Cypen & Cypen
OCTOBER 14, 2010
Stephen H. Cypen, Esq., Editor
1. APPELLATE COURT ORDERS ARBITRATION IN DELRAY/SMITH BARNEY CASE: Smith Barney appealed from denial of a motion to compel arbitration, presenting the question whether our client the Board of Trustees of the City of Delray Beach Police and Firefighters’ Retirement System agreed to arbitrate a dispute arising under its consulting agreement with Smith Barney, which helped the Board evaluate performance of several investment managers of pension funds the Board oversees. (See C & C Newsletter dated June 25, 2009, Item 1). The Board complained that Smith Barney abused its position as pension consultant when it provided erroneous reports about performance of investment managers of the fund, recommended investment managers who would agree to place trades through Smith Barney and engaged in self-dealing transactions with assets of the fund. Smith Barney moved to compel arbitration on the ground that the board chairman had bound the Board to arbitrate any dispute with Smith Barney when he signed several account agreements through which one of the investment managers of the fund could buy and sell securities. Those account agreements required arbitration of disputes under those and “any other agreement between” Smith Barney and the Board. The Board argued that the chairman had no authority to bind the Board to arbitrate disputes under the consulting contract, and Smith Barney responded that the chairman had both implied actual authority and apparent authority to bind the Board. The district court agreed with the Board, held that the chairman had no authority to bind the Board to arbitrate, and denied the motion to compel arbitration. Because the appellate court concluded that the chairman had implied actual authority to bind the Board to arbitrate disputes arising under the consulting contract, it reversed and remanded with instructions that the district court grant the motion of Smith Barney to compel arbitration. We agree with the dissent, which concluded that the Board’s delegation to execute documents did not empower the chairman fundamentally to amend unrelated and preexisting contractual relationships, because such result is neither consistent with the established doctrine of implied actual authority nor supported by the record. The dissenter further concluded that the chairman lacked apparent authority to amend the consulting contract, since for such authority to have existed, the Board must have held him out as having authority to amend the consulting contract, and Smith Barney must had reasonably relied on that appearance. Smith Barney’s reliance, if any, was not reasonable, in that it was intimately involved in the Board’s deliberations over the previously-existing consulting contract, and thus knew or should have known that the chairman alone could not effectuate a material change to the contract by inserting an arbitration clause. Board of Trustees of Delray Beach Police and Firefighters’ Retirement System v. Citigroup Global Markets, Inc., Case No. 09-13451 (US 11th Cir. October 8, 2010).
2. THORACIC AORTIC DISEASE IS HEART DISEASE FOR PURPOSES OF STATUTORY PRESUMPTION OF COMPENSABILITY: In a recent workers’ compensation appeal the employer/carrier argued that the Judge of Compensation Claims erred in finding claimant/firefighter’s thoracic aortic disease compensable under Section 112.18(1), Florida Statutes, because the condition is not “heart disease.” In relevant part, that section provides any condition or impairment of health of a firefighter caused by heart disease resulting in total or partial disability shall be presumed to be accidental and to have been suffered in the line of duty, unless the contrary be shown by competent evidence. Contrary to the employer/carrier’s assertions and arguments, evidence showed that claimant, as a result of his aortic disease, underwent open heart surgery, including heart catheterization, re-implantation of the aortic valve, replacement of the ascending aorta and reattachment of the coronary arteries. Moreover, claimant’s independent medical examiner, a cardiologist, testified that the condition in question qualified as heart disease. Nevertheless, the employer/carrier had the temerity to argue that because the ascending aorta is not “in” the heart, it cannot be considered heart disease under any available definition! A fundamental tenet of statutory construction requires that courts give statutory language its plain and ordinary meaning, unless words are defined in the statute or by clear intent of the legislature. When necessary, the plain and ordinary meaning of words can be ascertained by reference to a dictionary. Here, although “heart disease” was not defined by the legislature, it is defined in a recognized medical dictionary as any organic, mechanical or functional abnormality of the heart, its structures or the coronary arteries. The ascending aorta is one of the structures of the heart. Further, claimant underwent re-implantation of the aortic valve, which is one of the four major valves of the heart. Thus, it was clear that claimant’s aortic disease was a condition that can reasonably be classified as heart disease, and competent substantial evidence in the record supported the Judge of Compensation Claim’s findings. We know that court opinions don’t always reflect realities of the case. Regardless, sometimes a lawyer must take his lumps at the trial level and not file an appeal that apparently has no merit. City of Venice v. Van Dyke, 35 FLW D2234 (Fla. 1st DCA October 7, 2010).
3. EX-N.Y. STATE COMPTROLLER PLEADS GUILTY: Alan Hevesi, former New York State Comptroller, pleaded guilty to accepting nearly $1 million in gifts in exchange for approving $250 million in investments for the New York State Common Retirement Fund. Markstone Capital Partners, the firm that received the investments, gave Mr. Hevesi more than $500,000 in campaign contributions and about $400,000 in sham consulting fees for a lobbyist friend. (Hevesi had resigned as comptroller after pleading guilty four years ago to a felony for using state employees to chauffeur his disabled wife, ending his 35-year political career.) Of course, at the current hearing, Hevesi expressed deep regret for his conduct and sincerely apologized to the people of New York, the court and his family, according to pionline.com. Another sanctimonious SOB bites the dust.
4. EBSA NEEDS TO DO MORE TO PROTECT RETIREMENT PLAN ASSETS FROM CONFLICTS OF INTEREST: The U.S. Department of Labor, Office of Inspector General, Office of Audit, has issued its report to the Assistant Secretary for the Employee Benefit Security Administration, Department of Labor. Entitled “EBSA Needs To Do More To Protect Retirement Plan Assets From Conflicts Of Interest,” the report found EBSA has taken several actions to evaluate and reduce risk of harm to plan participants and beneficiaries from conflicts of interest of service providers. For example, EBSA (1) developed two new regulations regarding the determinations and disclosures and is requiring this information to be reported to EBSA; (2) followed up on the 2005 SEC report on conflicts of interest and initiated 12 specific investigations (See C & C Newsletter for May 19, 2005, Item 1); (3) worked with SEC to develop guidelines for plan fiduciaries to use in selecting and monitoring specific service providers and (4) implemented the Consultant Adviser Project, which concentrated resources on improper, undisclosed compensation by certain service providers. While these actions go a long way toward creating transparency in plan activities and improving protections for plan assets and participant benefits, EBSA needs to do more to protect plan participants and beneficiaries from conflicts of interest in service providers. Specifically, EBSA needs to address other crucial regulatory areas, such as broadening the definition of fiduciary status for investment advisors, requiring disclosure of all conflicts of interest and consideration of these conflicts of interest by plan fiduciaries when selecting service providers. The narrow definition of a fiduciary and the lack of regulations dealing with conflicts of interest have hampered EBSA’s enforcement program. For example, while SEC reviewed 24 pension service providers and took action on instances of inadequate disclosure of conflicts of interest, EBSA, using its regulations, could not take any enforcement action on the inadequate disclosure to pension plans. OIG recommended that EBSA (1) broaden the definition of a fiduciary for investment advisors and (2) develop regulations requiring disclosure of all conflicts of interest in consideration of conflicts of interest in selection of service providers. The Assistant Secretary for the Employee Benefits Security Administration agreed with the findings and recommendations. Now, we will see if Secretary Borzi runs with the ball. Report No. 09-10-001-12-121 (September 30, 2010).
5. STATE AND LOCAL GOVERNMENT DB PLANS ARE THE REAL DEAL: In the July 2010 issue of Journal of Pension Benefits, Beth Almeida, Executive Director of National Institute on Retirement Security, has written an article entitled “DB Pensions: The Real Deal.” Across the nation, governments are making a number of changes to their retirement plans—increasing contributions, adjusting retirement ages and modifying benefit design. However, governments’ commitment to defined benefit pensions has generally not wavered. This commitment has been a surprise to some who have called for the public sector to follow the private sector, away from DB pensions and toward greater reliance on defined contribution plans. Resilience of DB plans in the public sector is less surprising to those who understand these plans are ideally suited to serve the interests of all key stakeholders involved—taxpayers, employees and public employers. Here are three reasons why DBs have proven to be such a durable feature of the compensation landscape in state and local government:
A. DB pensions work for taxpayers, squeezing more value out of each dollar contributed. Citizens want to know that their tax dollars are being used in the most efficient manner possible, which includes taxpayer support of retirement benefits for public employees. At the same time, it is important to remember that financing of pensions in the state and local sector is typically a shared responsibility; contributions come from both employees and taxpayers. This shared financing model may be a reason why DB’s have been so durable in the public sector, even as they have dwindled in the private sector, where they are employer-financed. Moreover, DB pensions make good use of contribution dollars, whether from employers or taxpayers, because they are able more effectively to pool risks and costs than other alternatives such as 401(k) plans. There are three reasons for DBs’ cost advantage:
First, as many researchers have documented, DB plans outperform DC plans when it comes to investment returns. Second, unlike individuals, whose lifespan is finite, DB plans need not down-shift to an ever-more conservative portfolio over time. Third, DB plans pool longevity risks in a large group, whereas in a typical DC plan, individuals must self-insure the risk of outliving their savings.
B. DB Pensions work for employees, providing life-long retirement security. The primary purpose of a retirement plan is to provide benefits that will enable an employee to cease working at some point, and have a source of income to sustain himself for the remainder of his life. DB pensions are uniquely designed to serve as retirement income vehicles, in contrast to DC plans, which are savings (or wealth accumulation) vehicles. While both types of plans are important for a secure retirement, DC plans come up short when called upon to serve as primary retirement vehicle. Fully half of Americans will be unable to maintain their standard of living, or something close to it, in their older years. This finding represents a stunning reversal from recent decades, when large majorities of Americans could look forward to a secure retirement. A key driver to this trend is the decline in DB pension coverage in the private sector. Indeed, researchers found that having at least some income from a DB pension cuts retirement risks by half, as compared with those who lack such income. By contrast, those covered by a DC plan still face a 50-50 chance of falling short in retirement. In the public sector, adequacy of retirement income is a special consideration, because the state, as the provider of last resort, will ultimately be responsible for those who can no longer work and require assistance to meet basic needs. Thus, the government (read: taxpayers) can either “pay now” by ensuring workers have the opportunity to accumulate adequate resources for retirement or “pay later” in the form of providing public assistance. DB pensions are highly effective in keeping older folks out of poverty and away from dependence on public assistance.
C. DB Pensions work for employees seeking to recruit and retain talent to public service. More than 14 million Americans serve the public working for state and local government. As a group, employees of state and local government are highly skilled, with about half holding a college or advanced degree—double the proportions of the private sector workforce. A recent survey of government hiring managers indicates that even in this weak labor market, state and local employers struggle to fill vacancies for highly-skilled positions. These hiring difficulties likely stem from a persistent pay gap between public and private sectors. A new study finds that employees of state and local government earn salaries that are, respectively, 11% and 12% below those of their private sector counterparts, (See C & C Newsletter dated May 13, 2010, Item 1). Even after accounting for the value of benefits, employees of state and local governments still earn about 7% less than their counterparts in the private sector. So, public employees remain competitive in the market by offering DB pensions. Retirement plans can have the effect of encouraging employee commitment to employer, by creating rewards for longer service. Indeed, the dominant retirement plan design in public sector DB plan, the traditional final average pay plan, is one where long-tenure workers earn benefits more rapidly the longer they stay on the job, Economists long ago established that such plans have strong effects on retention.
The public debate on retirement issues often assumes a zero-sum game. In other words, if DB pensions are good for employees they must be bad for employers and taxpayers. But, as demonstrated, DB pensions, if properly structured and managed, can serve interests of all stakeholders: taxpayers, employers and employees. For plan sponsors who are serious about promising reasonable benefits and maintaining proper funding discipline, DB pensions remain a compelling proposition. DB plans squeeze value out of every taxpayer dollar they take in and deliver honest-to-goodness retirement security to employees. As we look ahead to a stronger economy in the future, DB pensions will help our states and cities build and maintain the public workforce that educates our kids, keeps our streets safe and our air and water clean. “Now that’s what I call the real deal.” Ditto.
6. FIRED BELL CITY MANAGER WANTS MORE MONEY: Robert Rizzo, who resigned as city manager of Bell, California, after his huge salary was revealed (See C & C Newsletter dated July 29, 2010, Item 1), may be due more money according to upi.com. Rizzo contends that the city reneged on an agreement to provide the longtime city administrator with severance payments and other benefits when he resigned earlier this summer. Rizzo’s attorney says the city is violating state labor laws, and should begin new negotiations over Rizzo’s departure. Rizzo resigned after it was reveled he was set to earn more than $1.5 million in compensation this year, making him one of the highest paid officials in the nation. He and seven other Bell city administrators were charged last month with public corruption from allegedly misappropriating more than $5.5 million from the small, working-class community. Since he resigned, Rizzo has also requested that the city pay his legal bills. This guy has a couple of titanium body parts.
7. CLASS-OF-ONE CLAIMS BASED ON DISCRETIONARY STATE ACTIONS NOT BARRED: A case before the US Second Circuit Court of Appeals presented a class-of-one equal protection claim by Analytical Diagnostic Labs, Inc. ADA alleged that defendants—employees of New York State Department of Health—intentionally and maliciously subjected ADL to an intense and unwarranted degree of regulatory scrutiny. ADL appealed a decision by the lower court, relying on the United States Supreme Court‘s decision in Engquist (See C & C Newsletter for June 12, 2008, Item 2), which found ADL’s claim was barred because it could not show the alleged differential treatment resulted from non-discretionary state action. The appellate court found the district court’s reading of Engquist overbroad, and reversed that part of the opinion. The court joined the Seventh Circuit in holding that Engquist does not bar all class-of-one claims involving discretionary state action. While there may be some circumstances where Engquist is properly applied outside of the employment context, the case before the court was not one of them. Critically, the state defendants exercised the state’s regulatory power. (The court also disagreed with lower court’s conclusion that ADL presented sufficient evidence to demonstrate it was treated differently from other similarly, so summary judgment was affirmed, albeit on different grounds.) Analytical Diagnostic Labs, Inc. v. Betty Kusel, Case No. 08-6297 (U.S. 2nd Cir. October 4, 2010).
8. A TALE OF TWO BRAS: We rarely come across relevant bra stories, so when we came across two, we though it appropriate to pair them up.
9. LIFETIME INCOME HEARING WITNESSES WANT FIDUCIARY SHIELD: Numerous presenters at a session sponsored jointly by the U.S. Departments of Labor and Treasury insisted that sponsors were concerned that, without detailed regulatory guidance, their eventual choice of a lifetime income option provider and their educational efforts could well land them in fiduciary hot water under the Employee Retirement Income Security Act. So, because providers selection and education will be more complex than in any other retirement plan service areas, a number of witnesses requested that Labor’s Employee Benefits Security Administration and Treasury officials consider a variety of safe harbor protections. Under current law, reports plansponsor.com, selection of an annuity provider is fraught with potential missteps that could result in continued liability for the plan sponsor well into the future. To rectify this situation, plan sponsors need clear, simple fiduciary guidance allowing them to make lifetime income options available to plan participants without risking a significant increase in potential fiduciary liability. Most witnesses agree that a strong and comprehensive participation education effort would have to be mounted for a lifetime income option to be effective—or to be accepted at all.
10. GOVERNANCE PRACTICES AND LONG-TERM INVESTMENT STRATEGIES HAVE EVOLVED GRADUALLY AS STATE AND LOCAL GOVERNMENT PENSION PLANS TAKE ON INCREASED INVESTMENT RISK: United States Government Accountability Office has issued a report to the Ranking Member, Committee on Finance, U.S. Senate, entitled “State and Local Government Pension Plans—Governance Practices and Long-Term Investment Strategies Have Evolved Gradually as Plans Take on Increased Investment Risk.” GAO found that recent market declines have significantly diminished the asset value of state and local pension plans. Reported unfunded liabilities for these plans are estimated in the hundreds of billions of dollars. As a result, in the long-term, these governments may need to make significant fiscal adjustments such as modifying employee benefits or increasing contributions to plans. They may also alter investment strategies to attempt to maximize returns by assuming increased risk. Consequently, GAO was asked to examine: (1) who makes investment decisions for sate and local defined benefits pension plans and what guides their decision making; (2) how plans allocate their assets and manage their investments; and (3) practices that plans are using to meet a range of challenges in governance, investing or funding. To address these objectives GAO reviewed relevant literature, interviewed experts in pension and retirement systems, conducted a survey of state and local plans and performed more detailed reviews of plans in seven states. Various stakeholders, such as boards of trustees and external consultants and managers, are involved in guiding plan investments. Plan officials generally expressed a commitment to policies or principles cited by many experts as key to sound governance, such as enhancing knowledge and skills of plan fiduciaries and increasing organizational transparency. State and local plans reported gradually changing their asset portfolios over many years by increasing their allocations in higher risk investments partly in pursuit of higher returns but also for diversification following well-accepted techniques of portfolio management, given their long investment horizon. Indeed, currently about two-thirds of public pension funds are invested in such higher risk assets. Plan officials stated they are focused on the long term, and generally reported they had not made any major changes to their investment strategies in response to the market downturn, in which they lost nearly a quarter of their asset value from June to December 2008. Despite these losses, plans have reported sufficient assets to cover years of benefit payments. Still, according to the survey, an estimated 60% of large and medium plans anticipate changes to their investment strategies in response to the current economic environment. Plans have devised various approaches to address governance, investment and funding challenges. These methods include pooling assets to pursue lower fees and higher quality managers, consolidating governance structures of multiple plans to improve accountability and transparency and issuing pension obligation bonds to overcome funding shortfalls. While some of these approaches predate the market downturn, their impact on plan health remains to be seen. Nevertheless, efforts that increase disclosure may be helping plan stakeholders understand the considerable challenges they face. GAO-10-754 (August 2010).
11. FAQ’S ON GENETIC INFORMATION NONDISCRIMINATION ACT: Our readers know that Title 1 of the Genetic Information Nondiscrimination Act of 2008 includes provisions that generally prohibit group health plans and health insurance issuers from discriminating based on genetic information (See C & C Newsletter for October 8, 2009, Item 2). Statutory provisions of GINA were effective for plan years beginning on or after May 21, 2009. Regulations implementing provisions of GINA were published on October 7, 2009, and were applicable for plan years beginning on or after December 7, 2009. Therefore, for calendar year plans the statue and regulations apply as of January 1, 2010. Here are a few frequently asked questions developed by United States Department of Labor, Employee Benefits Security Administration:
GINA applies generally to group health plans. Unlike the provisions under Title I of HIPAA, there is no exception for very small health plans with less than two participants who are current employees.
12. ALL PUNS INTENDED: It is very simple to be happy, but it is very difficult to be simple.
13. OXYMORON: A man walks into a bar with a slab of asphalt under his arm, and says: "A beer please, and one for the road."
14. AGING JOKES: Time may be a great healer, but it's a lousy beautician.
15. FABULOUS RANDOM THOUGHTS: How is it one careless match can start a forest fire, but it takes a whole box to start a campfire?
16. QUOTE OF THE WEEK: “If you had listened hard enough, you might have heard what I meant to say.” Rod McKuen
17. 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.