Cypen & Cypen
SEPTEMBER 15, 2011
Stephen H. Cypen, Esq., Editor
1. TERMINATION OF EMPLOYEE FOUND GUILTY OF CRIMES UPHELD EVEN THOUGH COURT WITHHELD ADJUDICATION: The Miami-Dade County Code provides for automatic suspension of a County employee who has been charged with a crime and for automatic forfeiture of his position if tried, found guilty, and conviction is not reversed. In addition, the code specifies that any such person shall not thereafter be eligible to any such service regardless of whether the person is placed on probation or given a suspended sentence. Dominguez, a County employee, was tried and found guilty of stealing thousands of dollars from the County by fraudulently obtaining reimbursement for tuition charges he never paid. All convictions were subsequently affirmed on appeal. A trial judge reversed the County Manager’s decision to deny Dominguez an administrative hearing to contest his discharge from employment and reversed his termination because he received a “withhold of adjudication” as to all convictions. On certiorari review by the District Court of Appeal, the circuit court’s decision was quashed. That court’s decision was a clear departure from essential requirements of law, resulting in a miscarriage of justice. A finding of guilt is a conviction, even though adjudication of guilt is withheld. Miami-Dade County v. Dominguez, 36 Fla. L. Weekly D1979 (Fla. 3d DCA, September 07, 2011).
2. NON-UNION MEMBER ENTITLED TO UNION REPRESENTATION AT PERFORMANCE REVIEW PROCEEDING: The Florida District Court of Appeal recently considered a case that arose out of a refusal by the School District of Miami-Dade County to permit a non-union teacher from having representation at a performance review proceeding. If the teacher had been a union member, he would have been permitted to have representation. The union insisted that the District had acted alone. The teacher argued that the District did not act alone, but rather the union “caused” the District’s action, and the union’s actions were unlawful. A Public Employees Relations Commission-designated hearing officer agreed with the teacher and PERC, found competent substantial evidence to support the recommendation of the hearing officer, and entered a final order adopting the recommendation. On appeal, PERC’s order was affirmed. The union failed to appreciate its legal obligation to the bargaining unit. The union is bargaining agent for all employees in the bargaining unit, union members and non-union members alike. The union may not prefer its dues-paying members over non-dues-paying members in its representation and negotiations. United Teachers of Dade v. The School District of Miami-Dade County, 36 Fla. L. Weekly D1974 (Fla. 3d DCA, September 7, 2011).
3. ANOTHER FEDERAL APPEALS COURT REJECTS CHALLENGES TO OBAMACARE:
A. The Commonwealth of Virginia brought an action against the Secretary of the Department of Health and Human Services challenging one provision of the Patient Protection and Affordable Care Act as an unconstitutional exercise of congressional power. Virginia maintained that the conflict between this provision and a newly-enacted Virginia statute provided it with standing to pursue the instant action. After finding that this asserted conflict did give Virginia standing to sue, the district court declared the challenged provision unconstitutional. The appellate court held that Virginia lacked standing to bring this action. A state may not litigate in federal court to protect its residents from operation of a federal statute, and cannot escape this bar merely by codifying its objection to the federal statute. Accordingly, the appellate court vacated the judgment and remanded with instructions to dismiss the case for lack of subject-matter jurisdiction. Commonwealth of Virginia v. Sebelius, Case Nos. 11-1057 and 11-1058 (U.S. 4th Cir., September 8, 2011).
B. Liberty University and certain individuals brought an action to enjoin, as unconstitutional, enforcement of two provisions of the recently-enacted Patient Protection and Affordable Care Act. The challenged provisions amend the Internal Revenue Code by adding: (1) a “penalty” payable to the Secretary of the Treasury by an individual taxpayer who fails to maintain adequate health insurance coverage and (2) an “assessable payment” payable to the Secretary of the Treasury by a “large employer” if at least one of its employees receives a tax credit or government subsidy to offset payments for certain health-related expenses. The district court upheld these provisions, ruling that both withstood constitutional challenge. Because the suit constituted a pre-enforcement action seeking to restrain the assessment of a tax, the Anti-Injunction Act stripped the court of jurisdiction. Accordingly, the appellate court was required to vacate the judgment of the district court and remand the case with instructions to dismiss for lack of jurisdiction. Liberty University, Incorporated v. Geithner, Case No. 10-2347 (U.S. 4th Cir., September 8, 2011).
4. DB PLANS FACE CHALLENGES WHEN INVESTING IN HEDGE FUNDS AND PRIVATE EQUITY: Barbara Bovbjerg, Managing Director Education, Workforce, and Income Security, GAO, has made a Statement Before the U.S. Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans: Millions of Americans rely on retirement savings plans for their financial well-being in retirement. Plan sponsors are increasingly investing in assets like hedge funds (privately administered pooled investment vehicles that typically engage in active trading strategies) and private equity funds (privately managed investment pools that typically make long-term investments in private companies). Given ongoing market challenges, it is important that plan fiduciaries apply best practices, and choose wisely when investing plan assets to ensure that plans are adequately funded to meet future promised benefits. The Director’s statement addresses (1) what is known about the extent to which defined benefit plans have invested in hedge funds and private equity, (2) challenges that such plans face in investing in hedge funds and private equity, (3) steps that plan sponsors can take to address these challenges and (4) the implications of these challenges for plan sponsors and the federal government. A growing number of private and public sector pension plans have invested in hedge funds and private equity, but such investments generally constitute a small share of total assets. According to a survey of large plans, the share of plans with investments in hedge funds grew from 11 percent in 2001 to 60 percent in 2010. Over the same time period, investments in private equity were more prevalent but grew more slowly -- an increase from 71 percent of large plans in 2001 to 92 percent in 2010. Still, the average allocation of plan assets to hedge funds was a little over 5 percent, and the average allocation to private equity was a little over 9 percent. Available data also show that investments in hedge funds and private equity are more common among large pension plans, measured by assets under management, compared with midsize plans. Survey information on smaller plans is unavailable, so the extent to which these plans invest in hedge funds or private equity is unknown. Hedge funds and private equity investments pose a number of risks and challenges beyond those posed by traditional investments. For example, investors in hedge funds and private equity face uncertainty about precise valuation of their investment. Hedge funds may, for example, own thinly-traded assets whose valuation can be complex and subjective, making valuation difficult. Further, hedge funds and private equity funds may use considerable leverage -- the use of borrowed money or other techniques -- which can magnify profits, but can also magnify losses if the market goes against the fund’s expectations. Also, both are illiquid investments; that is, they cannot generally be redeemed on demand. Finally, investing in hedge funds can pose operational risks -- the risk of investment loss from inadequate or failed internal processes, people and systems, or problems with external service providers rather than an unsuccessful investment strategy. Plan sponsors GAO spoke with address these challenges in a number of ways, such as through careful and deliberate fund selection, and negotiating key contract terms. For instance, investors in both hedge funds and private equity funds may be able to negotiate fee structure and valuation procedures, and the degree of leverage employed. Also, plans address various concerns through due diligence and monitoring, such as careful review of investment, valuation and risk management processes. Department of Labor has a role in helping to ensure that private plans fulfill their fiduciary duties, which includes educating employers and service providers about their fiduciary responsibilities under Employee Retirement Income Security Act of 1974. According to plan officials, state and federal regulators and others, some pension plans, such as smaller plans, may have particular difficulties in addressing the various demands of hedge fund and private equity investing. In light of this situation, in 2008, GAO recommended that Labor provide guidance on challenges of investing in hedge funds and private equity and the steps plans should take to address these challenges. Labor generally agreed with GAO’s recommendation, but has yet to take action. Labor explained that lack of uniformity among these investments could complicate development of comprehensive guidance for plan fiduciaries. GAO-11-901SP (August 31, 2011).
5. IMPORTANCE OF DB PLANS FOR RETIREMENT INCOME ADEQUACY: Previous studies from Employee Benefit Research Institute were able to document the degree to which eligibility for participation in defined contribution plans matter with respect to “at-risk” status. For example, the at-risk probability for Gen Xers varies from 60 percent for those with no future years of eligibility in a defined contribution plan to 20 percent for those with 20 or more years. However, EBRI’s Retirement Security Projection Model had never been used in the past to quantify importance of accruals in defined benefit plans. For purposes of an article in EBRI Notes, it was assumed that all households retired when the oldest wage earner reached 65. Each household was bifurcated in terms of whether it had a defined benefit accrual at age 65 to assess impact of these benefits on retirement income adequacy. Results were run for all Baby Boom and Gen Xer households, and found that overall the presence of a defined benefit accrual at age 65 reduces the at-risk percentage by 11.6 percentage points. The defined benefit plan advantage (as measured by the gap between the two at-risk percentages) is particularly valuable for the lowest-income quartile but also has a strong impact on the middle class (reduction in the at-risk percentage for the second and third income quartiles combined is 9.7 percentage points, which corresponds to a 19.5 percent relative reduction). The analysis shows that when the value of a defined benefit plan is analyzed for those without any future eligibility in a defined contribution plan, the impact on at-risk ratings increases to 23.6 percentage points. In other words, for those households without future years of defined contribution eligibility, presence of a defined benefit accrual at age 65 is sufficient to save nearly 1 out of 4 of households in the Baby Boom and Gen X cohorts from becoming “at-risk” of running short of money in retirement for basic expenses and uninsured medical expenses. Ebri.org Notes, August 2011, Vol. 32, No. 8.
6. FEW BABY BOOMERS FINANCIALLY PREPARED FOR RETIREMENT: They may long to give up their daily commutes and have wide-open schedules, but far too many baby boomers are largely unprepared to leave their jobs, according to benefitnews.com. Only 54% have tried to calculate a financial goal for retirement, just 45% have consulted with a financial planner and 43% do not consider themselves knowledgeable about making financial investments. When asked to name the most important feature of a retirement investment product, the number one trait was “guaranteed monthly income,” selected by 18% of respondents, followed by rate of return (17%) and principal protection (15%). In terms of preparedness, the overall attitude of Boomers nearing retirement is pessimistic, with six out of 10 expressing concern about outliving their retirement savings. Seven out of 10 are afraid that their household is not saving enough to cover future needs, and more than one-third of pre-retirees indicate that they did not know the age at which they would retire.
7. NYC DROPS APPEAL, AGREES TO RELEASE P.D. SHOOTING DATA: Internal reports on more than 1,000 incidents in which New York City Police Department officers fired a weapon at a civilian are about to become public, as the city has decided to stop resisting disclosure, according to New York Law Journal. The city’s Law Department dropped its appeal of a ruling by a Manhattan Supreme Court Justice, and agreed to release to the New York Civil Liberties Union 1,400 reports on 1,000 shootings since 1997. Justice Goodman had ordered NYPD to hand over redacted copies of the reports, rejecting its argument that the documents were exempt from disclosure under the Freedom of Information Law. Justice Goodman had held that firearms discharge reports prepared within 24 hours of the incident and those prepared 90 days after the incident are not, as NYPD claimed, categorically exempt from the Freedom of Information Law. She directed the city to redact identifying information, such as names of witnesses, and to turn over factual data. The city filed notice of appeal, but now has abandoned that effort.
8. IMPLICATIONS OF A “CHAINED” CPI: Two prominent commissions recently proposed introducing a “chained” consumer price index to adjust Social Security benefits, other government benefits and the brackets in federal income tax each year. The argument, according to a new Issue in Brief from Center for Retirement Research at Boston College, is that a chained CPI would be more accurate since it reflects the extent to which people substitute one item for another in the face of a price increase. The chained CPI is projected to rise about 0.3 percentage points per year more slowly than the current index. Thus, the change would result in lower cost-of-living adjustments for Social Security beneficiaries and for federal civilian and military retirees, and would also lead to an increase in federal taxes. Although this provision was not included in the initial package of cuts to raise the debt limit, it will almost certainly be considered by the Congressional Joint Select Committee on Deficit Reduction, which has been assigned the task of identifying an additional $1.5 Trillion in cuts over 10 years. Therefore, it is important to understand how a chained CPI would work and how it would affect Social Security beneficiaries. The first section of the brief describes what the CPI is intended to measure and how it is constructed. The second summarizes progress to date in accounting for substitution and the goal and mechanics of creating a chained CPI. Third section discusses one of the assumptions underlying the improved accuracy of a chained CPI -- namely, that the current index fully reflects the increase in prices faced by beneficiaries. The fourth section explores another underlying assumption of the chained CPI: that everybody has an equal ability to substitute when relative prices change. The final section concludes that, in current circumstances, moving to a chained index should be viewed as a cut in benefits. The cut could impact the poor, who are less likely to be able to shift their spending patterns in response to price changes, and the oldest old as they see the effects compounding over time. The adverse impacts can be mitigated by one-time adjustments around age 85, as suggested by both commissions, but, moving to a chained CPI is much more than a technical correction. September 2011, Number 11-12.
9. WILL YOU NEED 135% OF SALARY IN RETIREMENT?: Dan Ariely, Professor of Economics at Duke University, says it is nice to believe that we can easily get high-quality answers to our questions. In fact, our reality is mostly very complex, and we do not understand it well. The bottom line is that we need to spend more time helping people understand and deal with complexity and less time concocting dumbing-down mechanisms. A perfect example of what happens when you dumb down complexity occurs in the personal finance industry. When we face something as complex as money, we have an urge to simplify the problem. But, we often oversimplify it, by creating add-water-and-stir solutions. Typically, a financial adviser takes 1% of assets under management -- annually! -- to balance a portfolio, and makes investment decisions on the basis of our answers to two questions: (1) “How much of your current salary will you need in retirement?” and (2) “What is your risk tolerance on, say, a 10-point scale?” Frankly, Ariely thinks highly trained monkeys could do the same basic job given answers to those two questions. This is just not something for which we should pay 1% of assets under management. The real reason, however, we should not pay for it is that those questions do not help optimize our portfolios. To prove the point, Ariely asked many people those two questions. The most common answer to the first one was 75% -- a rule of thumb they had heard from financial advisers and from the media. In essence, financial advisers are asking customers a question that the customers are answering with what the advisers have told them is the right response. When Ariely changed the question to “How do you want to live in retirement?”, and costed out where people wanted to live, what they wanted to do, he discovered that they would actually need almost twice as much: about 135%. (Think about how much money you would need if you had an extra nine hours a day in which to spend it.) Ariely also asked people the risk question, varying the labels on the ends of the scale. Regardless of the labels, people chose somewhere near 5, depending on whether they felt slightly more or slightly less willing to take risk than what they thought of as average. So what do we have? A service that costs 1% a year and is based on two not very useful questions. The financial services industry needs to embrace complexity and difficulty inherent in our lives. It is easy to see why this change will not very likely happen. Unless we admit how complex the world is and how little we really know, we will not search for better questions, better ways to comprehend the world and better answers. A deep understanding of what we are trying to accomplish will always yield better answers than a “red is bad, green is good” approach, even if it does not feel that way. Weird science?
10. THE POWER OF COMPOUND INTEREST: Every entrant to the workforce should be subjected to the same questions posed to California undergraduates in a new experiment about how well people understand compound interest. According to the Trustees of Boston College, Center for Retirement Research, it is better to show the math than to explain it. Franny and Zooey just started working. Franny immediately begins depositing $100 per month into her new retirement account, which pays 10 percent interest annually. Zooey does not start saving for 20 years, but he puts in $300 every month and also earns 10 percent interest. In 40 years, Franny retires with $584,000 in her account -- more than double Zooey’s $227,000. Asked to calculate these future savings on their own, 90 percent of the undergraduates had vastly underestimated the totals in the experiment. Yet this mathematical calculation is central to the financial well-being of most Americans. In 2009, more than half of all households were at risk of not having sufficient assets to retire. After testing their subjects’ knowledge, the researchers tested how they might respond if they knew the implications of starting to save early and benefitting from exponential savings growth due to compounding. Shown the impact it has, they became more interested in saving earlier or more. If employers showed new employees their potential future account balances, it could substantially contribute to the welfare of retiring workers. (And if more employers provided defined benefit pension plans, employees would not have to worry as much.)
11. THE WRONG FINANCIAL ADVISER: Readers should enjoy the 4-1/2 minute video from Nobel Laureate William Sharpe, athttp://www.youtube.com/user/wfsharpe34#p/a/u/2/Vv4HQG2Hz0I.
12. LET’S DEFINE OUR TERMS: Here is a short video from Center for Retirement Research, at Boston College, in which people-on-the-street in Chicago are asked the meaning of everyday financial terms. Watch the video at http://vimeo.com/27206398, and try to remember you are not watching Jay Leno or Jimmy Kimmel.
13. 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.): Be alert! The world needs more lerts.
14. QUOTE OF THE WEEK: “The reward for a thing well done is to have it done.” Ralph Waldo Emerson
15. ON THIS DAY IN HISTORY: In 1982, first issue of “USA Today” published by Gannett Co., Inc.
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