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Miami

Cypen & Cypen
NEWSLETTER
for
SEPTEMBER 7, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. SIGNIFICANT VARIATIONS IN SPECIAL CALCULATIONS OF 2005 FLORIDA PREMIUM TAXES:

According to a memorandum from the Division of Retirement, Municipal Police Officers’ & Firefighters’ Retirement Trust Funds Office, significant variations in premium tax distributions sometimes occur when insurance companies file amended or late returns for prior years. This circumstance has the effect of inflating amounts received in one year and diminishing amounts received in a later year, as the “correction” is made in a subsequent distribution. A city should keep this fact in mind if it received a significantly higher or lower premium tax amount this year as compared to last year. This year the overall increase in gross amounts for firefighters’ premium taxes amounted to 15.67%, and the police officers’ premium taxes showed an increase of 3.11%. With implementation of the Insurance Premium Tax (IPT) database, Section 185.085(6), Florida Statutes, requires a proportionate calculation this year and for the next two years of police premium taxes. A similar calculation is not required for firefighter premium taxes. Inasmuch as there was an increase in this year’s distribution amount for police as compared to the amount collected for calendar year 2004, each participating municipality shall receive, at a minimum, an amount equal to last year’s distribution. The funding of guaranteed minimum distributions is provided by allocating the aggregate shortfall amount cities showing increases in the current year and subtracting from each the amount necessary to meet the minimum distribution for cities showing a decrease. Any new city electing to participate after January 1, 2005 is not subject to the proportionate share calculation, and shall receive the total amount reported by the insurance companies. Calculation details are provided on the Division’s website (www.myflorida.com/frs/mpf) under new updates. Visitors to that site can also click on “statistics,” and scroll down to premium tax distribution information for 2005. Anyone wishing to receive a detailed listing that shows each insurance company reporting premiums sold within a particular corporate or fire control district as compared to last year’s amount, may contact the police & fire office, toll free at 877.738.6737.

2. NUMBER OF AMERICANS WITHOUT HEALTH INSURANCE INCREASES:

The percent of Americans without health insurance hit 15.9%, or roughly 46.6 million people, in 2005, up from 15.6% of the population in 2004, or about 45.3 million people, according to the Census Bureau. Yikes.

3. BAY CITY, MICHIGAN, TRUSTEES IMMUNE FOR UNAUTHORIZED INVESTMENT:

Bay City Police and Fire Retirement System Board of Trustees invested approximately 20% of the system’s assets in a single entity. Michigan’s Public Employee Retirement System Investment Act limits investments to smaller percentages of a system’s total assets. Accordingly, Michigan Attorney General concluded that the Board’s investment was unauthorized under PERSIA. Several retirees commenced an action, asserting a breach of fiduciary duties against the trustees. The trial court denied the trustees’ motion for summary disposition on the basis of governmental immunity. The court explained that, although the allegation of violation of statute is one of ordinary negligence only, not gross negligence, the retirees had pleaded in avoidance of governmental immunity by asserting the trustees had authorized the investment of a quantity of funds that greatly exceeded the amount the Board was statutorily allowed to invest in any one investment, and could not have reasonably believed they were authorized to do so. On appeal, the trustees asserted that they were entitled to governmental immunity because they reasonably believed their actions were within the scope of their governmental authority, and, alternatively, that the Board is a quasi-judicial body that is entitled to quasi-judicial immunity. In an unpublished opinion, the Michigan Court of Appeals reversed: fire fighters’ and police officers’ retirement systems’ boards of trustees are legislatively defined as quasi-judicial bodies, whose “actions,” generally, are reviewable only by writ of certiorari. Because the legislature has determined that such trustees constitute a quasi-judicial body, they are entitled to the benefits of quasi-judicial immunity. The court was unpersuaded that PERSIA adopted the same standard of care required of investment fiduciaries under the federal Employee Retirement Income Security Act, and, that, therefore, PERSIA constitutes an exception to any governmental immunity otherwise granted public employee retirement boards. Talk about dodging a bullet! Bay City Police and Fire Retirees v. Bay City Police and Fire Retirement System Board of Trustees, Case No. 267018 (Mich. App., August 24, 2006).

4. FMLA DOES NOT GUARANTEE JOB:

Family and Medical Leave Act provides covered employees with two types of rights and protections. Covered employees who take leave of absence for family and medical reasons qualify for numerous substantive entitlements. Specifically, these employees are entitled to a total of 12 workweeks of leave during any 12-month period for family- and health-related matters, and have a right to be restored by the employer to the position of employment held by the employee when the leave commenced or to an equivalent position with equivalent employee benefits, pay and other terms and conditions of employment. Leave taken under FMLA shall not result in loss of any employment benefit accrued prior to the date on which the leave commenced. However, a restored employee is not entitled to any right, benefit or position of employment other than any right, benefit or position to which the employee would have been entitled had the employee not taken the leave. In a case of first impression in the circuit, the United States Court of Appeals for the Fourth Circuit has ruled that FMLA does not provide a covered employee with an absolute right to be restored to his previous job after taking approved leave. Every other circuit that has considered a similar case has concluded that FMLA provides an employee only a limited right to restoration to his previous employment position. In particular, an employer can avoid liability under FMLA if it can prove that it would not have retained an employee had the employee not been on FMLA leave. Although the statutory language may be ambiguous on the point, the Secretary of Labor has promulgated a regulation clearly resolving the question:

An employee has no greater right to reinstatement or to other benefits and conditions of employment than if the employee had been continuously employed during the FMLA leave period. An employer must be able to show that an employee would not otherwise have been employed at the time reinstatement is requested in order to deny restoration to employment. (29 C.F.R. §825.216-2005)

Yashenko v. Harrah’s NC Casino Company, LLC, Case No. 05-1256 (U.S. 4th Cir., April 27, 2006).

5. MID-YEAR ASSESSMENT OF SECURITIES CLASS ACTION CASE FILINGS:

Cornerstone Research has issued its Securities Class Action Case Filings, 2006 Mid-Year Assessment. In cooperation with the Stanford Law School Securities Class Action Clearinghouse, Cornerstone Research identified securities class action filings as of July 24, 2006. A sample includes 2,420 federal class action cases filed from the beginning of 1996 through June 30, 2006. Securities class action filing activity has decreased noticeably in the first half of 2006. In total, there were 61 “traditional” Securities Class Action Filings in the first half of 2006, a 45% decrease compared to the 111 filings observed in the first half of 2005. This level is the lowest during a six-month period since 1996, the year immediately following adoption of the Private Securities Litigation Reform Act of 1995. On an annualized basis, the 2006 data suggests that approximately 123 companies will be sued this year. If this extrapolation turns out to be appropriate, then 2006 will display the lowest annual level of filing activity since 1996, and will represent a 31% decrease from the 179 filings in 2005, and a 36% decrease from the 1996-2005 average of 194 annual filings. Total market capitalization losses associated with filings in the first half of 2006 also decreased substantially from the already reduced levels observed in 2005. The annualized maximum dollar losses the first half of 2006 amounted to $255 Billion, a 44% decline from 2005, and the annualized disclosure dollar losses amounted to $45 Billion, a 55% decline from 2005. In the first half of 2006 there were three “mega” maximum dollar loss filings with a maximum dollar loss of $10 Billion or more and no “mega” disclosure dollar loss filings (disclosure dollar losses of $5 Billion or more). Distribution of the types of complaint allegations in the first half of 2006 remain similar to distribution observed in 2005, with two exceptions. First, the share of cases alleging GAAP violations increased from 45% to 67%. Second, a number of complaints alleged lack of internal controls, causing the “other” classification of accounting allegations to increase from 36% in 2005 to 66% in the first half of 2006. The fifteen-page report contains these findings, and others, in great detail.

6. WAKE UP AND SMELL THE COFFEE! DC PLANS ARE NOT WORKING:

A piece from Barclays Global Investors recognizes that defined contribution plans are not working, and suggests how to fix them. DC plans have emerged as the dominant mechanism for retirement saving in the United States, yet they are not working. Median balances at retirement are only $44,000; average balances, which give a large weight to higher income investors, are only $112,000 -- not nearly enough to retire on. There are many reasons that DC plans are functioning poorly. Participants are not contributing enough to their plans, or they are borrowing from them or spending their plan balances when they change jobs. Many are earning low returns while paying high fees. Then, once they retire, most participants have no strategy for generating income for the rest of their lives. To show how DC plans can be better managed, the piece first identifies the major problems with current practice, including the self-defeating behavior of participants as well as the problems caused by poor plan designed. The authors then identify the three components that are needed to work well in order that DC plans have a chance at being effective retirement vehicles: a contribution, or savings, component; an investment management component; and a payout component. The contribution component emphasizes automatic enrollment, as well as autoescalation (a plan by which the employee commits a part of future pay raises to retirement savings). The investment component focuses on offering premixed asset allocation funds that are on the efficient frontier by design, using “eye-level positioning” to get investors to pay attention to these offerings. The payout component involves strategies for converting assets to income, as well as for managing diversified investment portfolios at a lower, postretirement risk level. The piece concludes that all of these goals are achievable with existing technology. The solutions are not perfect, but employees saving for retirement will be much better with them than with current practice. It is just a matter of using them. The solutions will require some effort, but plan sponsors and participants have plenty of reasons to expend that effort. Lots of luck, Charlie.

7. IN A TWIST, IRS TO AUDIT BIG FOUR AUDITOR:

Bloomberg News reports that PricewaterhouseCoopers, the world’s largest accounting firm, is being audited by Internal Revenue Service for potential violations of reporting its own taxes. IRS is evaluating timing of tax deductions, PricewaterhouseCoopers’ pension plan and how the firm moved profits between international units. IRS is expected to reach its conclusions by year end. The firm’s 2,000 U.S. partners could be personally liable for any back taxes. Additional taxes or penalties could damage reputations of the firm and of the industry, which has been under increased scrutiny since the 2001 collapse of Houston-based energy trader Enron and demise of its auditor, Arthur Andersen.

8. A NEW ROLE FOR THE GREAT COMMUNICATOR?:

Wearing a Ronald Reagan mask and a cape, a man strolled into a bank and told everyone to get down on the ground. Unfortunately, his mask obscured his vision and his cape got tangled in his gun, which fell to the ground. When he tried to make his escape, he found that his getaway car was blocked by delivery trucks, so he rammed his vehicle into the trucks. Understandably, that situation did not sit well with the drivers of the trucks, who started arguing with him, while he kept banging his vehicle against the trucks. Eventually, a dye bomb in the money bag exploded, so he finally got out, leaving his SUV, his mask, his gun and a 50 dollar bill behind. Who was that masked man?

9. QUOTE OF THE WEEK:

“Too many people overvalue what they are not and undervalue what they are.” Malcolm Forbes

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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