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Cypen & Cypen
OCTOBER 14, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The National Association of State Retirement Administrators and the National Council on Teacher Retirement have issued the results of their public fund survey for the fiscal year ending 2003. Initiated in Fall 2002, the survey currently contains data on a combined 12.7 million active members, 5.3 million annuitants and $1.8 Trillion in assets, representing more than 85% of these public retirement system characteristics. Every system in the survey has at least one plan. In cases of systems with multiple plans, separate plans typically are established for different employee groups, such as local government employees, public safety personnel, judges and elected officials. In some cases, retirement systems combine all employee groups into a single plan, but may provide different benefit levels for different groups. The survey covers 98 systems and 121 plans. Perhaps the most recognized measure of a public retirement plan’s health is its actuarial funding ratio, derived during an actuarial evaluation by dividing the value of a pension plan’s assets by its actuarial liabilities accrued to date. A pension plan whose assets equal its liabilities is funded at 100% and is considered fully funded; any shortfall of assets is an unfunded liability, and a plan with an unfunded liability is underfunded. However, underfunded typically does not mean that a plan is unable to pay benefits for which it is presently obligated -- in fact, substantially all underfunded public pension plans are able to meet their current obligations. All plans, underfunded and fully funded alike, that are open to newly hired workers, rely on future contributions and investment returns. A key difference between underfunded and fully funded plans is that underfunded plans require contributions both to fund benefits currently being accrued as well as to eliminate the shortfall between their assets and their accrued liabilities. Because fully funded plans have no such shortfall, they require contributions only to fund benefits currently being accrued. “Fully funded” can be mistakenly interpreted to mean that no future contributions to the plan will be required. In fact, fully funded means that the actuarial value of assets on hand equal the plan’s actuarial accrued liabilities; contributions and investment earnings still will be required to cover the benefit obligations as they accrue going forward. Some important statistical findings from the survey: (1) the average actuarial funding ratio was 91.1%, (2) the average investment return assumption was 8.0% (comprising 3.75% for inflation and 4.25% for real rate of return) and (3) the average asset allocation to equities and fixed income is 57/32. The entire survey can be viewed at


Seventeen investment firms representing over $147 Billion in assets under investment management have issued a document representing the collective efforts by their social research analysts. The document’s purpose is to (1) articulate the expectations for corporate reporting of social and environmental performance information, (2) provide answers to companies’ most frequent questions on reportings and (3) suggest ways companies can enhance the usefulness and credibility of their reports. As institutional investors with socially responsible investments, the firms encourage all publicly-traded companies to provide annual standardized reporting of their social and environmental policies, practices and performance. The firms also strongly recommend that companies base their reporting on the Global Reporting Initiative’s Sustainability Reporting Guidelines to increase credibility, comparability and utility of this type of reporting. The 6 page report can be accessed at


Fannie Mae and Freddie Mac, the two largest buyers of U.S. home loans, no longer need their ties to the government to promote home ownership because housing is readily available, according to a study by a former Freddie Mac board member issued by the conservative think tank the Cato Institute. Bloomberg News reported on the study, which contends that the government-chartered, shareholder-owned companies’ reduced interest rates of about .25% percentage points are not large enough to make a difference in the purchase of homes. (On a $200,000 loan for thirty years, the difference is about $32 a month in interest.) Congress created Washington-based Fannie Mae in 1938 to increase financing for home mortgages. Freddie Mac, based in McLean, VA, was created in 1970. The two companies buy mortgages and mortgage securities from banks and other financial institutions with the proceeds from bond sales, providing lenders with more money to make loans. Their biggest tie to the government is an option by the Treasury Department to buy $2.25 Billion in securities of each company if one were ever in financial distress. Such benefits create a “halo effect” and mean the taxpayers may be on the hook for a bailout of the companies, even without an actual guarantee by the federal government.


In the spirit of presenting both sides of the Social Security privatization issue (see Cypen & Cypen Newsletter for October 7, 2004, Item 5), we report on a Miami Herald piece written by a former congresswoman from Connecticut. Barbara Kennelly believes that Social Security is about to be sold to the highest bidder. She says Wall Street can barely wait to get its hands on the $940 Billion in fees that it will collect if Social Security is converted into individual investment accounts, as proposed by President Bush’s Commission on Social Security. Young workers are intrigued by the idea of diverting their payroll taxes into Wall Street accounts. Privatizers promise ownership of accounts and big investment returns. What they fail to mention are the costs, increased investment risks, cuts in Social Security benefits and a multi trillion-dollar increase in federal borrowing. Diverting money out of Social Security will create an even-larger solvency problem. Privatizers fill part of this funding gap by dramatically cutting Social Security benefits for younger generations. They cover the rest by borrowing more money, thereby increasing the burden on young taxpayers by trillions of dollars over the next half-century. Thank heaven privatizers are now being asked to explain exactly what happens when payroll taxes are diverted to private accounts. The reason we heard nothing after the President’s Commission reported its findings was that the transition costs were so high. Private plans will dismantle Social Security. The alternative is making the difficult but reasonable choices that address the solvency of Social Security and keeping a tried and true safety net for all Americans in tact.


A report from Ohio News Network indicates that some retired Ohio teachers who are paying more for health care believe their pension fund is spending too much on employee their expense. The State Teachers Retirement System has spent more than $2 Million in tuition reimbursements to its employees since 1999, twice as much as Ohio’s four other pension systems combined. The System’s executive director says the board has gone to great lengths to reduce some employee benefits, but notes that employees must take courses to improve or acquire skills necessary to perform their jobs. STRS employees, who work a 37 1/2 hour work week, also receive a stipend of up to $5,000 a year for each child they adopt and a subsidy for child care. (STRS began offering the adoption subsidy in 1997 at the request of the late Dave Thomas, an adoptee, who founded Wendy’s.) One complaining retiree went to work as a security officer after STRS informed him that health care coverage for his wife and him was jumping from $344 to $562 a month. He now pays $112 a month for the same coverage that, under the STRS plan, would cost $676 next year. Inasmuch as we assume STRS is a defined benefit system, we wonder how its administrative budget has any effect on retirees.


Officials in Orange County, California, hope they have finally found a cure for the decade-long hangover stemming from the County’s 1994 bankruptcy, reports Governing. The County has hired consultants to determine the wisdom of using spare general funds to pay off its debt early. When investments went south ten years ago, the County borrowed over a billion dollars. The County has now saved up almost $100 Million and could potentially buy back many of the outstanding bonds. Such a move could save about $5 Million a year through fiscal 2015. There are at least two stumbling blocks, however: the task of sorting out legality of repaying capital debt with general fund money and the political question of whether the money might not be more profitably spent for current needs. Stay tuned.

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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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