Cypen & Cypen
OCTOBER 1, 2009
Stephen H. Cypen, Esq., Editor
1. FLORIDA RELEASES 2008 SUPPLEMENTAL PREMIUM TAX DISTRIBUTION AMOUNTS: Patricia Shoemaker, Benefits Administrator, Municipal Police Officers’ and Firefighters’ Retirement Funds, Division of Retirement, has released a list showing the 2008 Firefighters’ Supplemental Distribution amounts. That list is available at https://www.rol.frs.state.fl.us/forms/Fire_Sup_2008.pdf Individual checks should be mailed no later than October 1, 2009. Fire fund trustees should be on the lookout for the supplemental checks and assure they are deposited within five days of receipt. Of course, if your fire fund has not been approved for release of the regular distribution, then the supplemental check will also be held. For your information, the total 2008 distribution is $7,280,000. Good job, Trish.
2. ANNUAL FLORIDA P & F CONFERENCE: Speaking of Trish, don’t forget that her 41st Annual Police Officers’ and Firefighters’ Pension Conference is scheduled for October 21-23, in Orlando at the Radisson Resort Orlando-Celebration. Additional information can be found on the Division’s website at http://www.myflorida.com/frs/mpf.
3. IRS SEEKS INPUT ON DETERMINATION LETTER PROCESS: The Internal Revenue Service Advisory Committee on Tax Exempt and Government Entities has conducted an online survey to collect opinions of employers and others about IRS’s determination letter filing program for retirement plans. Approximately five years ago, IRS enacted a 5- and 6-year cycle plan document restatement and filing process for plans seeking a favorable letter of determination as to their tax-qualified status. The process radically changed the plan document amendment and restatement process.
The online survey, which closed yesterday, asked respondents if they would be willing to participate in further discussion by conference call or attend a stakeholders' meeting in Washington in October, 2009 or January, 2010. We will publish survey results when available.
4. NEW YORK STATE COMMON SCOTCHES PAY-TO-PLAY: New York State Common Retirement Fund will not do business with investment advisers who have contributed to candidates running for state comptroller, according to pionline. The State Comptroller’s executive order ban lasts for two years following the date of contribution, and comes in response to pay-to-play allegations that surfaced with money managers being accused of paying kickbacks to placement agents who secured investment management business with the $116.5 Billion plan. The U.S. Securities and Exchange Commission is also considering passing similar rules on campaign contributions involving public pension funds (see C&C Newsletter for July 30, 2009, Item 2 and C&C Newsletter for August 6, 2009, Item 4). Separately, seven money management firms have agreed to adopt the New York Attorney General's Public Pension Fund Reform Code of Conduct, and have returned a combined $56.5 Million in management fees.
5. GENIUSES AT YALE LOSE THEIR SHIRT: Yale University, regarded as the most innovative college investor of recent decades, posted an annual investment loss of almost 25% in its latest fiscal year, according to the Wall Street Journal. Yale blamed its losses on big bets on real estate and commodities during the wider downdraft in investments of all kinds. Yale's strategy, favoring illiquid investments such as timber, had until this year generated chart-topping returns. But, in the year ended June 30, 2009, Yale lagged behind the median large endowment's loss of 18% in the Wilshire universe. The school experienced dismal performance in the largest portion of the endowment, which it calls "real assets" (including real estate, commodities and timber), which fell 34%. Energy investments alone dropped 47%. Private-equity holdings in leveraged buyouts and venture capital posted a 24% loss. By contrast, Yale's more conventional holdings in marketable securities, including stocks and bonds, held up better, declining 13%. (Harvard University, which uses a similar overall strategy, reported a 27% annual loss.)
6. QUIT OR YOU ARE FIRED = DISCHARGED: Tiliuta challenged the decision of an unemployment-law judge that he was ineligible to receive unemployment benefits because he was discharged for misconduct after stealing a coworker’s coffeemaker. Tiliuta argued that his employer coerced him into resigning and that he had actually been fired, that his conduct did not constitute misconduct because he did not intend to steal the coffeemaker and he was discharged as a result of discrimination. Although the Minnesota Court of Appeals affirmed because the unemployment law judge‘s findings were supported by substantial evidence showing that Tiliuta committed unemployment misconduct, the court did find that Tuliuta was discharged: when an employee is given the option of quitting or being discharged, the employer's action is considered a discharge. Tiliuta v. Methodist Hospital, Case No. A08-2014 (Minn. App., September 22, 2009) (unpublished).
7. PENSION PLAN PLACEMENT AGENTS HAVE BEEN UNFAIRLY DEMONIZED: In the spirit of telling all sides of a story, we report ai5000's issue positing that only an imbecile believes that real placement agents do not help. The second issue of ai5000 argues that pension plan placement agents have been unfairly maligned by regulators, attorneys general and the media. Out of the hundreds of placement agents that serve public and corporate pension plans, one supposed placement agent with tainted political ties acted inappropriately, and suddenly the entire group is public enemy number one. The rush to demonize and regulate placement agents fails to take into account their value to pension plans. It is striking how many institutional investors continue to insist that placement agents provide an essential service. Excluding placement agents from working with the $2.2 Trillion public pension system will not stop politicians from exerting unhealthy levels of control over the pensions of millions of employees. A quarterly online publication, ai5000 focuses on the 5,000 largest pools of capital in the world, across pension plans, sovereign wealth funds, endowments, foundations, insurance funds and other leading institutional investors.
8. CRS REPORT ON OLDER WORKERS EMPLOYMENT AND RETIREMENT TRENDS: Congressional Research Service has prepared a report for Congress on employment and retirement trends of older workers. As members of the “baby boom” generation -- people born between 1946 and 1964 -- approach retirement, the demographic profile of the U.S. workforce will undergo a substantial shift, as a large number of older workers will be joined by relatively few new entrants to the labor force. According to the Census Bureau, there will be 204 million Americans aged 25 or older in 2010. By 2030, this number will increase by 23%, to more than 251 million. Most of this growth will occur among people aged 65 and older. The Census Bureau estimates that while the number of people between the ages of 25 and 64 will increase by 15.5 million (9.4%) between 2010 and 2030, the number of people aged 65 and older is projected to grow by 31.7 million, or 79.2%. Census Bureau data show that the percentage of men and women aged 62 and older who work in paid employment has risen over the past several years. In March 2009, 52% of men aged 62 to 64 were employed, compared with 42% in 1990 and 47% in 2000. Of men aged 65 to 69, 33% were employed in March 2009, compared with 26% in 1990 and 30% in 2000. Among women 62 to 64 years old, 41% were working in March 2009, compared with 28% in 1990 and 35% in 2000. Among women 65 to 69 years old, 25% were working in March 2009, compared with 17% in 1990 and 20% in 2000. As more workers reach retirement age, employers may try to induce some of them to remain on the job, perhaps on a part-time basis, sometimes referred to as "phased retirement." Several approaches to phased retirement -- job sharing, reduced work schedules and rehiring retired workers on a part-time or temporary basis -- can be accommodated under current law. The Pension Protection Act of 2006 allows pension plans to begin paying benefits to workers who have not yet separated from their employers at the earlier of age 62 or the pension plan's normal retirement age, which in most plans is 65. Some employers would like to be able to pay partial pension distributions to workers who have reached the pension plan's early retirement age, even if earlier than age 62, but such payment would require a change in federal law. (September 16, 2009)
9. FLORIDA SBA WILL STUDY FRS DB PLAN: Florida State Board of Administration will undertake an asset-liability and asset allocation study for the $111 Billion Florida Retirement System defined benefit plan it oversees, according to pionline.com. The study will include looking at “lessons learned” from the market crisis of the past year and examine optimal levels of risk, diversification, allocation to passive/active management, internal/external management and funded status. The board, which last conducted such a study in 2007, normally does one every three to five years, but decided to accelerate the timing. The fund's allocation is 37.3% domestic equity, 21% international equity, 24.7% fixed income, 2.3% high-yield fixed income, 6.7% real estate, 3.5% strategic investments, 3.4% private equity and 1.1% cash.
10. FEDERAL APPELLATE COURT BROADENS SCOPE OF FMLA: Erdman challenged a lower court summary judgment in favor of her former employer, Nationwide Insurance Company. The principal issue on appeal -- whether Erdman accumulated sufficient hours to qualify for leave under the Family and Medical Leave Act -- raised questions of first impression in the U.S. Third Circuit Court of Appeals. The trial court found that Erdman could not establish a cause of action, either for interference or retaliation, because she had not accumulated the 1,250 hours necessary to qualify as an eligible employee under the statute. An employee is eligible for FMLA leave if he has worked at least 1,250 hours of service with his employer during the previous 12 month period. According to Erdman's records, she worked 1,298.25 hours in the relevant period, including 118.5 hours from home. In its calculation, the lower court excluded 77 hours worked from home, because Nationwide could not have had constructive notice of any hours Erdman worked from home because she had previously been told to put in the hours that she was supposed to put in and nothing more. In reversing, the appellate court concluded that a reasonable jury could find that Nationwide intended to preclude Erdman from earning overtime, while allowing her to continue to accrue “comp” time. Erdman v. Nationwide Insurance Company, Case No. 07-3796 (U.S. 3rd Cir., September 23, 2009).
11. POLICY CHANGES COULD REDUCE LONG-TERM EFFECTS OF LEAKAGE ON WORKERS’ RETIREMENT SAVINGS: The United States Government Accountability Office has released a report to the Chairman, Special Committee on Aging, U.S. Senate. GAO found the incidence and amount of principal forms of leakage from 401(k) plans -- that is, cashouts of account balances at job separation that are not rolled over into another retirement account, hardship withdrawals and loans -- have remained relatively steady, with cashouts having the greatest ultimate impact on participants' retirement preparedness. Approximately 15 percent of participants initiated some form of leakage from their retirement plans. In addition, incidence and amount of hardship withdrawals and loans changed little through 2008. Cashouts of 401(k) accounts at job separation can result in the largest amounts of leakage and the greatest proportional loss in retirement savings. Few plans provide participants with information on long-term negative implications that leakage can have on their retirement savings, such as loss of compounded interest and earnings on the withdrawn amount over the course of a participant’s career. Certain provisions had all likely reduced overall incidence and amount of leakage, including those that imposed a 10 percent tax penalty on most withdrawals taken before age 59 1/2, required participants to exhaust their plan's loan provisions before taking a hardship withdrawal and required plan sponsors to preserve the tax-deferred status of accounts with balances of more than $1,000 at job separation. However, a provision requiring plans to suspend contributions to participant accounts for six months following a hardship withdrawal may exacerbate long-term effect of leakage by barring otherwise able participants from contributing to their accounts. GAO also found that some plans are not following current hardship rules, which may result in unnecessary leakage. Of course, we do not suppose that anything will deter defined contribution proponents from their quest to convert the world to DC. GAO-09-715 (August 2009).
12. FLORIDA POTENTIAL RETIREES PLAY NUMBERS GAME: No bad thing lasts forever, so it's nice to see that the State of Florida actually expects its employees will get pay raises again some day. But not, according to tallahassee.com, next year. And not as much as had been predicted in previous forecasts by the Florida Retirement System. The state recently sent annual statements and its fall bulletin to FRS pension plan members, summarizing changes in pension laws and making projections of what they have to look forward to -- or dread -- depending how well each employee is fixed for Social Security and private retirement preparations. Routinely, year after year, pension projections had been made with an assumption of 3-percent raises. If you work for the state, you might have noticed your salary has not been going up 3 percent in recent years. In fact, you've undoubtedly noticed that it hasn't gone up at all. But there are other factors that affect an employee's "average final compensation," the five-year figure on which pensions are computed. Even without pay raises, you can get promotions or move to a higher-paying job, or see your average go down, due to layoffs or having to take a lower-paying job. Even without raises, however, your average final compensation can increase for pension purposes because each year you work, a lower-paying year drops out of your "high five." It's not the last five, although those are usually the top-paying, it's the high five that count. This year, in an acknowledgment of economic and political reality, FRS lowered its salary-estimating sights for those whose high-five years will mean to the average FRS worker. Employees' pension calculations will assume no raise next year -- a pretty safe bet, considering the state of the budget -- and only a 2-percent raise the following year. Frankly, even 2 percent in an off year sounds optimistic. The opinion piece also contains some interesting statistics:
For all six categories, average final compensation was $32,907 and the average pension was $16,280. (So, state employees lagged the FRS average by $1,129.)
13. HEALTH AND OPEB FUNDING STRATEGIES OF LOCAL GOVERNMENTS: Cobalt Community Research has released “Health and OPEB Funding Strategies: 2009 National Survey of Local Governments.” In 2004, the Governmental Accounting Standards Board issued Statement No. 45, “Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions (OPEB)." This statement created a national standard for measurement and disclosure of OPEB liabilities, especially in the area of health care for retirees. Local governments across the nation have been struggling with soaring health care costs for many years. Awareness of this new liability and the requirement to disclose it have created heightened concerns with affordability of public sector health care. This second year annual study provides detailed insight into awareness of and response to GASB 45, and maps strategies local governments have implemented and plan to implement to address health care costs. While several studies have examined OPEB issues for statewide retirement systems or for a limited sample of local governments, this study deliberately sampled a random cross-section of local governments across the United States. The Executive Summary contains three key findings:
Cobalt Community Research is a tax-exempt nonprofit organization with a mission to provide research and educational tools that help local governments and other nonprofit organizations thrive as changes emerge in the economic, demographic and social landscape. The study was partially funded by National Conference on Public Employee Retirement Systems.
14. CRIST, McCOLLUM SINK SINK’S PUSH FOR SBA EXPANSION: Florida Chief Financial Officer Alex Sink speaks with urgency about her desire to expand and better train the State Board of Administration, which oversees Florida's pension fund. But, a report from tampabay.com indicates the governor and the attorney general running against Sink for governor, who are SBA’s other two members, have opted for a slower, more measured approach. Sink wanted the Cabinet to recommend that the Legislature expand the board of trustees of the SBA by at least two people. Sink's proposal would add at least one person with financial expertise and one person who participates in the pension fund. Also, all trustees would get financial training, and there would be regular external audits of the pension's management and performance. Crist and McCollum decided to defer Sink’s proposal until December's Cabinet meeting. A recent SBA survey of other state’s funds found that Florida is somewhat unique in its small governance structure, especially considering it is one of the nation's largest pension funds (see C&C Newsletter for September 24, 2009, Item 3). The survey also found that Florida is the only state whose governor and attorney general oversee the state pension fund. Separately, St. Petersburg Times, not one of our favorites, writes that an Attorney General’s role as trustee for a state investment fund may be a conflict of interest: the state's top law enforcement officer and top legal adviser cannot provide independent legal advice to a board on which he sits.
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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.