Cypen & Cypen
SEPTEMBER 1, 2011
Stephen H. Cypen, Esq., Editor
1. DB PLANS DELIVER BETTER BANG FOR THE BUCK: San Antonio Fire and Police Pension Fund, City of Austin Employees’ Retirement System and Houston Municipal Employees Pension System retained Pension Trustee Advisors, Inc. to compare the costs and benefits of a defined benefit plan to the costs and benefits of a defined contribution plan, applying data relevant to the subject plans. (A research paper in 2008 entitled “A Better Bang for the Buck” compared the costs and benefits of a typical DB plan with the costs and benefits of a typical DC plan, based on a hypothetical group of employees. See C&C Newsletter for August 21, 2008, Item 1.) Worries about retirement security abound. Governments are concerned about delivering on the promises they have made to their citizens and to their employees, as tax revenues shrink amid a weakening economy. In this environment, some have proposed replacing traditional DB pensions with 401(k)-type DC retirement savings plans in an effort to save money. The value of traditional DB pensions to employees is generally recognized: they provide a secure, predictable retirement income that cannot be outlived. But less well known is the value of a DB pension to an employer. Due to their group nature, DB plans possess “built-in” savings, which make them highly efficient retirement income vehicles, capable of delivering retirement benefits at a low cost to the employer and employee. These savings derive from three principal sources:
First, DB plans better manage longevity risk, or the chance of running out of money in retirement. By pooling longevity risks of large numbers of individuals, DB plans avoid the “over-saving” dilemma -- that is, saving more than people need on average to avoid running out of cash -- that is inherent in DC plans. Consequently, DB plans are able to do more with less.
Second, because DB plans, unlike the individuals in them, do not age, they are able to take advantage of the enhanced investment returns that come from a balanced portfolio throughout an individual’s lifetime.
Third, DB plans, which are professionally managed, achieve greater investment returns as compared with DC plans that are made up of individual accounts. A retirement system that achieves higher investment returns can deliver any given level of benefit at a lower cost.
Because of these factors, the report found that a DB pension plan can offer the same retirement benefit at substantially less cost than the cost of a DC retirement savings plan. Specifically, the analysis indicated that for workers in the three Texas DB plans that were studied, the cost to deliver the same level of retirement income ranged from being 39% to 44% lower than the cost of a DC plan. The analysis clearly demonstrated that DB plans are far more cost-efficient than DC plans. To achieve target retirement benefit that will replace 46% to 86% of average salary, the three DB plans will require contributions ranging from 7.3% to 20.1% of payroll, whereas the DC plan will require contributions almost twice as high, ranging from 12.0% to 35.7% of payroll. And due to effects of longevity risk pooling, maintenance of portfolio diversification and greater investment returns over the lifecycle, a DB plan can provide the same level of retirement benefits at 56% to 61% of the cost of a DC plan. So, what else is new?
2. PUBLIC PENSIONS NOT TO BLAME: In response to a recent San Gabriel Valley Tribune editorial, the president of the Los Angeles Police Protective League writes that the condition of public pensions in California is not a crisis, despite best efforts of pension foes and editorialists to portray it as such. Elements of the issue are a concern: curbing pension spiking, ensuring public workers contribute a fair share of pension costs and reducing pensions of a small number of public workers who have outsized retirement benefits. What the editorialists don't say is that all of these concerns are being addressed in California, quickly and responsibly at the bargaining table, in the Legislature and by public pension funds themselves. State worker pensions make up just some 3 percent of the state budget, and that percentage is falling as the amount state workers contribute to their retirement continues to rise. Where they once contributed 5 percent to 8 percent of income, they now pay 8 percent to 11 percent. Formulas for calculating pensions have been reduced, and stringent new rules are being established to eliminate abuses like spiking. In all, such changes -- made through collective bargaining -- have reduced state pension costs by some $600 Million over the past two years. The changes at the local level are equally dramatic. According to data kept by CalPERS, in more than 185 cities, counties and districts, public employees have agreed to increase their pension contributions, reduce formulas and lower public costs. The truth, though, is that most public pensions are very modest. The average CalPERS pension is about $2,200 a month, and half of all retirees draw pensions of $1,500 a month or less. Meanwhile, those seeking to cut public costs by cutting pensions should note that some 64 percent of CalPERS payments to pensioners in 2010 came not from taxpayers but from pension fund earnings on investment, which have averaged 7.9 percent annually over the last 20 years. Pensions paid to retirees by CalPERS in 2010 were $12 Billion, more than a three-to-one return over what taxpayers put into the fund that year. Those payments stimulated $26 Billion in total economic activity, and supported 93,000 jobs in California. There is a rising pension crisis in America, but it is not about public workers’ pensions, which are much more modest than public pension opponents would have everyone believe. The true focus of pension reform should be on the crisis of private sector pensions that have eroded at an alarming rate. This erosion allows public pension foes to play off the misery and frustration of private sector workers, who have seen their pension savings shrink to nothing in an economy that throws away workers. Less than 20 percent of private sector workers have secure pensions, a low point in a decline that has been steady for decades. Only in this firestorm can the modest pensions for teachers and other public employees look large by comparison.
3. FLORIDA RETAINS OUTSIDE COUNSEL FOR PENSION CASE: Naked Politics, a Miami Herald blog, says that following a suggestion from Governor Rick Scott, Alston and Bird has been hired to represent Scott and other state officials in a lawsuit challenging the state’s new pension law. The law requires state employees to contribute 3 percent of their paychecks to the state's general revenue fund to offset state contributions to the retirement plan. Several unions sued, arguing the payments are unlawful and unconstitutional. The contract, approved by the Department of Management Services, allows Alston and Bird, a law firm with no office in Florida, to charge up to $60,000 under an initial agreement. Attorney General Pam Bondi approved a total contract of $400,000 for attorneys fees and $100,000 for costs. Although rules generally limit attorney’s fees to $200 per hour, DMS received a waiver from Bondi to pay $495 an hour, “because the necessary legal expertise is not currently available on staff.” Well, here’s another nice mess you’ve gotten [us] into! (Trivia: Who is still widely recognized for that catch phrase?)
4. FIREFIGHTERS’ STATUTORY PRESUMPTION OF COMPENSABILITY MUST BE REBUTTED BY EVIDENCE OF NON-OCCUPATIONAL CAUSE: In a workers’ compensation appeal, a firefighter challenged an order of the Judge of Compensation Claims finding that his employer and its workers’ compensation carrier had introduced sufficient evidence to establish a non-occupational cause of his cardiac arrhythmia. The firefighter argued that testimony establishing that the cause of his condition was unknown was insufficient to demonstrate that the condition, in fact, had a non-industrial cause. The district court of appeal agreed, and reversed. There was no dispute that the firefighter established legal conditions for operation of the presumption in Section 112.18(1), Florida Statutes, rendering his cardiac arrhythmia work-related, and, thus, compensable under Workers’ Compensation Law -- unless sufficiently rebutted by introduction of evidence establishing a non-industrial cause. (The statute provides that any condition or impairment of health of any Florida firefighter caused by tuberculosis, heart disease or hypertension resulting in total or partial disability or death shall be presumed to have been accidental and to have been suffered in line of duty unless the contrary be shown by competent evidence.) Medical evidence accepted as credible by the JCC established that the sufficient cause of the firefighter’s condition was unknown; he could have developed the condition notwithstanding his occupation; and, “mechanistically,” the condition is caused by an electrical defect in the cells of the heart. From this evidence, the JCC concluded that the employer/workers’ compensation carrier had sufficiently established a non-occupational cause of the firefighter’s condition. By finding that the firefighter’s condition, which, by definition, is an electrical defect of the heart, was caused by a defect of the heart -- the cause of which is unknown -- the JCC devalued and eviscerated the legal presumption of compensability afforded by the statute. A determination of the physiological cause of a disease or medical diagnosis -- although perhaps helpful under some circumstances in determining the efficient, or legal, cause of a medical condition -- does not, without more, establish the legal cause of the condition, but rather, evades the issue altogether. Moreover, medical testimony accepted by the JCC as credible established that the efficient cause of the firefighter’s condition was unknown, based on the evidence presented, an empty set that precludes a contrary postulate. The employer/workers’ compensation carrier was required affirmatively to demonstrate non-work-related cause, not prove that there is no known cause. LeBlanc v. City of West Palm Beach, 36 Fla. L. Weekly D1860 (Fla. 1st DCA, August 23, 2011).
5. ONE-THIRD OF RETIREES WILL CONTINUE TO WORK: Four years from now, the median account balance of a defined contribution plan assets will reach $150,000, up from $100,000 today, a decent-sized nest egg by most standards, but a far cry from the $1 Million or more experts say is needed to sustain a retiree’s lifestyle and health care costs. Thus, according to Employee Benefit News, one-third of those “retiring” will continue to work, and a majority of senior workers will be saving a portion of their earnings for true old age, when they actually stop working. Although market turbulence over the past several months has been jarring, experts expect the industry to experience a period of relative calm over the next five years, a settling that investors and advisers both will welcome. Domestic equities are expected to appreciate, and the economy to grow slowly but steadily by an average of 1.4% a year. Eighty-three percent predict the Dow Jones Industrial Average will reach 14,000 by the end of 2015, surpassing the peak of October 2007!
6. U.S. QUAKE BOLSTERS CALLS FOR PUBLIC SAFETY WIRELESS NETWORK: Disruption of cell phone service by a rare U.S. East Coast earthquake has prompted renewed calls for Congress and regulators to provide a dedicated wireless network for emergency workers, msn.com reports. The 5.8-magnitude earthquake centered in Virginia shut federal government agencies some 90 miles away, and sent office workers into the streets, as tremors were felt as far as Canada. The Federal Communications Commission said it is assessing a significant disruption to cell service due to the quake, and will be looking at ways to improve communications during emergencies. All major cellular service providers reported higher call volumes and network congestion in affected areas, making it difficult to reach out to family and friends after the quake. A large percentage of first responders who rely on cellular data networks for some of their services would have experienced the same problem. Creating a nationwide mobile broadband network for emergency services is a key 9/11 Commission recommendation that has yet to be put into action as the 10th anniversary of the September 11, 2001 attacks approaches. The wireless network would allow firefighters, police and other first responders easily to communicate, but lawmakers and regulators have yet to reach a consensus on how to build, maintain and fund the network. Of particular contention is whether to allocate a highly sought-after segment of the 700 megahertz band of airwaves called D Block directly to public safety groups, or to auction it to commercial carriers that will be mandated to share it with first responders. Public safety groups have pushed for control of the D Block, which the FCC is currently under instruction from Congress to auction off, and used the earthquake to strengthen their case. The old, previous effort to auction D block for shared commercial use with public safety groups failed. (See C&C Newsletter for March 28, 2003, Item 2; C&C Newsletter for February 7, 2008, Item 3; C&C Newsletter for August 7, 2008, Item 6 and C&C Newsletter for August 28, 2008, Item 2.)
7. MORE PENSIONS USING ALTERNATIVES: An SEI Quick Poll shows a significant increase in the percentage of pension portfolios investing in alternatives when compared to the previous three years of polling. This year, 78 percent of pension executives reported their organization had some allocation to alternatives in the pension portfolio, compared to 51 percent in 2008, 53 percent in 2009 and 65 percent in 2010. However, while more plans in 2011 appear to be using alternative investments, allocations greater than 10 percent of the overall portfolio appear to have decreased in the past year. In 2010, 77 percent of respondents with more than $300 Million in pension assets allocated at least 10 percent of the portfolio to alternatives, compared to only 42 percent of pensions of the same size this year. Of executives surveyed, 46 percent said their plan’s funded status was 90 percent or better. When asked about the future direction of pension plans, 52 percent said even if the pension were fully funded they would not look to terminate the plan. The results also indicate a correlation between well-funded plans and the long-term strategy of the plan. Of those executives with fully-funded plans, 76 percent reported they would not terminate the plan if they could, compared to 65 percent of plans less than 80 percent funded who said they would terminate if they could.
8. FORMER STARBUCKS BARISTA STANDS TALL: Starbucks has agreed to pay a former employee $75,000 to settle a discrimination complaint alleging she was fired for her dwarfism (see C&C Newsletter for May 26, 2011, Item 4). Foxnews.com reports that Elsa Sallard had asked during her orientation for a stool or little stepladder to accommodate her small stature, a request that was disregarded. The U.S. Equal Employment Opportunity Commission sued Starbucks on Sallard’s behalf, alleging she was terminated over concerns she posed a danger to customers and employees. In addition to the cash settlement, Starbucks agreed to conduct training for managers in Americans With Disabilities Act compliance.
9. NO SOUP, RADIO: The Court of Appeals of Iowa has upheld denial of unemployment benefits to an employee who was found guilty of misconduct, as defined by law. Misconduct that justifies termination of an employee is not necessarily serious enough to justify denial of unemployment benefits. For purpose of determining eligibility for unemployment benefits, misconduct is defined as a deliberate act or omission by a worker that constitutes a material breach of duties and obligations arising out of such worker’s contract of employment. It is limited to conduct evincing such willful or wanton disregard of an employer’s interest as is found in deliberate violation or disregard of standards of behavior that the employer has the right to expect of employees or in carelessness or negligence of such degree of recurrence as to manifest equal culpability, wrongful intent or evil design or to show an intentional and substantial disregard of the employer’s interests or of the employee’s duties and obligations to the employer. (Pretty serious stuff, right?) Oh, what did the subject miscreant do to forfeit her unemployment benefits? Per company policy, she removed two-day-old soup from her employer’s store and took it out to the dumpster. The soup was what the company called “wasted,” because of its age, and could no longer be sold to customers. She put the soup in the garbage, and then immediately removed it and put it in her car to take home to feed to her dog. Company policy would have required her to pay $10 for the container of soup lying in the garbage. Really. Tompkins-Kutcher v. Employment Appeal Board, Case Nos. 1-459/11-0149 (Iowa, August 24, 2011).
10. JUDGE WHO DISTRIBUTED CONDOM-FILLED ACORNS CLEARED ON ETHICS CHARGES: FindLaw’s “Greedy Associates” blog says he may like to feed women condom-filled acorns, but Judge Isaac Stoltzfus of Intercourse (no comment here), Pa. is apparently still fit for the bench. Although he was cited for disorderly conduct for passing out the enriched acorns on state Capitol grounds, the state’s Court of Judicial Discipline agreed to dismiss misconduct charges against the jurist. However, he has been ordered to refrain from posing as the safe-sex squirrel in the future. Nevertheless, it is unlikely that the judge will be able to suppress his urges, as he has made thousands of condom-filled acorns over the years. He claims they are used in his courtroom to help raise awareness of safe sex and effectiveness of condoms against pregnancy and disease. The ethics court seemed to be only slightly peeved with the charges. Apparently, the legal community does not care whether a judge passes out condom-filled acorns, as long as such behavior is not part of the “decision-making process.” This guy may be crazy but the judges on the Pennsylvania Court of Judicial Discipline are completely nuts.
11. READER RESPONSE TO SPEEDO STORY: Our August 25, 2011 Newsletter had a story about a 61-year-old lifeguard who was fired for refusal to wear a Speedo bathing suit. The story quoted the four-decade employee: “I wore a Speedo when I was in my 20s. But come on. There should be a law prohibiting anyone over the age of 50 from wearing a Speedo.” Now, a reader writes about a family trip he recently took to Key West. While riding by the beach, the reader’s 9- year-old son exclaimed “oh, man, that’s just wrong!” When the reader asked what he was talking about, the son said “Dad, did you see that old guy wearing a Speedo?” (Considering the perspective of children, the old guy was probably 30.) And while we are at it, here are the answers to the two trivia questions in the August 25, 2011 Newsletter: (1) the 1950’s hit Speedo was sung by the Cadillacs and (2) “now, they often call me Speedo, but my real name is Mister Earl.”
12. PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.): You're never too old to learn something stupid.
13. QUOTE OF THE WEEK: “Until you make peace with who you are, you’ll never be content with what you have.” Doris Mortman
14. ON THIS DAY IN HISTORY: In 1995, Rock & Roll Hall of Fame opens in Cleveland, Ohio.
15. 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.
16. 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.