Against Discrimination. The intermediate appellate court had entered judgment for the Borough of Haddonfield on Cutler’s hostile work environment claim. Cutler, who is Jewish, had been employed by the Haddonfield Police Department since 1995. His faith and background were known by his co-workers and supervisors. Cutler was subjected to comments and incidents that caused him to feel he was subjected to discriminatory or harassing treatment because of his religion. After a trial on Cutler’s lawsuit against the Borough, a jury found that Cutler had been subjected to a hostile work environment, but it awarded no damages and found that the delay in Cutler’s promotion was not retaliatory. The Borough moved for judgment notwithstanding the verdict, and Cutler moved for post-judgment relief. Upon denial of each by the trial court, both parties appealed. The Appellate Division reversed denial of the Borough’s motion for judgment notwithstanding the verdict (N.O.V.), finding that the alleged discriminatory conduct was sporadic and not sufficiently severe or pervasive to create a hostile work environment under the Law Against Discrimination. In reversing, the Supreme Court of New Jersey held that the threshold for demonstrating a religion-based, discriminatory hostile work environment is no more stringent than the threshold applicable to se.xually or racially hostile workplace environment claims. Here, Cutler had satisfied the standards for hostile work environment claim to warrant, and subsequently uphold, a jury determination. Some of the high court’s specific holdings were as follows: (1) "severe or pervasive" conduct must be conduct that would make a reasonable person believe that the conditions of the employment are altered and that the work environment is hostile; (2) the Law Against Discrimination prohibits severe or pervasive workplace harassment about any religion or belief system; and (3) religion-based harassing conduct is as offensive as other forms of discriminatory, harassing conduct. The matter was remanded to the Appellate Division so that it may decide any unresolved issues that Cutler had raised on appeal, but which had been unnecessary to its prior judgment (including, presumably, the verdict for zero damages). Cutler vs. Dorn, Case No. A-51-07 (NJ July 31, 2008).


The American Academy of Actuaries, a professional association whose mission is to serve the public on behalf of the U.S. actuarial profession, has issued a new Position Statement. The Academy believes that the time has come for the United States to address Social Security’s long-term financial soundness. For two decades, Social Security’s trustees have been telling the public, annually, that the system is not in actuarial balance. What does that mean? At some point in the foreseeable future, absent corrective legislation, the program will be unable timely to pay benefits in full. Over the years, actuaries have evaluated numerous proposals to prevent this situation from happening. Among the very many options that would alleviate the imbalance, one rises to the top of the list: raising Social Security’s retirement age. As life expectancy increases, the percentage of workers’ lives spent in retirement continues to grow, while the number of working years stays relatively constant. Inevitably, Social Security’s costs will exceed what its scheduled financing will support. This primarily demographic problem demands a demographic solution. Enacted in 1935, our Social Security system has certainly withstood the test of time. Having paid benefits to over 100 million retired and disabled workers and their families, Social Security has indisputably had a positive impact on society. However, the system has required occasional adjustments to continue functioning well. The last time was in 1983, following a period of slow economic growth and very high inflation that had drained the trust fund. Without the 1983 legislation, timely benefit payments could not have been made starting in July 1983. The law was changed in April, just in time. According to Social Security’s 2008 Trustees’ Report, the program will not face a 1983-type crisis for many years, but the program’s cash flow is projected to move into the red in 2017, the first of several critical dates cited by the trustees. While the significance of 2017 (or even 2041, the projected date of trust fund exhaustion) is debatable, the underlying financial picture is not in dispute. Social Security needs a course correction to continue fulfilling its mission. While Social Security’s financial soundness could be restored in many different ways, the Academy believes that any solution package should include increases in retirement age. The Social Security amendments of 1983 raised the normal retirement age from 65 to 67 over three decades. But it is frozen at 67 for all workers born after 1959. Holding the retirement age constant is a certain prescription for future financial problems. Raising it to reflect increasing longevity would contribute to solving those problems. The American Academy of Actuaries believes that a financially sound Social Security system must accommodate future increases in longevity. The most direct way to accomplish this goal would be to extend the currently scheduled increases in Social Security’s retirement age. And the time to enact this change is now.


Many big public pension funds have used their investment clout to push a social agenda, according to But California’s largest funds are learning that being virtuous does not always pay. Eight years ago the state treasurer launched his “Double Bottom Line” initiative, espousing a philosophy of profits and social reform. As part of the plan, the $240 Billion California Public Employees’ Retirement System dropped investments in countries that lacked a free press, labor unions and other hallmarks of democracy. CalPERS and $162 Billion California State Teachers’ Retirement System also dumped tobacco stocks, and plowed money into businesses and real estate that would benefit the local economy. The strategy has been a drag on returns of the funds, which overall have still trumped the S&P 500-Stock Index over the past five years. CalPERS, the largest pension fund in the United States, left $400 Million on the table by screening out investments in China, Colombia and other countries. CalSTRS revealed that its cigarette ban cost it $1 Billion in lost gains. With California home prices down nearly 40% in the past year and commercial properties off 15%, the funds’ real estate bet could fizzle. The plan was controversial from the start. In 2000, CalPERS approved a method for excluding countries that allowed certain social ills to fester. Angered, officials from the Philippines, one country that was dropped, bused local immigrants to CalPERS’ Sacramento headquarters to protest. The fund’s managers reinstated the country after it turned out they had relied on old data. A 2007 CalPERS report found its emerging-market investments had underperformed by 2.6% a year an index without the same limitations. The fund repealed the screening policy last year. The funds may reverse their stance on tobacco, as well. Besides worrying about public health, the then-state treasurer had argued the industry could go bankrupt in face of legal and regulatory battles. But with cigarette shares soaring since 2000, CalSTRS reported that avoiding the stocks could no longer be justified. And its board will review the policy next month. (Separately, CalPERS and CalSTRS reported respective investment losses of 2.4% and 3.7% for the year ending June 30, 2008.)


After quitting, Johnson brought a federal action against her employer, alleging that her employer had discriminated against her on the basis of her se.x in violation of Title VII of the Civil Rights Act of 1964 and Ohio state law. A crane operator, Johnson was the only female on a particular crew, which worked 12-hour shifts. When Johnson asked about bathroom breaks, she was informed that the crane operated continuously. There was not a person to give her a break, and if she needed to use the bathroom she would have to urinate off the back of the crane. She was upset because she really wanted to work, but could not go without a break to relieve herself. Title VII makes it unlawful for na employer to discharge an individual or otherwise discriminate against an individual with respect to compensation, terms, conditions or privileges of employment because of such individual’s se.x. An employee may base a claim of employment discrimination on a theory of disparate impact, disparate treatment or both. Under the disparate impact theory, a plaintiff must show that a facially neutral employment practice falls more harshly on one group than another and that this practice is not justified by business necessity. In such case, proof of discriminatory intent is not required. Under the disparate treatment theory, a plaintiff must show that the employer has treated some people less favorably than others because of race, color, religion, se.x or national origin. Unlike the disparate impact theory, proof of discriminatory motive is critical in the case of disparate treatment. A United States magistrate judge has ruled that Johnson presented sufficient evidence to establish a prima facie case of disparate impact. And since the employer did not demonstrate a business necessity for the practice in question, the employer’s motion for summary judgment on Johnson’s claim of disparate impact was denied. On the other hand, the record failed to disclose any direct evidence of intentional discrimination on part of the employer. Thus, the employer’s motion for summary judgment on this claim was granted. We would say this case represents a real leak of faith. Johnson vs. AK Steel Corp., Case No. 1:07-cv-291 (SD Ohio, May 22, 2008).


A good time to keep your mouth shut is when you're in deep water.


“I don’t look to jump over 7-foot bars; I look around for the 1-foot bars that I can step over.” Warren Buffett

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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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