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Cypen & Cypen

Stephen H. Cypen, Esq., Editor

1.      MICHIGAN LAW REQUIRING 3 PERCENT EMPLOYEE COMPENSATION CONTRIBUTION TO FINANCE RETIREMENT HEALTH CARE FUNDING ACT IS UNCONSTITUTIONAL: Unions addressed wage provisions during collective bargaining negotiations with the state.  Ultimately, the parties agreed to a collective bargaining agreement that provided hourly wages would be frozen for fiscal year 2008-2009, increased by one percent for fiscal year 2009-2010 and increased by three percent for fiscal year 2010-2011.  The CBA was approved by the Civil Service Commission and transmitted to the Governor for incorporation into the state budget. The Legislature’s attempt to reject the three percent wage increase for 2010-2011 failed.  The Legislature thereupon enacted a law requiring a mandatory three percent contribution from compensation of active employee members from November 1, 2010 through September 30, 2013 into the public employee retirement health care funding act. The unions filed suit to challenge the reduction, alleging that it violated both the Michigan and United States Constitutions and contractual rights.  The trial court held that the law violated the Michigan Constitution, and the Michigan Court of Appeals affirmed. The Legislature attempted to, but did not succeed in, eliminating the three percent wage increase for fiscal year 2010-2011.  However, the Legislature faced a budget deficit and determined that it would balance the budget by reducing the “compensation” of state employees. The Legislature did not have the authority to act to eliminate the three percent wage rate increase by enacting the law in question. Among other things, the state contended that the will of the people must be examined with regard to the passage of the subject law, and the will of the people would approve of state workers being responsible for retirement costs. The people did not vote and ratify terms and conditions of the law. Rather, the will of the people was expressed in the Constitution. There, the people ratified a system of checks and balances where the Civil Service Commission has plenary authority over classified civil servants with a process in place for legislative override.  The people expect that that the system of checks and balances would be respected, and a review of Michigan law reveals that the Civil Service Commission and the executive branch have dealt cooperatively to address employee compensation in times of economic hardship.  The people can and should expect shared sacrifice; however, it cannot come at the expense of constitutional nullification, and the Legislature cannot expect to balance the budget on the backs of state workers. AFSCME Council 25 v. State Employees Retirement System, Case Nos. 302959, 302960, 302961 and 302962 (Mich. August 25, 2011).. 

2.      GLOBAL PENSION FUNDS REACH RECORD HIGH IN 2010: Towers Watson reports that total assets of the world’s largest 300 pension funds grew by 11% in 2010 (8% in 2009) to a record high of $12.5 Trillion and up by about $1.2 Trillion from last year’s figure. By individual region, Europe had the highest five-year growth rate of 11% compared to Asia (9%) and North America (1%); while the Latin American and African regions combined had a growth rate of about 15% (albeit from a low base).  The world’s top 300 pension funds now represent over 47% of global pension fund assets. Defined benefit assets grew by 8% in 2010, compared to 13% for defined contribution funds and 21% for reserve funds. DB funds account for 70% of all assets. The United States remains the country with the largest share of pension fund assets, accounting for 34%, although declining steadily over the last five year period. Japan has the second-largest market share of 19% (14% in 2007), largely because of the Government Pension Investment Fund, which at $1.4 Trillion is the largest pension fund in the world. 

3.      FLORIDA 2010 FUNDS VALUATIONS STATISTICS: Florida actuary, Foster & Foster, Inc. has released 2010 Comparative Analysis Schedules for the firm’s clients across the state. The data were obtained from 2010 Actuarial Valuation Reports, determined as of October 1, 2010. Here is some information readers might find of interest: 

  • Market Value Investment Returns (Net of Fees): High – 15.13%, Low – 4.57%, Average – 8.89%
  • 3-Year Average Market Value Investment Returns (Net of Fees): High – 3.43%, Low – (6.95%), Average – (1.47%)
  • 2012 Sponsor Contributions: Low – 0% (3 plans), High – 137.11%, Average – 30.20%
  • 2010 Member Contributions: Low – 0% (7 plans), High – 16.46%, Average – 5.64%
  • 2010 Funded Ratio: High – 169.68%, Low – 32.11%, Average – 74.86%
  • 2010 Benefit Multiplier: High – 4.00% (5 plans), Low – 1.60%, Average – 3.06%
  • 2010 Salary Increases: High – 12.73%, Low – (9.04%), Average – 2.40%
  • 3-Year Average Salary Increases: High – 15.88%, Low – (2.13%), Average – 5.06%

Of course, the above summary omits all of the plans in between. 

4.      NEW WISCONSIN COLLECTIVE BARGAINING LAW BLAMED FOR TEACHER RETIREMENTS:  When students returned for the first day of school across Wisconsin, many familiar faces were gone. The Associated Press says teachers chose retirement over coming back in the wake of a new law that forces them to pay more for benefits while taking away most of their collective bargaining powers. Records show that twice as many public school teachers decided to hang it up in the first half of this year as in each of the past two full years, part of a mass exit of public employees. Their departures came before the new law took effect, changes pushed by Governor Scott Walker and the Republican Legislature that led to weeks of protests at the Capitol. The ensuing exodus of teachers and other state employees has led to fears that the jobs might not be filled, and that classroom leadership by veteran teachers will be lost. (Goodbye, Mr. Chips.) In the first six months of 2011, overall public employee retirements were double that in all of 2009 and 2010, including 5,000 Wisconsin school district employees who started receiving retirement benefits, up from 2,500 teacher retirements in all of 2010 and 2,400 in 2009. Teachers were not the only ones heading for the exits.  State agency retirements were particularly dramatic, nearly tripling from 750 in all of 2010 to 2,000 through June 2011. Retirements from the University of Wisconsin System more than doubled, up from 480 last year to 1,100 this year.  All told, almost 10,000 public workers had retired by the end of June, a 93 percent increase from 5,100 in 2010 and 2009. 

5.      CALIFORNIA COUNTY PENSION BOARD MUST DISCLOSE NAMES OF RECIPIENTS AND AMOUNTS OF BENEFITS: The California Superior Court ordered Sonoma County Employees’ Retirement Association to disclose to The Press Democrat, names of all persons receiving pension benefits, gross amount of each recipient’s benefit and the recipient’s age at retirement.  The pension board petitioned for a writ of mandate to overturn the trial court’s order, contending the information sought was exempt from disclosure under the County Employees Retirement Law. On appeal, a California appellate court held that the pension board need not disclose ages of its benefit recipients at retirement, but must disclose names of recipients and the gross amounts of each recipient’s pension benefits. The court agreed that the public’s interest in knowing the names and pension amounts of retirees and beneficiaries is substantial, and the pension board failed to demonstrate such interest is clearly outweighed by the members’ privacy interests. Sonoma County Employees’ Retirement Association v. The Superior Court of Sonoma County, Case No. A130659 (Cal. App. 1st, August 26, 2011). 

6.      PENSION BOARD CANNOT SETOFF CLAIM FOR ATTORNEYS’ FEES AGAINST PENSION REFUND: The City of Philadelphia and its Board of Pensions and Retirement appealed as order of the Court of Common Pleas granting the appeal of Richard Mariano, and reversing the Board’s decision to retain Mariano’s pension contributions totaling over $65,000.00. Mariano was convicted of several crimes, which, like in Florida, resulted in forfeiture of all pension benefits except a refund of contributions. The pension plan also had a somewhat standard spendthrift clause exempting the right to benefits from levy, garnishment, etc. However, the City shall have authority to assert or offset any claim of the City against such person and the rights or benefits arising from membership in the plan. The City did assert a claim against return of Mariano’s contribution for $82,000 in legal fees it had incurred in providing Mariano with representation during investigation of the criminal charges and prior to his indictment. On appeal from the Board’s decision to withhold Mariano’s contributions, the trial court held (1) the plan provision is not preempted by the Public Employee Pension Forfeiture Act, which says the Board may retain a member’s contributions for purpose of paying any fine imposed or for repayment of funds misappropriated from the employer; (2) the City was entitled to recoup the attorneys’ fees it paid for Mariano's criminal defense; and (3) the Board was not the proper forum in which the City could seek to recoup the fees. Thus, the trial court granted Mariano’s appeal, and reversed the Board's decision to retain Mariano’s pension contributions. The trial court found that Mariano was denied any opportunity to review or contest the legal bill. The City had every right to file a civil action against Mariano.  If the City obtained a judgment against Mariano, then it would have every right to offset the judgment with the pension contribution, which did not take place, however.  The City’s actions circumvented Mariano’s right to contest the legal bill.   We believe the Commonwealth Court elevated form over substance. Mariano v. City of Philadelphia Board of Pensions and Retirement, Case No. 1428 C.D. 2010 (Pa. Cmwlth. August 31, 2011). 

7.      STATUTORY DEFINITION OF “COMPENSATION” TRUMPS DIFFERENT LOCAL PROVISION: The California Superior Court rejected the claim of Stillman for an increase in retirement benefits paid to her by the Fresno County Employees’ Retirement Association. On appeal, the issue was whether the board of retirement must determine compensation upon which the retirement benefits are based from the statutory definition of “compensation” used by FCERA, or, instead, whether the board must use the different definition of compensation established by the retirement plan of San Luis Obispo County.  The appellate court concluded that the trial court correctly determined that FCERA was required to apply the definition of compensation set forth in the statute. Stillman was employed by Fresno County for 19 years. After leaving Fresno County employment, she went to work for San Luis Obispo County; accruing 18 years of service credit as a member of the San Luis Obispo County Pension Trust. When Stillman left Fresno County, she deferred her retirement, because Fresno and San Luis Obispo Counties are “reciprocal” employers. When she retired from San Luis Obispo County employment, she concurrently filed for retirement from Fresno County. Because reciprocal employers are each required to base an employee’s retirement benefit upon the highest annual compensation earned from either employer, FCERA contacted San Luis Obispo County to ascertain Stillman’s compensation.  San Luis Obispo County informed FCERA that Stillman’s highest average monthly salary for one year was $8,500.  FCERA later determined that Stillman’s base salary was $7,800 per month.  In addition, however, San Luis Obispo County paid an additional monthly amount of $725 a month to SLOCPT as the employee’s retirement contribution. The San Luis Obispo County collective bargaining agreement designates this “employer pickup” as compensation for purposes of calculation of benefits under the retirement plan administered by SLOCPT. Nevertheless, FCERA notified Stillman that it deemed her compensation to exclude the employer pickup, employing its own definition of final compensation. (The difference to Stillman was $400 per month.) The appellate court determined that the board had correctly applied the relevant definitions of compensation and final compensation as bases for Stillman’s retirement benefit.  Under the generally applicable terms of SLOCPT, employer payments of employee contributions to the pension fund would not be compensation. For certain bargaining units within county employment, however, SLOCPT provides that compensation shall also include the amount of the member’s normal contributions and member additional contributions “picked up” by the employer, provided the “pickup” meets certain requirements of the Internal Revenue Code (we assume Section 414(h)). Inasmuch as employee contributions picked up by the employer are designed to make such contributions “pre-tax,” we think the court missed the boat on this one. Stillman v. Board of Retirement of the Fresno County Employees’ Retirement Association, Case No. F059430 (Cal. App. 5th, August 31, 2011). 

8.      SETTING THE RECORD STRAIGHT ON LA. TEACHERS’ RETIREMENT SYSTEM: In a response to some Louisiana state lawmakers’ spreading misinformation about financial well-being of the state’s public pension systems, Maureen Westgard, director of the Teachers’ Retirement System of Louisiana, responded in Teachers’ Retirement System of Louisiana is a defined-benefit plan that provides retirement benefits to members once eligibility requirements are met.  In these plans, benefits are funded over a person’s working career.  Members and employers make contributions to the retirement system.  The funds are pooled, invested and used to pay benefits.  Historically, member contributions and investment earnings have funded the bulk of retirement costs. The System does have an unfunded liability of $10 Billion, but most is the result of years of employer underfunding.  However, that total debt never has to be paid off at one point in time.  Much like a mortgage, payments are made according to a payment schedule, so to suggest the debt is due all at once is misleading. Since 1987, necessary payments have been made to the system not only pay for retirement benefits currently due to retirees but also to pay down the system’s debt by 2029.  In fact, Louisiana has been recognized as one of the top 10 states to make the required contributions to its pension systems. In recent years, Louisiana has taken other steps to ensure fiscal health of its pensions, including dedicating a substantial portion of excess investment returns toward additional payments on pension debt and scaling back benefits for newly-hired public employees. On a final note, the Teachers’ Retirement System of Louisiana ended the fiscal year with a 26.76 percent return on investments, making it the highest-performing fund among public pension plans with assets greater than $1 Billion. 

9.      ARIZONA WANTS SUIT OVER PENSION CONTRIBUTIONS TOSSED: The state of Arizona wants a judge to throw out a lawsuit filed by state workers that would block new rules that require government employees to pay more toward their retirement benefits, reports The interest of the state and the potential cost savings to taxpayers outweigh the impact on individual workers, the state argued. Employees and the state are also debating whether or not the past contribution agreement is a contract. The legal fight is part of a flurry lawsuits filed after Arizona lawmakers made deep cuts to close a $1 Billion budget gap for fiscal year 2012. Lawmakers scrapped legislation that had been in effect for more than 25 years that required public agencies and their workers to contribute equal amounts to the Arizona State Retirement System. Cost-cutting measures saved the state $41.3 Million in pension expenses, and dropped its share to 47 percent, as of July 1, 2011.  Employees pay the other 53 percent of required contributions. Union officials say the Arizona Constitution makes the state pension system a contract, which another constitutional provision bars lawmakers from impairing. “If the state wanted to make it 53-47 for any new hires after the effective date of the law, we wouldn't even be having this conversation,” said a union spokesperson.

10.    FEDERAL GOVERNMENT SETS FISCAL YEAR 2012 MAXIMUM PER DIEM REIMBURSEMENT RATES:  General Services Administration has released GSA Per Diem Bulletin FTR 12-01 (August 22, 2011), setting lodging allowances for locations within the continental United States to provide for actual and necessary reimbursement of federal employees’ expenses covered by per diem. The per diem bulletin updates maximum per diem rates and existing per diem localities, effective October 1, 2011. Following are the per diem rates for lodging expenses and meals and incidental expenses, or M&IE, incurred during business travel for Miami-Dade County: 

  • Season begin date -- October 1; Season end date – November 30; Lodging rate -- $105; M&IE rate -- $66. 
  • Season begin date -- December 1; Season end date – March 31; Lodging rate -- $152; M&IE rate -- $66. 
  • Season begin date -- April 1; Season end date – May 31; Lodging rate -- $125; M&IE rate -- $66. 
  • Season begin date -- June 1; Season end date – September 30; Lodging rate -- $105; M&IE rate -- $66. 

11.    CALIFORNIA GOVERNOR’S FURLOUGH ORDER UPHELD AS TO EMPLOYEES OF ELECTED CONSTITUTIONAL OFFICERS: Prompted by California’s unprecedented budget deficit, on December 19, 2008, the Governor issued an executive order directing the Department of Personnel Administration to implement a mandatory two-day-a-month unpaid furlough of most workers employed in the executive branch. California’s Supreme Court held this order was valid because it was ratified by the Legislature (see C&C Newsletter for October 7, 2010, Item 2).  However, the court left open the question of whether the decision extended to employees of elected constitutional officers.  On appeal by the State Controller and other officers from a judgment of the trial court granting the Governor’s petition for writ of mandate compelling the Controller to exercise his ministerial duty to comply with the furlough order, the California appellate court affirmed. The Controller’s ministerial duty to implement the mandatory furlough plan as to officers’ employees did not cease when the Governor subsequently used the line-item veto to cut the officers’ respective budgets because the officers refused to implement the furloughs.  The principles of equitable estoppel do not operate to prevent the Governor from enforcing the furlough order against the officers.  Finally, applying the furlough order to the officers does not violate the California Constitution’s system of divided executive authority or impermissibly interfere with their statutory right to control staffing and management of their respective offices.  Brown v. Chiang, Case No. C061648 (Cal. App. 3rd, August 30, 2011). 

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.):  A bus station is where a bus stops. A train station is where a train stops. On my desk, I have a work station.  

13.    QUOTE OF THE WEEK: “There’s never enough time to do all the nothing you want.” Bill Watterson 

14.    ON THIS DAY IN HISTORY: In 1565, first permanent settlement in U.S. forms (St. Augustine, Florida). 

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. 

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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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