Cypen & Cypen
NOVEMBER 3, 2005
Stephen H. Cypen, Esq., Editor
National Conference on Public Employee Retirement Systems has long been delivering the message that traditional DB pension plans represent a tried and true system that benefits taxpayers. The following is NCPERS’ list of disadvantages of replacing defined benefit plans with defined contribution plans for state and local governments, their employees and taxpayers:
We recently reported a Florida Supreme Court decision holding Section 843.085(1), Florida Statutes, unconstitutional (see C&C Newsletter for June 30, 2005, Item 4). That statute makes it a crime for an individual to exhibit, wear or display any indicia of authority, or any colorable imitation thereof, of any federal, state, county or municipal law enforcement agency or to display in any manner or combinations the word or words “police,” “patrolman,” “agent,” “sheriff,” “deputy,” “trooper,” “highway patrol,” “wildlife officer,” “marine patrol officer,” “state attorney,” “public defender,” “marshal,” “constable” or “bailiff,” which could deceive a reasonable person into believing that such item is authorized by any of the agencies described. We thought the court was declaring only subsection (1) unconstitutional, because the Supreme Court said: we agree with the Third District that Section 843.085(1), is unconstitutional. However, we failed to realize that the Supreme Court also affirmatively answered the following certified question: “Is Section 843.085, Florida Statutes (2001), unconstitutional as overbroad, vague, or a violation of the right to substantive due process?” Subsection (2) makes it unlawful for any person to own or operate a motor vehicle marked or identified in any manner or combination by the words or words “police,” “patrolman,”“sheriff,” “deputy,” “trooper,” “highway patrol,” “wildlife officer,” “marine patrol officer,”“marshal,” “constable” or “bailiff,” or by any lettering, marking, or insignia, or colorable imitation thereof, including, but not limited to, stars, badges, or shields, officially used to identify the vehicle as a federal, state, county, or municipal law enforcement vehicle. The Florida Attorney General has now concluded that he must rely on the holding of the Florida Supreme Court, which answered the certified question in the affirmative and stated that the entire section is unconstitutional. Until this matter is clarified by the courts, the Attorney General cannot state that the court’s decision is limited to provisions of Subsection (1). Nevertheless, the Attorney General recognized (as did the subject Supreme Court decision) that Section 843.08, Florida Statutes, not involved in the case, criminalizes the false impersonation of an officer when such individual takes upon himself or herself to act as such or to require any other person to aid or assist him or her in a matter pertaining to the duty of any such officer. Informal Attorney General Opinion dated August 1, 2005.
On September 21, 2005 the Securities and Exchange Commission voted to publish for comment proposed interpretive guidance concerning Section 28(e) of the Securities Exchange Act of 1934 (see C&C Newsletter for September 29, 2005, Item 5). Such section creates a “safe harbor” by providing that a person who exercises investment discretion with respect to an account shall not be deemed to have acted unlawfully or to have breached a fiduciary duty under state or federal law solely by reason of having caused an account to pay more than the lowest available commission, if that person determines in good faith that the amount of the commission is reasonable in relation to the value of the “brokerage and research services” received. SEC is now seeking comments on the release, which would interpret the scope of the safe harbor as follows:
The release reiterates the statutory requirement that money managers must make a good faith determination that commissions paid are reasonable in relation to the value of the products and services provided by broker-dealers in connection with the managers’ responsibilities to the advisory accounts which the managers exercise investment discretion. The release also reiterates that under Section 28(e), broker-dealers must be financially responsible for the brokerage and research products they provide to money managers, and they must be involved in “effecting” the trade. In addition, the Commission solicits comments on ten topics, including:
Readers can access the entire SEC release at www.sec.gov/rules/interp/34-52635.pdf.
That’s the cover story on the current issue of Time. Subtitled “The Broken Promise,” Time says it was part of the American Dream, a pledge made by corporations to their workers: for your decades of toil, you will be assured of retirement benefits like a pension and health care. Now more and more companies are walking away from that promise, leaving millions of Americans at risk of an impoverished retirement. How can this be legal? A Time investigation looks at how Congress let it happen and the widespread social insecurity it’s causing. The role of Congress has been pivotal. Lawmakers wrote bankruptcy regulations to allow corporations to scrap the health insurance they promised employees who retired early -- sometimes voluntarily, quite often not. They wrote pension rules that encouraged corporations to underfund their retirement plans or switch to plans less favorable to employees. They denied workers the right to sue to enforce retirement promises. They have refused to overhaul America’s health-care system, which has created the world’s most expensive medical care without any comparable benefit. One by one, lawmakers have undermined or destroyed policies that once afforded at least the possibility of a livable existence to many seniors, while at the same time encouraging corporations to repudiate lifetime-benefit agreements. All this under the guise of ensuring workers that they are in charge of their own destiny -- such as it is. The universal replacement of the pension, by consensus of the Bush administration, Congress, Wall Street and corporate America, is the ubiquitous 401(k). As Bush recently explained, “Now they’ve got what they call defined-contribution plans. Workers are taking aside some of their own money and watching it grow through safe and secure investments.” (Like Enron, WorldCom and Kmart.) Truth to tell, the 401(k) was never intended as a retirement plan. It evolved out of a tax break that Congress awarded to corporate executives in 1978, allowing them to defer part of their salaries and cut their tax bills. It wasn’t until several years later that companies began to make 401(k)s available to most employees. Even then, the idea was to encourage savings and provide a tax shelter, not to substitute the plans for pensions. By 1985, assets in 401(k)s had risen to $91 Billion, still only one-tenth that in guaranteed pensions. All that changed as corporations discovered they could improve their bottom lines by shifting workers out of costly defined-benefit plans and into much cheaper (for companies) and riskier (for workers) uninsured 401(k)s. In effect, employees took a hefty pay cut and barely seemed to notice. Lawmakers and supporters advocated the move by pointing to a changing economy in which employees frequently switch jobs. They maintained that because defined-benefit plans are based on length of service and an average of salaries over the last few years of work, they don’t meet today’s needs. But Congress could have revised the rules and made the plans portable over a working life, just like a 401(k), and retained the guarantee of a fixed retirement amount, just like corporations do for their executives. As it is, 401(k) portability often impedes efforts to save for retirement. When today’s job hoppers move from one employer to another, most succumb to the temptation to cash out their 401(k)s and spend the money, a practice hardly reflective of a serious retirement system. Today $2 Trillion is invested in those accounts, but to understand why the 401(k) is no substitute for a defined-benefit pension plan, look beneath that big number. Earlier this year the airwaves crackled with announcements that the value of the average (mean) 401(k) had climbed to $61,000 in 2004. Noticeably absent from many reports was any reference to the median value, a more accurate indicator of the health of America’s retirement system. That number was $17,909, meaning half held less, half more. Nearly one in four accounts had a balance of less than $5,000! Considering Time’s general slant on things, this article is quite telling.
“We are too generous to workers.” That is the mantra repeated over and over as the reason for the foundering of America’s great industries, says a Star-Telegram.com editorial. Last week we heard it from the automobile industry, the week before it was the lament of the airlines and in prior years the tune was sung by steel and textiles. Apparently we can no longer afford the luxury of providing America’s industrial workforce with a decent living, health care and retirement security. Top executive pay may still be climbing through the roof, but rank-and-file labor costs in America’s manufacturing sector have nowhere to go but down, with China as the model. Wall Street cheers any move in that direction. General Motors stock climbed 7.5% on the day it announced that a tentative agreement had been reached to cut health care expenses for union members and retirees by $1 Billion per year. The stock rose even as the company reported its largest quarterly loss in more than a decade. Owners like to celebrate when workers lose out. Rick Wagoner, GM Chairman, whined that over $1,500 of each car sold goes to pay health costs, a burden that their competitors in Japan and Germany don’t face. “Well, guess what? Those countries have national health care programs.” (Think about it.) Maybe if GM and the rest of our dying auto industry had spent as much time and money supporting a health care plan in 1993 as they have lobbying against automobile safety features and emissions limits, they wouldn’t be in this fix. And, more important, neither would their workers. (When you read the next item you will see why we really didn’t want to split up the two Time items. However, this opinion piece from the other side of the political spectrum sounded so much like Time’s cover story, we just had to juxtapose them.)
In the same issue as the above cover story, there is a more Time-like story entitled “Where Pensions Are Golden.” The main point of the article is to distinguish between private pensions, which are only “guaranteed” to the extent that the privately-funded Pension Benefit Guaranty Corp. has money, and public pensions, which are “guaranteed” by a state or local government. The point could have been made -- that private retirees are entitled to guarantees similar to public retirees -- without being snide. Nevertheless, the article does recognize, as we reported, why so many public plans are in trouble (see C&C Newsletter for September 22, 2005, Item 3): “Politicians neglected to put money into pension plans, made poor investments, endowed extraordinarily generous retirement packages and gave special treatment to their fellow politicians.” One point, though, if true, is troubling. The article claims that California Public Employees’ Retirement System invests in “vulture funds,” which specialize in buying bankrupt companies, slashing costs and then selling the firms for a large profit. Unfortunately, principal among the costs pared are pensions. We expect CalPERS will respond, one way or the other.
Johnson claimed that he was terminated from his job because he suffers from epilepsy. He filed suit under the Americans with Disabilities Act. Johnson had also applied for, and received, Social Security Disability Insurance benefits. On his application for those benefits, he stated that he had been unable to work because of his disability, epilepsy, since the date that he was terminated. On appeal from the U.S. District Court’s grant of summary judgment in favor of the employer, the Court of Appeals affirmed. To establish a prima facie case under ADA, a plaintiff must show that, with or without reasonable accommodation, he can perform the essential functions of the employment position that he holds. Johnson’s SSDI application directly contradicted this element of a valid ADA claim. Although the United States Supreme Court has held that an SSDI recipient is not automatically estopped, or precluded, from pursuing an ADA claim (see C&C Newsletter for July, 1999, Item 4), an ADA plaintiff cannot ignore his SSDI contention that he is unable to work, but must explain why that contention is consistent with his ADA claim that he can perform the essential functions of his job, at least with reasonable accommodation. Here, Johnson did not even attempt an explanation; he merely asserted that he was “mistaken” in his SSDI application. The United States Supreme Court precedent does not stand for the proposition that one should be allowed to explain why he gave false statements on his SSDI application. Contradictions are unacceptable. A person who applied for disability must live with the factual representations made to obtain them, and if these show inability to do the job, then an ADA claim may be rejected without further inquiry. (The appellate court made note of the fact that Johnson presented no evidence that he had taken any steps to “correct” the mistake on his SSDI application and relinquish benefits that he had received as a result of it. Johnson v. ExxonMobil Corporation, Case No. 04-1269 (U.S. 7th Cir., October 18, 2005).
A front page Wall Street Journal story reveals how a divided Republican Party and strong opposition derailed private accounts. Through two campaigns, George W. Bush vowed to fix and partially privatize Social Security, the nation’s most popular government program. This year, claiming a reelection mandate and enjoying a Congress controlled by his party, the President finally made his move. Yet now even the President has acknowledged Social Security reform is dead for this year, his biggest domestic defeat to date. How could it have gone so wrong? According to people on both sides of the battle over Social Security, the President overestimated his postelection capital and underestimated his opposition. Embittered Democrats were even more vehemently opposed to any privatization than the White House imagined. And the President’s party faced deep divisions of its own. As a candidate, Bush had never spelled out his Social Security plans, except to suggest that carving out private accounts would solve the program’s looming financial woes. When he acknowledged this year that they wouldn’t, and that future benefits would need to be reduced, both the public and lawmakers recoiled. The idea of letting workers divert some Social Security payroll taxes to personal retirement accounts is central to Bush’s notion of an “ownership society,” where Americans assume more responsibilities and risk. The Democrats, many Republicans and organizations such as the giant seniors group AARP adamantly oppose such accounts as a risk to Social Security, to the government’s fiscal health and to future retirees who could become victims of market downturns. As usual, the White House insists its Social Security strategy was correct, apparently oblivious to its patent misjudgment of the Democratic leadership and of AARP. Unbowed, the President in a recent private meeting told supporters, “I intend to be the President who signs Social Security reform into law.” It’s so nice to dream.
Police officers should use Tasers only on suspects who actively resist arrest or present a serious danger to themselves or officers, according to a national law enforcement group spokesperson quoted in the Houston Chronicle. This recommendation was among 50 best practices suggested for law enforcement agencies that use the controversial “conducted energy devices.” Tasers deliver a 50,000-volt charge of electricity intended to subdue combative or threatening suspects. “While we believe that CEDs have been very effective, we also feel a responsibility, professionally, that we use these in the most surgical and strategic way possible,” the Executive Director of the Police Executive Research Forum said. Among the main recommendations issued by the Forum:
Let’s see ... taser/bullet, taser/bullet, taser/bullet -- which would I rather take? Not a real tough choice.
On June 9, 2005, Barclay Grayson, former CEO of Capital Consultants, testified before the U.S. Senate Committee on Health, Education, Labor, & Pensions. The 35-year old father of three, who holds an MBA from Columbia Business School, spent 14 months in the federal penitentiary after pleading guilty to one count of mail fraud. Mr. Grayson played a role in a scheme that resulted in millions of dollars of losses, primarily from union pension funds. At its peak, Capital Consultants managed assets in excess of $1 Billion, three-fourths of which were Taft-Hartley funds. In his testimony, Mr. Grayson himself raised and answered three “natural” questions:
So, what does the ex-con, who cooperated extensively with authorities, recommend?: (1) educate trustees and all parties associated with the pension fund, (2) strengthen regulatory oversight and (3) expand laws regulating pension assets. What else is new?
Internal Revenue Service is seeking 84,290 taxpayers whose income tax refund checks could not be delivered in 2005. Checks totaling approximately $73 Million can be reissued as soon as taxpayers correct or update their addresses with IRS. In some cases, a taxpayer has more than one check waiting. The average amount owed to each taxpayer is $871. The “Where’s My Refund?” feature at www.irs.gov provides information about taxpayer refunds. A taxpayer who has moved since filing his last tax return can correct his address by filing IRS Form 8822, Change of Address. The form can be downloaded from the IRS site or obtained by calling 1.800.TAXFORM. If all else fails, IRS has a toll free assistance number at 1.800.829.1040.
The November 2005 Benefits & Compensation Digest features an article entitled “Fiduciary Liability Insurance: An Overview.” The article discusses basic coverage, the essentials for protection of fiduciaries and trust funds, a brief market overview and information on what to do if there is a claim. Although the article focuses on plans covered by ERISA (rather than public plans), it is an excellent primer on the subject. Although trustees should read the article in its entirety, we present the following excerpts here. There are basically two buying decisions when it comes to the purchase of fiduciary liability insurance. The first decision for trustees is to select an insurance practitioner with experience in advising trust fund clients (most brokers and agents have access to all insurers, either directly or through intermediaries). The second decision is to work with that agent or broker to determine the best insurer for a particular trust and authorize that agent or broker to negotiate the policy with the best terms and conditions. Historically, only a few insurance companies offer fiduciary liability coverage. In selecting an insurer, the following are of importance: (1) financial rating of the carrier (do not buy from one with less than a A.M. Best A- rating); (2) take into account breadth of coverage offered; and (3) compare the pricing. While always a factor, price should be considered last because the various insurers tend to have comparable pricing over time. Seek the lowest sustainable premium over the long term, rather than just taking the low quote, which may be offered by the insurer in order to get the account. Another factor is the need for continuity. It is usually best to stay with the same insurer unless there is a very good reason to change (such as a decline in the current insurer’s financial strength, availability of materially broader coverage or similar coverage available at significantly lower cost). Staying with one insurer over time also builds up good will, should there be a decline in the financial strength of the trust or if a claim is made. And because fiduciary policies are “claims-made,” switching from one insurer to another can be risky, with coverage left behind in the transition. The conclusion is that fiduciary liability insurance is the cornerstone of the risk management program of a trust fund. Trustees can buy fiduciary coverage appropriate for the fund and at limits that take into account unique fund exposures and the risk profile of the board of trustees. With fiduciary coverage in place, trustees can then get a good night’s sleep, knowing that both the trust fund and their personal assets are protected. Amen.
A man handed a bank teller a note demanding money “the quicker the better.” He got away, but left the note, which was written on a pay stub. Now, this guy was not a complete idiot; he was fully prepared: he crossed out his name and address with a marker. But, as the Director of Public Safety said, “It wasn’t a huge forensic undertaking. We just put it under a light.” You can thank PlanSponsor.com for this one.
You think commercial space in South Florida is expensive? Wrong again, Saks breath. Rents on New York’s Fifth Avenue rose 38% during the past year, as retailers competed for space on the world’s most expensive shopping street. Prime rents were over $1,300 per square foot a year at the end of June, up from $950 a year earlier, says a report from Bloomberg News. Rents in Causeway Bay in Hong Kong jumped 90% to $1,083, leapfrogging Avenue des Champs-Elysees in Paris as the second-most expensive street. This piece is apropos of absolutely nothing.
New York City and its firefighters’ union announced that they had agreed to a tentative 50-month contract that gives firefighters a raise of more than 17%. The two sides also extended an agreement that will keep 64 engine companies staffed with five people each. In return, firefighters agreed to several concessions, including a steep cut in wages for new hires, a reduction of vacation time and withdrawal of several grievances against the city. Specifically, the agreement, which is retroactive to June 1, 2002 when the last contract expired, calls for 5% increases in each of the first two years, a 3% increase in the next 14 months and 3.15% in the final year. Current salaries of firefighters ($36,878) will drop to $25,100 for a 13-week period when firefighters are in the academy, and then increase to $32,700. Salaries will rise to a maximum base of $63,309, up from $54,048. The wage schedule for new hires approximates a pattern set in a June arbitration ruling that binds the police officers’ union.
Unions representing thousands of police officers and firefighters filed a lawsuit seeking to force the State of New Jersey and local governments to pay what is owed to their pension system. The unions cited a nearly $4 Billion deficit in the Police and Firemen’s Retirement System, which had a $1 Billion surplus in 2000. They blamed the state and municipalities for paying only a portion of their required yearly pension contribution in the face of persistent budget shortfalls. Meanwhile, police officers and firefighters have continued to pay 8.5% of their salaries into the system, while the state and municipalities began to delay payments in the late 1990s when stock market gains swelled pension funds’ surpluses. Separately, the New Jersey Education Association also filed suit, accusing the state of underfunding the Teachers’ Pension System, according to this report from the Asbury Park Press.
Researchers from the Political Economy Research Institute at the University of Massachusetts have ranked the most employee-friendly states, according to Business & Legal Reports. Researchers looked at working environments in all 50 states and the District of Columbia, analyzing data on average pay, employment opportunities, employee benefits, percentage of low-income workers, fair treatment between genders and ability for employees to be unionized. As a result, the top five states for worker environment are
And the bottom five are
By the way, Florida came in 40th, tied with North Carolina.
The Center for Retirement Research at Boston College has issued two “Issues in Brief.”
It may sound a bit silly, but “The Rule of the Ds” is a good place to start. When a good employee’s performance dips, look to the Ds. An effective boss is a detective. He seeks to discover the base problem. Discovery leads to diagnosis. Diagnosis leads to discussion with the employee. Discussion leads to two options: (1) The employee commits to a program to get back to performing or (2) the employee is de-employed. To understand, start with the “Ten Ds:” Debt, divorce, disease, drugs, death, depression, drinking, dice, deviancy and dalliance. The Ds are dangerous. They hurt the employee, the organization and the boss. Quick diagnosis can lead to fast remedies, fast fixes and fast improvement, according to How to Become a Great Boss.
The typical U.S. worker spends 3.3%, or $1,341.00, of his annual pay on gasoline, according to salary.com. That number is based upon an average cost of about $3.00 a gallon, which can be expected to fluctuate with the price of crude oil.
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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.