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Cypen & Cypen
NEWSLETTER
for
SEPTEMBER 30, 2010

Stephen H. Cypen, Esq., Editor

1. JUDGE ENJOINS WASHINGTON STATE FROM REPEALING “GAIN-SHARING” PROVISIONS FOR EMPLOYEES WHO WERE MEMBERS WHEN PROVISIONS WERE IN EFFECT:  Following a period of extraordinary returns on retirement fund investments, the Washington State legislature adopted a program that would divide a portion of investment returns that exceeded 10% over a four-year period between employers and members of certain Washington State retirement programs.  Legislation was passed in 1998 and 2000, which, in addition to adopting the “gain-sharing” program, included a “reservation of rights” by which the legislature reserved the right to terminate the gain-sharing program by amendment or repeal of the enabling legislation.  In a class action filed by Washington Education Association, the issue under consideration by the state judge was whether the legislation may lawfully terminate gain-sharing for employees who have been members of the plan during the time gain-sharing was in effect.  (There was no dispute about the legislature’s ability to terminate gain-sharing for members who first began participation after the legislature terminated gain-sharing.)  The judge granted plaintiffs’ motion for summary judgment and denied defendants’ motion, enjoining the Department of Retirement Systems from withholding gain-sharing benefits to those employees who were covered by the plan during the time gain-sharing was in effect and prior to its withdrawal by the legislature.  Public sector retirement benefits enjoy a constitutionally-protective status: an employee who accepts a job to which a pension plan is applicable contracts for a substantial pension and is entitled to receive the same when he has fulfilled the prescribed conditions.  His pension rights may be modified prior to retirement, but only for the purpose of keeping the pension system flexible and maintaining its integrity.  To be sustained as reasonable, alterations of an employee’s pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan that result in disadvantage to employees should be accompanied by comparable new advantages.  Here, there was nothing inherent in gain-sharing that has been shown to negatively affect retirement system flexibility.  To the contrary, gain-sharing was designed as a flexible tool to recognize and equitably to share extraordinary returns on pension investments; to appeal to a wider range of potential members, specifically those who may come into covered employment for a shorter time than would allow full retirement.  Further, nothing in the record supported a finding that repeal of gain-sharing was necessary to maintain integrity of the system.  Finally, an earned pension right, such as gain-sharing for covered employees, may not be removed without adding counterbalancing benefits.  While some benefits were added when gain-sharing was removed, the record would not support a finding that those added benefits meet the standard of “counterbalancing.”  The so–called reservation of right to terminate was unavailing: even though an employer has reserved the right to amend or terminate the plan, once an employee, who has accepted employment under such plan, has complied with all conditions entitling him to participate in such plan, his rights become vested, and the employer cannot divest the employee of his rights thereunder.  Washington Education Association v. Washington Department of Retirement Systems. Case No. 07-2-17203-3 (Wash. Sup. September 9, 2010.)

2. NEW STUDY FINDS PUBLIC WORKERS EARN LESS THAN PRIVATE SECTOR WORKERS, EVEN FACTORING IN BENEFITS:  With unemployment in the region lingering at record levels and job security a wistful memory for many, it is easy to look for scapegoats.  Thus, a familiar refrain--government workers are overpaid and our tax dollars are going toward outsized benefit and salary packages—has returned.  But as with most scapegoating, there is not much truth to the accusation: the reality is just the opposite.  Once age and education are factored in, state and local workers actually earn less, on average, than their private-sector counterparts.  The wage penalty for state and government workers in New England is close to 3%.  In a new study, “The Wage Penalty for State and Local Government Employees in New England,” the Political Economy Research Institute at the University of Massachusetts Amherst and the Center for Economic Policy Research demonstrate that the average state or local government worker does earn higher wages than the average private-sector worker, but only because they are, on average, older and substantially better educated.  The higher average wage in the public sector means that the teachers, engineers, accountants and others who are running government offices, schools and public services in New England are more experienced than highly trained, on average, than workers in the private sector. Despite these qualifications, their pay is on average lower than their private counterparts.  Another way to look at it is that given workers of the same age and same level of experience, a public sector worker earns less than a private sector worker.  Critics of public workers sometimes claim that the real pot of gold is in the benefits packages—that public workers receive a far more generous insurance, leave and retirement benefits than private workers.  And while state and local workers on average do indeed receive more valuable benefits than private-sector workers, the difference only reduces the wage penalty for the average state and local and government worker.  The better benefits packages are not better enough to offset the lower base pay.  The entire 18-page working paper is available at www.peri.umass.edu.

3. DISPITE COURT ORDER, NEW HAMPSHIRE RETIREMENT SYSTEM WILL NOT RELEASE DATA:  Similar to the situation in Ohio (See C& C Newsletter dated September 2, 2010, item 4), the New Hampshire Retirement System is refusing to release names of the state’s top pension earners.  The (Manchester, NH) Union Leader reports that a state judge has ordered the retirement system to comply with a right-to-know request filed by that newspaper for the names of the 500 state retirement system members who received the highest annual pension payments in 2009 and the amounts of such payments.  A judge found that all payments made to retired state employees are subject to mandatory disclosure.  For its part, the system filed a motion to reconsider and a motion to stay, saying it has a legal obligation to protect privacy of individuals who are entitled to privacy.  The judge dismissed the argument that the right-to-know law does not apply to retirees because they are no longer employees. 

4. FOLLOW-UP ON VALLEJO, CA, BANKRUPTCY: In an interview on August 20, 2010, Vallejo bankruptcy attorney Robert McConnell goes from one judicial or legislative topic to another, discussing the past, present and future of the City of Vallejo’s Chapter 9 Bankruptcy (See C & C Newsletter for June 10, 2010, item 1). The entire one-hour video interview, at http://www.ibvallejo.com/index.php?option=com_content&task=view&id=933, is well worthwhile. 

5.  IRC DOES NOT SHIELD CITY EMPLOYEES FROM MANDATORY VICTIMS RESTITUTION ACT PENSION GARNISHMENT: Two employees were convicted of defrauding the City of New Orleans.  At sentencing, the federal district court determined that the city had suffered an injury compensable under the Mandatory Victims Restitution Act, and ordered the employees to pay over $1 million jointly and severally, in restitution.  After judgment was entered, the United States moved for writs of garnishment under the Federal Debt Collection Procedures Act, seeking seizure of the employees’ interest in their pensions to satisfy the restitution order.  The Louisiana Sheriffs Pension and Relief Fund answered the writs, stating that DeCay (real name) was eligible for an immediate lump-sum withdrawal of $78,000 and that Barre was currently receiving a month pension benefit of about $2,500.  LSPRF asserted that the pension benefits were exempt from seizure under Federal and Louisiana Law, and that enforcement of the writs against it as garnishee would violate the Tenth Amendment to the U.S. Constitution.  On appeal by the employees and LSPRF, the U.S. Fifth Circuit Court of Appeals affirmed the garnishment order, but limited the United States to garnishing 25% of Barre’s monthly pension benefit.  Because the lower court found the City’s injury to be compensable under MVRA, the Tenth Amendment theory and the Internal Revenue Code, Section 401a(13) were overridden by MVRA.  However, the Consumer Credit Protection Act limited garnishment of monthly benefits to 25%.  United States of American v. DeCay, Case No. 09-30218 (U.S. 5th Cir. September 20, 2010).

6.  FIREFIGHTER’S MISCONDUCT IN BANKRUPTCY CASE BARS TRUSTEE FROM COLLECTING JUDGMENT:  Lubke, an ex-firefighter, obtained a $1 million verdict against the City of Arlington, Texas, pursuant to the Family Medical Leave Act.  While that case was pending on appeal, Lubke and his wife filed a Chapter 7 bankruptcy case, but omitted the pending $1 million judgment from his sworn statements and bankruptcy filings.  He obtained a discharge of $300,000 in debt, while creditors were led to believe that his was a “no asset” case.  The principal question in the current appeal was whether judicial estoppel should prevent not only Lubke but his bankruptcy trustee from collecting the judgment against the city.  Under all facts and circumstances, the U.S. Fifth Circuit Court of Appeals concluded that to protect integrity of judicial processes, judicial estoppel barred the trustee from collecting the judgment.  Not to uphold judicial estoppel in this instance would send debtors the message they should consider disclosing personal assets only if they are caught concealing them.  Reed v. City of Arlington, Case No. 08-11098 (U.S. 5th Cir. September 16, 2010).

7.  (SOME) NEW YORK PENSION FUND INVESTMENTS WILL STAY LOCAL:  Although investments of the state public pension fund are scattered worldwide, New York State Comptroller Thomas P. DiNapoli noted, investing in New York businesses is part of an equity program that is designed to help generate jobs and private sector growth within the state.  A report from mpnnow.com indicates the fund will consider investing in businesses that commit to staying in New York.  There is $1 billion available in the program, about half of which has already been allocated to start-ups, expansions and relocations.  Another program, the New York Business Development Corporation, makes loans to small businesses, including those that may not be eligible for a bank loan. 

8.  DON’T IGNORE POSITIVES OF PUBLIC PENSION FUNDS:  Writing in vindy.com, a local educator is disturbed at the obvious negative statements focusing on Ohio’s Public Retirement System by the state’s news media.  The writer’s career began in 1977 with a meager salary of $9,200: others before him earned even less.  While others of his generation chose to work in factories or other college-educated careers at double and triple the salary educators received, he accepted his “unfortunate” situation.  His acceptance of this plight was knowing one day there would be a decent retirement for his wife and him, and it would come from one of the oldest, if not the oldest, and finest state teachers retirement fund in the country.  It is abhorrent to see the negative treatment aimed at retirement funds of the police, fire, highway patrol and welfare workers, who put their lives on the line everyday.  Here are some facts the writer would like to share with the public:

  • In 2009, 130,000 retirees received benefits from the State Teachers’ Retirement System, of which 109,000 still live and spend income in the state.
  • In 2006, five public pension plans paid out $8.3 billion to retirees, helping to drive the state economy.
  • In 2006, said systems paid $4.3 billion in income to 79,000 job holders working for the retirement system.
  • In 2006, another $703 million in taxes was paid by retirees and beneficiaries to the state. 
  • In 2008, management costs for STRS were 24 cents per $100 of assets, while costs for 401(k) plans cost $1 per $100 of assets.

And do not forget those who work in the private sector and have accumulated the necessary quarters for Social Security are financially penalized for the decision to be fruitful workers in both the public and private sectors. 

9.  FDIC PROPOSES RULES ON TEMPORARY UNLIMITED DEPOSIT INSURANCE COVERAGE:  The Federal Deposit Insurance Corporation Board of Directors has approved issuance of a proposed rule to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide depositors at all FDIC-insured institutions unlimited deposit insurance coverage on noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012.  Two years ago FDIC instituted a program providing unlimited protection for noninterest-bearing transaction accounts, and found it to be highly successful in providing stability at those institutions during one of the most severe economic downturns in our history.  The Dodd-Frank provision is different from FDIC’s program, but continues the purpose of that program as the country emerges from economic crisis.  FDIC will create a new temporary deposit insurance category for noninterest-bearing transaction accounts.  Such accounts are primarily checking accounts used by businesses for payrolls, accounts payable and other purposes.  Unlike FDIC’s voluntary Transaction Account Guarantee Program, which will expire at the end of this year, the Dodd-Frank provision will apply at all FDIC insured institutions, and will cover only traditional checking accounts that do not pay interest.  Note to lawyers: starting January 1, 2011, your Interest on Lawyer’s Trust Accounts, currently protected under the TAG Program, will no longer be eligible for unlimited guarantee. FDIC will be accepting comments on the proposed rule through October 15, 2010. 

10. EMPLOYEE’S COMMON LAW CLAIM FOR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS BY SUPERVISOR NOT SUBJECT TO EXCLUSIVE REMEDY OF WORKERS’ COMPENSATION:  In an action for sexual harassment and discrimination, Blumenfeld alleged that her supervisor at Qualcomm, Inc. subjected her to unwelcome sexual comments, inappropriate touching and battery.  Qualcomm filed a motion for summary judgment, asserting that (1) the evidence showed the conduct was not unwelcome, as Blumenfeld regularly participated in the same kind of conduct with the supervisor and others, never complained about the supervisor’s conduct and stated she enjoyed working for him; (2) she could not show the supervisor’s conduct was based upon her gender, as the supervisor engaged in similar conduct with males he supervised; (3) because she failed to complain about the supervisor’s conduct, her damages claims we barred by the doctrine of “avoidable consequences;” (4) her discrimination claim was not viable, as she could not show she suffered any adverse employment action because she remained employed at Qualcomm; and (5)  her common law claims were barred by the exclusivity provisions of the workers’ compensation system.  The trial court granted Qualcomm’s motion, finding as a matter of law that Blumenfeld could not prevail on any of the asserted grounds.  (Based upon this ruling, the trial court was not required to reach Qualcomm’s “avoidable consequences” defense.)  On appeal by Blumenfeld, the appellate court concluded that the evidence presented by Blumenfeld, construed in the light most favorable to her, created a triable issue of fact as to both whether the supervisor’s conduct was unwelcome and whether it was directed at her because of her gender.  The appellate court also concluded that because Blumenfeld’s claim for harassment was viable, her common law claim for intentional infliction of emotional distress was not subject to the workers’ compensation system.  Such claim, if based upon the employer’s harassment and discrimination, is founded upon actions that are outside the normal part of the employment environment.  Blumenfeld v. Qualcomm, Inc., Case No. D055441 (Cal. App 4th September 23, 2010) (unpublished).

11. NEW YORK BAR SAYS LAWYERS MAY COMB SOCIAL MEDIA FOR DIRT:  The New York Bar Association said it is ethical for lawyers to sift through social networking websites to collect damaging information on opposing parties in lawsuits, according to The Associated Press.  The 77,000- member association said the explosion in the use of networks like Facebook and MySpace raises new legal questions about privacy rights.  The group’s Committee on Professional Ethics concluded that attorneys in litigation can access the public pages of another party’s site to obtain information about that person, as long as it is accessible to all members of the network.  Obtaining information about a party available on Facebook or MySpace is similar to obtaining information that is available in publicly-accessible online print media, or through a subscription research service such as Nexis, which is plainly permitted.  However, “friending” is prohibited; that is, using deception to be accepted on to someone’s private contact list in order to gain access to otherwise non-public information. 

12. AMERICA’S FAILED 401(K) EXPERIMENT:  Writing in huffingtonpost.com, Lee Saunders, Secretary-Treasurer, AFSCME, has joined an ever-growing crowd assailing our country’s failed 401(k) experiment.  While unfunded liabilities in many public retirement funds have received an inordinate amount of attention, the larger retirement deficit of most Americans is not generating the level of concern that it deserves.  Individuals who have been left on their own to save for retirement in 401(k) accounts face challenges that are not being met.  As a result of the financial crash that led to the worst economic crisis since the Great Depression, the retirement savings of most baby boomers—already inadequate—were reduced to levels that may create genuine impoverishment as the boomers retire and enter their 70s.  Because 401(k) accounts are rarely professionally managed, individuals are often exposed to excessive risk.  When the market goes bad, individual investors are hit the hardest.  Many Americans with 401(k) accounts lost one-third to one-half of their “nest-egg” when the equity markets collapsed in 2008 and 2009.  Because most boomers are now well over 50 years of age, they have little time to accumulate adequate retirement savings.  Rather than focusing on the real problems facing most future retirees, much of the media has been focusing instead on problems facing public retirement funds.  While the funding levels of some of these plans will present real challenges in the future, the problems can be resolved over a period of 30 years under generally accepted accounting rules.  In addition, the combined deficit in our major state and local government retirement systems represents less than 2% of the total state and local government spending over the coming 30-year period.  When one considers that many states and local government budgets have been cut by 10% to 40% over the past three fiscal years, it is not too difficult to see how governments can rebuild their pension funds once the economy recovers and tax revenues return to more normal levels.  Most government pension funds have 70- to 75% of assets necessary to provide promised benefits.  On the other hand, the median 401(k) balance for workers who have had consistent access to such an account was just $43,700 at the end of 2008.  But, most employers do not offer such access, and many workers do not have the ability consistently to save.  So, the median account balance of all 401(k) accounts is less than $13,000, barely a fraction of what is needed for a secure retirement.  In aggregate, the gap between what Americans have saved and what they will need in retirement has been calculated at $6.6 trillion.  The contrast is clear:  while public pensions have decades to cover their relatively small deficit, many individuals must accumulate sufficient savings in little more than a decade.  Given our current financial straits, this feat may be impossible.  So, what can be done?  First, we need to recognize that our current retirement programs, based on individual accounts such as 401(k) plans, are a failed experiment.  Instead, we must investigate policy options that combine portability features of 401(k) plans with professional investment management, long term asset growth strategies, shared risk and guaranteed income streams that make traditional pension plans so efficient.  Second, we need to stop inflicting unnecessary damage to our frail retirement systems.  Rather, we simply need to allow pension plans to function as intended, with the reliance on long-term growth strategies to weather the ups and downs of an increasingly volatile-investment environment.  At the end of the day, our traditional pension systems will remain strong and will continue to be the cornerstone of retirement security for those Americans fortunate enough to participate in such programs.  For these and other Americans, Social Security will almost always be the bedrock of a secure retirement.  But, for the tens of millions who must rely on Social Security alone, more must be done to help them save in order to live out their elderly years in dignity.  The sooner we have a serious conversation about this issue, the better.

13. ALL PUNS INTENDED:  Why is a person who plays the piano called a pianist but a person who drives a race car is not called a racist?

14. OXYMORON:  I distinctly remember forgetting that.

15.            AGING JOKES: He used to be tough and ruthless.  Now he’s rough and toothless.

16. FABULOUS RANDOM THOUGHTS:  If Barbie is so popular, why do you have to buy her friends?

17. QUOTE OF THE WEEK:  “It's so simple to be wise. Just think of something stupid to say and then don't say it.”  Sam Levenson

18. 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 mattrs 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. 

19. PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm.  Thank you. 


Copyright, 1996-2011, 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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