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Cypen & Cypen
SEPTEMBER 22, 2011

Stephen H. Cypen, Esq., Editor

1.      RHODE ISLAND JUDGE DENIES STATE’S MOTION TO DISMISS PUBLIC UNIONS’ PENSION LAWSUIT: Eight public labor unions filed an action against the Governor of the State of Rhode Island and the Employees’ Retirement System of the State of Rhode Island, alleging that two recent legislative changes to ERSRI violated the Contract Clause and the Takings Clause of the Rhode Island Constitution.  Defendants filed a Motion for Summary Judgment, seeking a determination as to whether ERSRI, a statutorily-created pension system for most state and some municipal employees, established a contractual relationship between the State of Rhode Island and participating employees.  The Court denied Defendants’ Motion for Summary Judgment, and found that ERSRI does give rise to an implied contract and the rights and obligations incident thereto. The parties stipulated that the sole issue for decision by the Court on Defendants’ Motion for Summary Judgment was whether the statutorily-created ERSRI pension plan established a contractual relationship between the State of Rhode Island and ERSRI participants for purposes of the Contract and Takings Clauses of the Rhode Island Constitution. The Court noted that the Rhode Island Supreme Court had never answered the specific question of whether state employees with at least ten years of contributory service possess contractual rights to their retirement allowances and COLA benefits under ERSRI. Nevertheless, there are cases that provide a number of guiding principles. First, to determine whether a statute gives rise to a contractual relationship for purposes of contract clause analysis, the Court must look to the language of the statute and the circumstances of its enactment. In keeping with its exercise of caution in addressing constitutional challenges to state enactments, the Court begins with the assumption that ERSRI merely declares a policy to be pursued until the legislature shall ordain otherwise. Second, a COLA and a pension are one and the same. Third, neither contributory nor non-contributory pensions are gratuities. Rhode Island is among the majority of jurisdictions recognizing that medieval notions of the beneficence and graciousness of worldly monarchs have no relevance to modern notions of sovereignty. Benefits provided pursuant to ERSRI are not gratuities that may be taken away at the whim of the State. Fourth, a vested pension benefit constitutes deferred compensation to be paid to the vested employee when the requirements of the pension statute are met, and the right to receive the pension is subject to divestment for employee’s failure to satisfy terms of employment: long-term faithful service.  Therefore, upon full vesting, and subject to honorable service, a pension cannot be altered or revoked.  Ultimately, the issue was decided on basic contract law principles:  (1) the State offered to enter into a contract with its pensioners, (2) the pensioners accepted the offer and (3) the contract was supported by sufficient consideration to render the contract valid.   (Incidentally, the Rhode Island State Labor Relations Act prohibits collective bargaining of retiree benefits.) Rhode Island Council 94, AFSCME, AFL-CIO v. Carcieri, Case No. PC 10-2859 (R.I. Sup., September 13, 2011). 

2.      COMPARING COMPENSATION OF STATE-LOCAL VERSUS PRIVATE SECTOR WORKERS: Center for State & Local Government Excellence has issued a new brief that compares compensation of state-local versus private sector workers. Decline in the funded status of pensions in the wake of the financial crisis has put state and local governments under great pressure just as their budgets were decimated as a result of the ensuing recession.  The response all over the country has been to increase employee contributions, cut benefits for future employees and in some cases cut cost-of-living adjustments.  To justify these changes, the story is that public employees are overpaid and their pensions are a particularly egregious example of that overpayment. At this point, observers generally agree that wages of similarly situated workers are lower in the state-local sector than in the private sector (about 9.5%).  The disagreement hinges on the extent to which benefits offset the wage penalty.  The Center’s re-estimation of the much-used wage equation plus adjustments for proper valuation of pensions and retiree health insurance indicates a difference of about 4 percent in favor of private sector workers. In short, for the nation as a whole the difference between public and private sector compensation appears modest. The relatively modest differential should make policymakers cautious about massive changes without carefully studying specifics of their particular situation. Amen. Issue Brief September 2011. 

3.      CALLAN DC INDEX TRAILS AVERAGE DB PLAN:  The purpose of the Callan DC Index is to understand the asset allocation of defined contribution plans, track DC fund flows and measure performance of DC plans. The Index is an equally-weighted index tracking the cash flows and performance of more than 70 plans, representing greater than 800,000 defined contribution participants and more than $80 Billion in assets.  The Index is updated quarterly, and reflects 401(k) plans as well as other types of defined contribution plans. The Index eked out a negligible 0.23% return in the second quarter of the year (which put its return well behind that of the average corporate DB plan’s 1.31% for the period).  Since the Index’s 2006 inception, the average corporate DB plan has bested the DC Index by more than 1.5 percentage points annually.  (The performance edge is partly attributable to the fact that corporate DB plan returns are reported gross of fees while the Index’s returns are net of fees.) 

4.      EBSA TO RE-PROPOSE RULE ON DEFINITION OF FIDUCIARY: The U.S. Department of Labor's Employee Benefits Security Administration will re-propose its rule on the definition of a fiduciary.  Consistent with the president's January executive order on regulation, the re-proposal is designed to inform judgments, ensure an open exchange of views and protect consumers while avoiding unjustified costs and burdens.  When finalized, this important consumer protection initiative will safeguard workers who are saving for retirement as well as the businesses that provide retirement plans to America's working men and women.  The decision to re-propose is in part a response to requests from the public, including members of Congress, that the agency allow an opportunity for more input on the rule. The decision to re-propose means that this important consumer protection initiative will benefit from additional input, review and consideration.  The agency agrees with stakeholders and lawmakers that more public input and greater research will strengthen the rule. This extended input will supplement more than 260 written public comments already received, as well as two days of open hearings and more than three dozen individual meetings with interested parties held by the agency. Consistent with the president's executive order, the extended rulemaking process also will ensure that the public receives a full opportunity to review the agency's updated economic analysis and revisions of the rule. EBSA will continue to coordinate closely with the Securities and Exchange Commission and the Commodities Futures Trading Commission to ensure that this effort is harmonized with other ongoing rulemakings. Specifically, the agency anticipates revising provisions of the rule including, but not restricted to, clarifying that fiduciary advice is limited to individualized advice directed to specific parties, responding to concerns about the application of the regulation to routine appraisals and clarifying the limits of the rule's application to arm's length commercial transactions, such as swap transactions. Also anticipated are exemptions addressing concerns about the impact of the new regulation on the current fee practices of brokers and advisers, and clarifying the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks and insurance products.  The agency will carefully craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice. The agency is seeking to amend a 1975 regulation, which defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act, in order to adapt the rule to the current retirement marketplace.  The proposal's goal is to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on, so they can retire with the dignity that they have worked hard to achieve. The new proposed rule is expected to be issued in early 2012.  Learn more about the importance of providing protections for retirement savers by visiting EBSA's website at . Release Number:  11-1382-NAT

5.      EMPLOYER PROPERLY OFFSET WORKERS’ COMP BENEFITS AGAINST PENSION: Frye brought an action under Employee Retirement Income Security Act of 1974 against his former employer, Thompson Steel Company.  He sought review of denial of pension benefits by Thompson Steel Retirement Committee, which administers a company-sponsored retirement plan. The Committee had determined that the plan required it to offset against his pension the amount he previously had received from Thompson Steel in settlement of two workers’ compensation permanent partial disability claims.  On cross-motions for summary judgment, the district court held that the Committee had misread the plain language of the plan, and that the offset therefore was arbitrary and capricious.  Accordingly, the district court granted summary judgment in favor of Frye and remanded the matter to the Committee for a new determination.  On Thompson Steel’s appeal, the appellate court concluded that the decision of the Committee was not arbitrary and capricious.  The Committee’s determination that the offset provision was applicable had rational support in the plan’s terms. Thus, the court reversed the district court judgment, and remanded the case with directions that the district court grant summary judgment for Thompson Steel. The Committee determined that the plan offset provision applied to Frye’s permanent partial disability awards. Reconciling conflicting provisions of a plan by dealing with difficulties posed by its language is precisely the task entrusted to a plan administrator vested with interpretative discretion by the plan document. To prevail, Mr. Frye had to demonstrate that there was no rational support in the record for the Committee’s resolution of the ambiguous plan language. Moreover, there was no evidence that the Committee had applied the plan provisions inconsistently or that it manufactured its interpretation for the occasion.  Frye v. Thompson Steel Company, Incorporated, Case No. 10-1900 (U.S. 7th Cir., September 2, 2011). 

6.      ALICIA MUNNELL ON SOLVING THE RETIREMENT CRISIS:   Economist Alicia Munnell has headed the Center for Retirement Research at Boston College since its inception about 15 years ago, studying everything from retiree health-care to the role of older Americans in the job market.  In an interview with SmartMoney, Munnell weighed in on the finance and policy issues that have transformed retirement into a source of anxiety for so many Baby Boomers. Here is only one of several questions and answers: 

Q:      Other than purchasing an annuity, what else can a retiree do if he is worried about outliving his savings?  

A: There is one product that could be key to the financial security of many retirees, but it has a bad rap: a reverse mortgage.  In the past, many retirees did not tap their home equity because they did not have to.  Going forward, more of them are going to need to.  Here again, a reverse mortgage can be complicated to understand.  It has been criticized as expensive, but the costs have fallen.  You cannot shift all of the risks to the banks, though, or they are not going to want to be in this business.

(A rather unique idea, but we do not see how a reverse mortgage addresses the problem of outliving one’s savings.) Read the entire Q&A at .

7.      BP OIL SPILL REPORT: On September 14, 2011, the Department of the Interior, Bureau of Ocean Energy Management, Regulation and Enforcement, issued its Report regarding Causes of the April 20, 2010 Macondo Well Blowout. The report concludes that BP, Transocean and Halliburton violated numerous federal offshore safety regulations. Read all the gooey details of the 200-+ page document at

8.      STATE OF U.S. EMPLOYEE RETIREMENT PREPAREDNESS:  Financial Finesse, Inc. has issued a report about the state of U.S. employee retirement preparedness.  Retirement preparedness is enormously hard to gauge because there are so many unknown variables. There is no way of knowing future market returns or accurately predicting economic cycles that create and destroy wealth.  Accordingly, the report focuses on the component of retirement preparedness that is the easiest to pinpoint -- what employees are doing to prepare themselves. Employees are increasingly focusing on retirement planning, and taking action to improve their preparedness now that many have built a more solid financial foundation after the recession, by cutting unnecessary expenses, reducing debts and establishing an emergency savings fund.  Over 25% of the questions Financial Finesse has received from employees this year have been focused on retirement planning vs. 24% in 2010 and 15% in 2009.  In addition, questions have been more proactive in nature, focused on how much to save to retire comfortably and how to allocate assets vs. how to take loans and hardship withdrawals or how effectively to time the market. However, only 14% of employees indicate they are on track to replace 80% of their income (or their goal) in retirement and would thus be considered prepared.  Employees who indicate they are not on track or do not know whether they are not on track because they have not run a retirement projection, are considered unprepared. Most employees have never run a retirement projection. Barring an unexpected and sustained bull market that brings outsized returns, such employees will need significantly to increase their savings rates to avoid delaying retirement. Hint: run a retirement projection. Financial Finesse was founded in 1999 with a single mission:  to provide people with information and guidance they need to become financially secure and independent.  

9.      THE NTH DEGREE: The BestDegrees has identified the top 51 degrees based upon salary. With the current downturn in the economy, the number one thing you want to look for in a degree is a good chance of finding a job once you graduate. Of course, the amount of money you can make is important.  However, you do not want to fall into the trap of choosing a degree that leads to a high paying job but has too many job seekers in the marketplace.  A degree with a competitive job market lowers your chance of getting a job, and you could easily end up unemployed or underemployed, struggling to pay off student loans. It is much better to enroll in a degree program that leads to a lower paying job but has a great chance of employment.  Here are the top five, including median annual salary: 

  • MBA Degree in Technology Management - $115,780, or $55.67 per hour
  • PhD Degree in Computer Science - $100,660, or $48.39 per hour
  • Bachelor’s Degree in Software Engineering - $94,180, or $45.28 per hour
  • Master’s Degree in Education Administration - $86,970, or $41.81 per hour
  • Master’s Degree in Geoscience - $82,500, or $39.66 per hour.

10.    MIAMI, OTHERS CHALLENGE CENSUS NUMBERS: Miami leaders say there is no way the city’s population has increased by only 10 percent. New York City does not buy census figures that show the population of Queens increased by just 1,300 over the past decade. And Santa Ana, California says it is growing, not shrinking, as census figures suggest.  So, according to, begins a decennial tradition, as local leaders across the country make the case to Washington that their cities and counties are larger than the new figures indicate.  But these challenges are not likely to offer much relief.  Take the case of Houston, which has a population just shy of 2.1 million. City officials believe Houston may have been undercounted by 100,000 people, most of whom are low-income immigrants living in rental housing, but even if Houston is lucky, the census will only increase its population by 1,000.  Why the disparity? The census will not consider a locality’s challenge unless it fits one of three specific, very technical types of arguments, such as the way housing is coded or how boundaries of a jurisdiction are interpreted.  As a result, Houston officials are searching foot-by-foot through maps of the city’s borders to make its case that the census mistakenly counted as many as 1,000 residents as living outside its borders.  What about the other 99,000?  Not much of a chance. After the 2000 census, undercount challenges increased the U.S. population by a mere 2,700 residents.  The only other option for localities is to sue, however, such cases are expensive and unlikely to garner results, since it is almost impossible to determine accuracy of a census snapshot months or years after the fact.  Localities may have better luck persuading the census to tweak the official population estimates it releases in the years between decennial counts. 

11.    WOMAN WHO GAVE IMPROMPTU STRIP SHOW CHARGED WITH DISORDERLY INTOXICATION: reports that it was not amateur hour at the Baby Dolls Lounge, and Natalie Behnke found out the hard way. The 25-year-old Florida woman was taken into custody after allegedly stripping, asking customers for money and becoming aggressive with dancers at the Clearwater strip club. The manager told her to re-dress because she was causing a disturbance with the other girls. When deputies responded to a call, Behnke was standing outside the establishment in what appeared to be her underwear. The suspect was emotional, and deputies deemed her intoxicated. The club manager told police that Behnke was asked to get dressed and leave the premises after she began disrobing and asking patrons for cash.  When employees confronted Behnke about her behavior, she became aggressive and was escorted out. She was charged with disorderly intoxication, a misdemeanor, pleaded no contest and was fined $525. An office manager at Baby Dolls said the incident is not anything new: stuff like that happens all the time. 

12.    MASSAGE PARLOR MISTRIAL DECLARED WHEN MASSEUSE RECOGNIZES DEFENSE LAWYER AS CLIENT: A Chicago federal judge declared a mistrial in a sex-trafficking prosecution after a masseuse who worked for the defendant and testified for the prosecution recognized the defense lawyer as a client. According to, on stepping down from the stand, masseuse Liudmyla Ksenych told prosecutors she recognized defense lawyer Douglas Rathe. The revelation prompted the judge to declare a mistrial in the case against a massage parlor owner accused of threatening immigrant women to extort money and force them to into sex trafficking. Rathe denied any improper conduct, although admitted that he “got too friendly” with Ksenych. Rathe did not recognize Ksenych’s name on the witness list because she did not use her real name on the job. Once in a while, it is nice to print a story with a happy ending. 

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.):    The car stopped on a dime, which unfortunately was in a pedestrian's pocket. 

14.    QUOTE OF THE WEEK: “It is better to stay silent and let people think you are an idiot than to open your mouth and remove all doubt.” Abraham Lincoln

15.    ON THIS DAY IN HISTORY: In 1862, President Lincoln says he will free slaves in all states on January 1.  

16.    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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