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Cypen & Cypen
August 9, 2012

Stephen H. Cypen, Esq., Editor

1. ACTUARIES DEBUNK 80% PENSION FUNDING STANDARD: An 80% funded ratio often has been cited in recent years as a basis for whether a pension plan is financially or actuarially sound. Left unchallenged, according to an Issue Brief from American Academy of Actuaries, this misinformation can gain undue credibility with the observer, who may accept and in turn rely on it as fact, thereby establishing a mythic standard.   The issue brief deconstructs that myth, and clarifies how actuaries view funding levels for pension plans and how the funded ratio relates to the general idea of soundness or health of a pension plan or system.   The Pension Practice Council of the American Academy of Actuaries finds that while the funded ratio may be a useful measure, understanding a pension plan's funding progress should not be reduced to a single measure or benchmark at a single point in time. Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time. Some more specific Key Points are

  • Frequent unchallenged references to 80% funding as a healthy level threaten to create a mythic standard.
  • No single level of funding should be identified as a defining line between a healthy and an unhealthy pension plan.
  • Funded ratios are a point-in-time measurement.   Movement or trend of the funded ratio is as important as the absolute level.
  • Not all plans should have the objective of accumulating assets equal to 100% of a relevant pension obligation.
  • Financial health of a pension plan depends on many factors in addition to funded status -- particularly size of any shortfall compared with resources of the plan sponsor.

2. CREDIT RISK AND ILLIQUIDITY RISK IN GUARANTEED INVESTMENT PRODUCTS: Guaranteed investment products, including stable value funds, guaranteed investment contracts (GICs), synthetic GICs, bank investment contracts, deferred fixed annuities, and the like are offered in many defined contribution plans in the United States, according to Journal of Financial Planning. These downside guaranteed products can vary significantly from product type to product type, as well as within a given product type. But many of these products share some common characteristics that are not found in traditional marked-to-market products. This paper establishes a flexible framework for estimating credit risk and illiquidity risk for guaranteed products, so their "true" risks are reflected in the inputs to asset-allocation-oriented optimizations. Ignoring or inaccurately estimating illiquidity risk and credit risk can lead to an unjustified preference for guaranteed products. Despite popularity of guaranteed products, practitioner literature offers surprisingly little guidance on their evaluation, risk estimation and, ultimately their role in a diversified asset allocation portfolio. Numerous academic researchers have priced-out and valued structured products on a stand-alone basis, but have been mostly silent on the optimal allocation and role in the optimal portfolio.   The calculation of a risk-neutral price is simply too arduous for most practitioners. One notable exception is a paper written last year that examines the performance of stable value funds since their inception in 1973.   It analyzes performance of stable value funds using mean-variance analysis, Sharpe and Sortino ratio analyses, stochastic dominance analysis and multi-period portfolio optimization (or intertemporal optimization).   All of these historical analyses suggest that stable value funds dominate short-term government/credit bond funds and cash, and that stable value funds often occupy a significant position in optimal portfolios across a broad range of risk-aversion levels.   In this case, domination of stable value funds comes from a similar return but with a significantly lower standard deviation of returns -- a standard deviation the authors believe does not reflect true risk of the investment. Comparing volatility of a marked-to-market asset (an asset whose price is determined by the market) to that of a rules-based product that is not marked to market is hardly an apples-to-apples comparison.   Some continue to argue that volatility of a guaranteed product that is experienced by investors should be used for asset allocation or portfolio construction.   The authors believe such a view fails to consider the true risk of the products to investors, and makes meaningful comparisons between two rules-based products challenging.   For example, coupon payments associated with Lehman Brothers-issued structured products had no standard deviation until Lehman's bankruptcy in 2008. We did not know that. Did you?

3. GASB NEW PENSION STANDARDS NOW AVAILABLE: Governmental Accounting Standards Board has published standards intended to improve accounting and financial reporting of public employee pensions by state and local governments (see C&C Newsletter for June 28, 2012, Item 5). The two pronouncements are available to download at no charge on GASB's website at   Statement No. 67, Financial Reporting for Pension Plans, revises existing guidance for financial reports of most pension plans.   Statement No. 68, Accounting and Financial Reporting for Pensions, revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits.   GASB's website also contains a news release and plain-language descriptions of the new standards.   Happy hunting.

4. U.S. ATTORNEY SUES NYC FOR USERRA VIOLATIONS: The United States Attorney for the Southern District of New York announced that the United States has filed a class action against the City of New York, the New York City Police Department and the New York City Police Pension Fund under the Uniformed Services Employment and Reemployment Rights Act of 1994, on behalf of all current and retired NYPD officers who have performed active military service since September 11, 2001, or who will do so in the future. USERRA requires that, in calculating pension benefits, the employer must take into account compensation that the service member would likely have earned had he not been performing military service, including but not limited to overtime hours and night differential pay. The class action suit alleges that the City only took into account the service members' base pay rates in calculating their pension benefits, thereby unlawfully reducing those benefits in violation of USERRA. Specifically, the City unlawfully calculates pensionable earnings of NYPD officers called to active military duty by relying exclusively on their base pay rate, instead of including overtime or night shift differential compensation they would have earned had they not been on active military duty, as required by USERRA. As a result, service members are being deprived of pension benefits they would have been reasonably like to receive, but for their military service. The class action seeks to require the City lawfully to calculate pensionable earnings of all current and former NYPD officers who were called to perform active military service after September 11, 2001, or who will be called, to recalculate the pension benefits they are currently receiving, and to remit any additional pension benefits owed as a result of performing these recalculations.   Procedurally, the lawsuit comes in the form of an amended Complaint to three separate lawsuits previously filed by the U.S. Attorney's Office on behalf of three NYPD officers who were called to active military service during the time they worked for NYPD, and whose pension benefits were unlawfully calculated. The judge permitted the United States to amend one of those complaints to raise allegations on behalf of a class of similarly situated individuals. Any current or former NYPD officer who believes that his pension benefits may have been improperly reduced based on military service should call the U.S. Attorney's Office Civil Rights Unit Complaint Line at 212.637.0840.  

5. ARBITRATOR'S REFORMATION OF CBA NOT AMENDMENT OR MODIFICATION: The American Federation of State, County, and Municipal Employees, Local 1184, AFL-CIO appealed a final judgment that granted a motion for rehearing of an order vacating an arbitration award and confirming an award in favor of Miami-Dade County Public Schools. The case presented the following legal issue:   Where a mutual mistake exists between the parties to an agreement, does reformation of that agreement constitute a modification?   The court answered that question in the negative, and affirmed the trial court's order confirming an arbitration award in favor of the School Board. Apparently after the parties had negotiated a Collective Bargaining Agreement, the School Board inadvertently attached the wrong salary schedule, which would have required the School Board to pay approximately $9 Million more than it had budgeted for during the period covered by the CBA. The arbitrator found that, although the School Board was responsible for preparing the mistaken documents, the Union knew or should have known the salary schedules were grossly above what the parties had agreed to during bargaining, and, accordingly, determined that the salary schedules should be reformed to reflect the actual intent of both parties. The Union brought an action in circuit court to vacate the arbitration award, asserting the arbitrator exceeded his jurisdiction under the express provisions of the CBA: the arbitrator shall limit his decision to application and interpretation of the Agreement, and the arbitrator shall have no right to amend, modify, nullify, ignore or add to provisions of the Agreement. The circuit court affirmed the arbitration award.   On appeal to the Third District, the court affirmed, finding that the arbitrator did not exceed his jurisdiction violation of Section 682.13(1), Florida Statutes. Thus, neither a trial court nor a district court of appeal has authority to overturn the award. The case presented a classic example of mutual mistake. A mistake is mutual when the parties agree to one thing and then, due either to a scrivener's error or inadvertence, express something different in the written instrument. The Supreme Court of Florida has acknowledged generally that reformation of a written instrument in no way alters the agreement of the parties.   Instead, the reformation only corrects the defective written instrument so that it accurately reflects the true terms of the agreement actually reached. Remember the facts, Folks: a different ruling would have cost the School Board an extra $9 Million. Duh. American Federation of State, County, and Municipal Employees, Local 1184, AFL-CIO v. Miami-Dade County Public Schools, Case No. 3D11-1572 (Fla. 3d DCA August 1, 2012).

6. INDIANA REALLY, REALLY CUTS RETURN ASSUMPTION: Indiana Public Retirement System adopted the lowest investment return assumption of any major public plan, lowering it to 6.75% from 7%, according to It also plans to transfer $360 Million from its $2 Billion in reserve assets to bolster the pension plans the $25.6 Billion INPRS oversees.   That transfer is in addition to expected pension contributions of $2.3 Billion in the current fiscal year. INPRS is the first among the 126 largest public retirement systems to drop its assumed rate below 7%. INPRS actual investment return was a respectable 5.74% for the 10 years ended June 30, 2012.

7 PENSIONS AND RETIREMENT PLAN ENACTMENTS IN 2012 STATE LEGISLATURES: National Conference of State Legislatures has released its report summarizing selected state pensions and retirement legislation enacted in 2012.   Its goal is to help researchers and policy makers know how other states have addressed issues that could arise in any state.   In keeping with that goal, the report excludes most clean-up legislation, cost-of-living adjustments, administrative procedures and technical amendments. So far in 2012, seven states have made major structural changes in state retirement plans:

  • Alabama will close its existing retirement plan for most state and local government employees on December 31, 2012, and replace it with a new defined benefit tier that includes higher age and service requirements for retirement, a longer period for calculating final average compensation, a lower multiplier for calculating benefits and, uniquely in 2012, a reduced mandatory employee contribution.
  • Kansas concluded a two-year reconsideration of its defined benefit retirement plans for state, school and local public employees with new statutory provisions that include generally higher contributions from current employees (or a reduction in benefits) and a cash balance plan for most new state, school and local public employees hired on or after January 1, 2015.
  • Louisiana will close its defined benefit plan for most state government employees and employees of higher education on July 1, 2013, and replace it with a cash balance plan.
  • New York closed its latest retirement tier for state and local employees, including most New York City employees, on March 31, 2012, and replaced it with a Tier 6 plan that increases the age of retirement, and provides a longer period for calculating final average compensation and a lower multiplier for calculating benefits.   The legislation will increase employee contribution requirements with an unusual plan of scaling contributions to the amount of employees' salary.  
  • South Carolina enacted legislation to increase employee contributions for current and new employees, increase age and service requirements for retirement with full benefits, provide a longer period for calculating final average compensation, cap future cost-of-living increases and terminate a deferred retirement option plan for general employees and teachers.
  • Virginia enacted legislation to require local government plan members to begin contributing 5 percent of salary to retirement plans, contributions that for many years have been picked up by employers.   Local government employers will provide an offsetting salary increase.   Separate legislation will close defined benefit plans for most state and local government employees at the end of 2013, and replace them with a hybrid plan with defined benefit and defined contribution components. Legislation also limited future cost-of-living increases.  
  • Wyoming created a new defined benefit plan tier applicable to state and local government employees as of August 31, 2012. The new tier includes higher age and service requirements for retirement, a longer period for calculating final average compensation and a lower multiplier for calculating benefits. Contribution requirements are unchanged.   Separate legislation provides that cost-of-living adjustments will be granted in the future only when the retirement system is fully funded.

8. CAPITOL IDEA: Want to dig up some data on the words your legislators use every day? Well, Capitolwords is a site which offers that service, at The site is a project of Sunlight Foundation, a non-partisan non-profit that uses cutting-edge technology and ideas to make government transparent and accountable. (P.S., if you figure out how the site works, tell us.)

9. GET ON YOUR FEET, GET UP AND MAKE IT HAPPEN: Restricting the amount of time spent seated every day to less than 3 hours might boost the life expectancy of U.S. adults by an extra 2 years, according to an analysis of published research in the online journal BMJ Open.   And cutting down television viewing to less than 2 hours every night might extend life by almost 1.4 years, the findings suggest.   Several studies have linked extended periods spent sitting down or watching TV to poor health, such as diabetes and death from heart disease or stroke. Researchers used data collected for the National Health and Nutrition Examination Survey to calculate the amount of time U.S. adults spent watching TV and sitting down on a daily basis.   Researchers came up with a population attributable fraction -- an estimate of the theoretical effects of a risk factor at a population, rather than an individual level -- to calculate the number of deaths associated with time spent sitting down.   The population attributable fractions for deaths from all causes linked to sitting time and TV viewing were, respectively, 27% and 19%.   The results of life table analyses indicate that cutting the amount of time spent sitting down every day to under three hours would add an extra two years to life expectancy.   Similarly, restricting time spent watching TV to under two hours daily would extend life expectancy by an extra 1.38 years. But here is the key:   the authors emphasize that their analysis assumes a causal association rather than proving that there is one.   BMJ Open is an online-only, open access general medical journal, dedicated to publishing medical research from all disciplines and therapeutic areas. Get on your feet -- stand up and take some action.

10. I SWEAR I DID NOT SWEAR: Employees who make frequent contributions to the swear jar may lose more than loose change; they may lose out on a promotion. Sixty-four percent of employers said that they would think less of an employee who repeatedly uses curse words, and 57 percent said they would be less likely to promote someone who swears in the office.   The nationwide survey, from CareerBuilder, included more than 2,000 hiring managers and 3,800 workers across industries and company sizes. Half (51 percent) of workers reported that they swear in the office. The majority of those (95 percent) said they do so in front of their co-workers, while 51 percent cuss in front of the boss.   Workers were the least likely to use expletives in front of senior leaders (13 percent) and their clients (7 percent).   Comparing genders, men are more likely to report swearing at work (huh?) -- 54 percent compared to 47 percent of women.   Employers are inclined to think less of an employee who swears at work, for a variety of reasons.   Most (81 percent) believe that use of curse words brings the employee's professionalism into question. Others are concerned with the lack of control (71 percent) and lack of maturity (68 percent) demonstrated by swearing at work, while 54 percent said swearing at work makes an employee appear less intelligent.   While many employers may think less of an employee who curses too much in the office, one in four employers (25 percent) admitted to swearing at employees. Roughly the same amount (28 percent) of workers said they have sworn at co-workers.   Among top markets in the U.S., workers in the nation's capital were most likely to report that they swear at work, with Denver and Chicago rounding out the top three.   Who gives a damn?

11. IRANIANS DON'T NEED NO STINKIN' DODD-FRANK: That's the title suggested by a reader who sent us the following story from Reuters. An Iranian court has sentenced four people to death for a billion-dollar bank fraud that tainted the government of President Mahmoud Ahmadinejad. Iranians, hit by sanctions and soaring inflation, were shocked by the scale of the $2.6 billion bank loan embezzlement that was exposed last year and by allegations it was carried out by people close to the political elite or with their assent. Of the thirty-nine people tried for fraud -- the largest in the Islamic Republic's history -- four were sentenced to hang, two people were sentenced to life, and others received jail sentences of up to 25 years.   In addition to jail time, some were sentenced to flogging, ordered to pay fines and banned from government jobs. Ahmadinejad has rejected claims that the investment company at the heart of the scandal has links to his closest aide, a powerful figure who has become the prime target for the president's adversaries within the hardline ruling elite. If you say so.

12. "NEED A PRICE CHECK IN AISLE 7": A Kansas man and woman were arrested after police say they stole a tube of lube and got busy in the middle of a Walmart store. According to, Julian Call, 22, and Tina Gianakon, 35, were booked into jail on charges of theft and lewd and lascivious behavior. Police say Call se.xually fondled Gianakon in front of other customers, who then reported the incident from the store in Hutchinson, Kansas. The couple also reportedly shoplifted several items, including a tube of K-Y Jelly. Police say the couple was cooperative, and, incredibly, appeared to be sober. They did not steal any peanut butter.

13. GOLF WISDOMS: No one with funny head covers ever broke par (except for Tiger Woods).
14. PUNOGRAPHICS: Did you hear about the cross-eyed teacher who lost her job because she couldn't control her pupils?
15. QUOTE OF THE WEEK: "Always get married early in the morning. That way, if it doesn't work out, you haven't wasted a whole day." Mickey Rooney

16. ON THIS DAY IN HISTORY: In 1974, Richard Nixon resigns presidency, Vice President Gerald Ford becomes 38th President.  

17. 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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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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